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Financial Planning > Charitable Giving

The Planning Skill Set Prized by the Wealthiest Clients

By John Manganaro

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What You Need to Know

  • While the level of charitable giving has not changed dramatically in recent times, the giving landscape has.
  • Clients are looking for guidance on how to maximize their giving while considering their tax exposure.
  • From donor-advised funds to charitable remainder trusts, there are many vehicles and strategies to utilize.

Americans across the wealth spectrum have an increasing array of choices when it comes to how they give, and they are looking for expert counsel on how to maximize their philanthropic impact while taking into consideration their tax exposure and possible tax policy changes.

In fact, as emphasized by a panel of experts during ThinkAdvisor’s recent webinar about charitable giving trends, advisors have a critical and expanding role to play in informing clients about such topics as donor-advised funds, tax deductions and overall financial planning — and helping them build successful wealth management strategies tied to charitable giving.

The event’s speakers included Jeffay Chang, senior trust and estate specialist for Capital Group Private Client Services; Leslie Heffernen, managing director of fiduciary and legal services at Pitcairn; Stephen Kump, CEO and chairman at Charityvest; and Ken Nopar, vice president and senior philanthropic advisor at the American Endowment Foundation.

According to the panel, 2023 is a highly dynamic time for charitable giving here in the United States, after 2022 saw charitable contributions nearing $500 billion. This represents a decline in giving after strong growth in 2020 and 2021, but the figure is nonetheless impressive, given the sharp equity and bond market declines experienced in 2022.

Looking ahead, more than half of Americans plan to make philanthropic gifts in 2023 that match their charitable contributions in 2022, while 10% expect to give more than they did last year.

This means that advisors who can help their clients take advantage of new developments in philanthropy, financial planning and taxation to achieve both their long-term charitable giving and wealth management goals will be highly prized by wealthy clients.

Sizing the Philanthropic Market

As Nopar pointed out, data from Giving USA’s latest annual report on philanthropy shows giving dropped in 2022, marking the first annual decline since the Great Recession.

“Specifically, giving fell 3.4% from 2021, but it was actually down 10.5% when adjusted for inflation,” Nopar said. “Frankly, this makes sense and was to be expected, because there was a 20% to 25% decline in the stock market during the year. In that sense, it is still very impressive that $500 billion was given.”

As Nopar observed, the level of giving has not changed dramatically in recent times, but the giving landscape definitely has.

“You can see this in some other statistics,” he posited. “In 2000, two-thirds of all Americans donated in some capacity, but that number has fallen to below 50% in the past few years. Where and why people give has also changed.”

According to Nopar, giving to religious organizations accounted for 27% of 2022’s total, while human services groups received 14% of donations and education organizations grabbed 13%. Notably, for higher-net-worth individuals, giving to education was the top objective, while religious giving was third.

“Back in 1990, half of all giving was going to religious organizations. That’s been cut in half in the last 30 years,” Nopar said.

As Kump observed, the fact that giving is now more concentrated among the wealthiest segment of the U.S. population is a reflection of the greater concentration of wealth at the top of the income scale.

“This is a trend to be aware of if you are an advisor who focuses on mass affluent and high-net-worth clients,” Kump said. “Charitable giving is increasingly a planning topic that you need to bring to the table. It is a skill set that is highly prized by the wealthy, and if you aren’t talking to your clients about this, another advisor will.”

Guiding Questions for Clients and Advisors

As Heffernen explained, for advisors to give the best possible guidance to their clients about giving, they need to understand what the client wants to do with their money — both today and in the future.

“There are four key guiding questions,” Heffernen said. “Why are you giving? When are you giving? How are you giving? And how much are you giving? These questions can really present a good starting point for these conversations with your clients or prospects.”

Some other good questions, Heffernen said, include whether a client favors “one and done” giving, or if they want to establish a planning vehicle that will last over time. Will the family get involved, or is this a solo effort?

“Another big question is, does the client want to be able to change the beneficiary at some point?” Heffernen suggested. “Are they giving to a charity because their parents always did, or is this a cause they truly support? How much research have they done into their preferred causes? How much does the tax picture matter to this client?”

Regarding the taxation topic, Heffernen explained, it can be very beneficial to have the client think through potential liquidity events they expect in the future that could affect their overall tax burden.

“For example, is there some big special dividend you are expecting in the next few years, and if so, how can we incorporate that event into our giving strategy?” Heffernen asked. “Maybe you have a client who is paid on a retainer basis and they know that next year or maybe the year after, they are going to be generating millions of dollars in income. How can we plan for this?”

Chang said another important line of questioning is whether a client is motivated to give during their lifetime or if they prefer testamentary giving. Increasingly, he said, donors are giving while they are still alive, in the interest of personally seeing the benefits afforded to the causes they support.

“They want to see the mission of the charity advance while they are alive, and they believe they can make a tangible difference in their communities today,” Change explained. “Others say they derive personal satisfaction and enjoyment from the act of giving, and a significant number say they want to give back to their community now out of a sense of gratitude.”

Growth of DAFs Is Significant

As Nopar observed, hundreds of thousands of clients have opened donor-advised fund (DAF) accounts in the past decade.

The main advantages of DAFs are ease of use, ability to accept donations of both liquid and illiquid assets, and greater tax benefits than private foundations, Nopar said.

In his experience, most charities today recognize that they receive larger donations from DAF donors than from those who donate cash or publicly traded stock. This is because the donors already received a tax deduction when they donated to the DAF and thus have a large pool of assets that can only be granted to charitable organizations.

One key emerging trend the panel highlighted is the donation of appreciated real estate assets to a DAF, as this provides a substantial degree of tax efficiency.

Two Other Popular Giving Vehicles

In closing the webinar, Heffernen spotlighted two other popular giving vehicles — charitable remainder trusts (CRTs) and charitable lead trusts (CLTs).

A CRT allows a donor to gift assets to a trust in return for an income stream that is paid to a non-charitable beneficiary for an express period. A qualified charity then receives the remainder of the trust assets at the end of the pre-defined period.

“When is this useful? When there is a desire to receive an income stream while obtaining an income tax deduction,” Heffernen suggested. “It also may help to avoid capital gains taxes on highly appreciated assets, depending on the circumstances.”

One thing to note is while the charitable remainder beneficiary can be changed, the trust is generally irrevocable. For this and many other reasons, it is important for advisors, clients and legal resources to diligently construct and review trust documents.

Clients using a CLT can expect a different experience. With a CLT, they also gift assets to a trust, but it is the qualified charity that receives an income stream for an express period. The remainder interest then passes to non-charitable beneficiaries at the end of the pre-defined period.

The CLT is basically an estate-free vehicle that can transfer wealth to family members at reduced or no gift and estate tax cost, Heffernen explained, depending on the specifics.

Credit: Adobe Stock 

John Manganaro

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