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How Advisers Can Help Clients Give to Charity and Save on Taxes

May 24, 2022, 8:45 AM

Taxes have and will always be at the forefront of conversations; this was especially true last year, when a major tax increase proposal was on the table in the US. The Biden administration proposed $6 trillion in new federal spending last year, with plans to partially fund these expenditures by increasing taxes on the wealthiest Americans. It understandably stirred up chatter among individual investors and wealth advisers who were left to figure out what steps to take to absorb those increases.

While the tax increases ultimately failed to materialize, the anticipation of future tax increases did lead many wealthy investors to accelerate their income realization last year. As we come to the end of a multiyear bull market, many portfolios now find themselves sitting on unrealized capital gains. As shareholder wealth increases, so too does their share of non-withheld income, leading to higher taxes. So, what should investors do?

The good news is that there is one important way to help control those taxes and feel good about doing it, and it’s an area where financial advisers can make a huge difference: charitable giving.

For individual investors and financial advisers seeking to minimize 2022 tax bills, charitable giving can be an important—and impactful—tool to leverage. And despite the financial challenges brought on by the pandemic, Americans have become increasingly generous with giving in recent years. According to recent data from Envestnet | Yodlee, Americans with an annual income of $50,000 or more increased their charitable giving by 25% in the first quarter of 2022 compared to pre-pandemic levels. In March 2022 alone, those earning more than $150,000 per year increased their charitable giving by 34% relative to pre-pandemic levels.

Despite the uptick in charitable giving—and the potential implications on tax planning—there’s a divide between the guidance that individual investors want from their wealth advisers and the guidance they’re getting. According to a 2018 Spectrem study, 92% of investors expect their financial advisers to talk about tax planning, and only 25% believe they’re receiving that from their financial advisers. If paying it forward can pay off for your portfolio, why are the tax benefits of charitable giving so often left out of these important conversations?

While many advisers shy away from tax conversations, their job is to think about the after-tax implications of their clients’ portfolios, and there’s considerable value left on the table when tax planning isn’t part of their financial planning. Discussing the right tax strategy is necessary to help clients take full advantage of opportunities to grow their wealth, and ultimately give back. At the end of the day, it’s not about what they make, but what they keep. And, in the context of charitable giving, what they can offer.

Different Strategies

A common strategy for minimizing tax liabilities while maximizing charitable giving is to donate appreciated stocks instead of cash. Let’s assume an individual would like to donate $100 to their favorite charity and is weighing two options: sell $100 in stock and cut a check or donate the stock directly to the charity. Let’s also assume the stock sale would trigger a $10 tax liability on long-term capital gains. In the first scenario, the individual would generate a $10 tax bill, and could donate $90, creating a $90 deduction. But in the second scenario, the individual would incur no capital gains tax at all, thus allowing them to not only donate $100, but also to get a $100 deduction.

Donating appreciated stocks instead of cash can truly be a win-win for investors and charities. This strategy is often overlooked by donors, providing an opportunity for wealth advisers to educate and implement this strategy into their client’s charitable giving plans.

An increasingly popular vehicle for unlocking tax-advantageous charitable contributions is a donor-advised fund, or DAF. With a DAF, investors can typically contribute cash, securities, and even cryptocurrencies to personal accounts used for the sole purpose of charitable giving. The contributions automatically trigger the full tax deduction and can subsequently be granted to charities, or they can be held and invested to increase the value of funds available for donation over time without incurring any additional taxes.

Because of their ease, control, and tax advantages, DAFs are becoming more common. According to the 2021 Donor-Advised Fund Report from the National Philanthropic Trust, DAF contributions equaled $47.8 billion in 2020, more than a 20% increase from 2019. DAFs are important vehicles to help advisers improve their clients’ after tax performance, all while facilitating charitable giving and granting their clients control to donate further in years to follow.

Financial advisers can help their clients make giving more generously a tax advantage by starting the conversation on after-tax performance with clients, educating clients on the advantages of donating securities over cash, and introducing them to the concept of DAFs. These strategies not only allow wealth advisers to help their clients save on taxes while giving back, but they also allow for their charitable donations to be as effective as possible and provide the opportunity for them to give back even more with the additional money they saved.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Erik Preus, CFA, is head of investment solutions at Envestnet | PMC and is responsible for oversight and leadership of investment solutions. He has more than 25 years of experience in the investment services industry.

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