In a year when client portfolios have been put through the wringer, year-end tax strategies might feel like more of a grind than usual. But now is the right time for advisors to tap into client aspirations in a way that adds value to both the portfolio and the advisory relationship.

That’s the advice of James Carpenter and Danielle Kelly, charitable planning consultants at Fidelity Charitable, the firm’s independent charity that manages donor-advised funds. They were joined in a webinar by Albert Yambor, a senior director of family wealth at Sequoia Financial Group in Akron, Ohio, in a presentation entitled, “Year-End Giving Strategies for Uncertain Times.”

Either despite the gloomy economic climate or because of it, a firm survey in July and August found that 59% of Fidelity Charitable donors were considering giving more to charity this year over last year because of concerns about individuals and nonprofits being able to weather a recession.

Although big givers like foundations and corporations get the most attention, about $330 billion, or 70%, of the money given to U.S. charities last year was from "individuals like your clients making gifts to their favorite charities, their churches or their local food banks,” Carpenter said. “Americans continue to be terrifically generous.”

This generosity can give clients a sense of purpose and legacy with their wealth and opens the door for financial advisors to be an important part of those aspirations, he continued. However, the survey also found that only about 6% of advisors are engaging with their clients at an aspirational level.

“In order to do that, you need to have this conversation with your client. You need to understand what their charitable intent looks like,” Yambor added. “Not every one of your clients is going to have charitable intent, but if you were to ask every one of your clients you’d be surprised by who is charitable, who is giving, that you’re not aware of.”

The panel delved into five strategies advisors can use to have successful conversations with their clients around charitable giving that boosts philanthropic endeavors and lowers a client’s tax burden at the same time.

Select The Right Asset To Give
A lot of that $330 billion given last year was cash and cash equivalents, like writing checks or swiping a credit card at a fund raiser, Carpenter said.

“It’s after-tax income, so in one sense it’s the most expensive thing they could be giving,” he said. “But, if they happen to have appreciated securities, now we’re in an opportunity to talk about getting some leverage into their charitable gifting.”

By donating long-term appreciated securities, clients generally are entitled to full fair market value of the asset on the date of the gift and the embedded capital gains are transferred to the charity, which in most cases has a zero tax rate.

“We magically switch capital gains into charitable gains,” he said. “The client gets a better tax benefit and the charity gets more money.”

For example, the panel illustrated, a client in the 37% federal income tax bracket has long-term appreciated securities valued at $50,000, with long-term unrealized gains of $30,000. If sold, those gains would be subject to a 20% capital gains tax and 3.8% Medicare surtax.

If the client sells the securities and donates the cash proceeds, she’ll owe $7,140 in taxes, leaving $42,860 for the charity. In addition, the saved income tax on her donation will be $15,858. However, if she donates the securities directly, she pays nothing on capital gains and the charity gets the full $50,000. And the saved income tax on her donation will be $18,500.

“We particularly like this strategy for clients with concentrated positions. Whether that’s an executive with a lot of public company stock, or clients who have positions in, say Apple, bought 12 years ago,” Yambor said. “Nobody likes to pay a penalty for success, so we really like this strategy for our charitable clients to take that stock, give that to the charity and use their cash to further diversify the portfolio and manage that concentration risk.”

And for clients who are not suffering from concentration risk, a variation on this is to use the cash to rebuy the same stock in order to reset their tax basis, he said.

First « 1 2 » Next