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.

Give At The Right Time
Even with the volatility of 2022, the S&P 500 has gained more than 400% since the bottom in 2009. Situations where a client has a forced capital gains event—when the advisor rebalances, for example—are excellent opportunities to maximize tax deductions.

“You may have heard from some clients earlier in the year who wanted to take some risk off the table, and maybe you’ve already done some rebalancing and forced the capital gain on your clients. Here we are in the fourth quarter, it’s time to address it,” Carpenter said. “They may or may not have some loss carry-forwards from previous years. If they don’t, you’ll have de-risked the portfolio and created a tax issue.”

Yambor said that rebalancing this year has been different than other years, as equities and fixed income both have dropped—at times by the same amount—and traditional rebalancing hasn’t been useful.

“So many clients had these more growthy name stocks that have done so well, they were looking to de-risk the portfolio and rotate into value names,” he said. “And they’re looking for opportunities now to generate some charitable deductions to offset those gains from rebalancing and improving the quality of their portfolio earlier in the year.”

Divest Privately Held Investments With DAFs
Donor-advised funds (DAFs) are a suitable repository for that broad category of complex investments that cannot immediately be sold on a public market. These could be private company stock, S Corp or C Corp shares, limited partnership shares, but also could include bitcoin or restricted shares of public stock, insurance interests, annuities, life insurance policies, and oil and gas interests, the panelists said.

“Why donate these complex assets? No question about it, these assets are often the most appreciated, lowest basis shares of anything a client might own,” Carpenter said.

If a client donates these assets directly to a private foundation (theirs or someone else’s), their tax deduction will be their cost basis, which could be extremely low. To earn a fair market tax deduction, the client can donate the asset first to a DAF. The DAF would then make the donation to the foundation.

Offset A High-Income Year
The strategy of bunching several years of contributions into one year to maximize a tax deduction is one that never gets old, Kelly said.

For example, a married couple filing jointly in a 35% income tax bracket could take a $25,900 standard deduction this year. If they owned a house and itemized, they could qualify for $10,000 in a SALT deduction and a hypothetical $6,000 in mortgage interest. If they made a $10,000 charitable donation, that would put them over the standard deduction by $100, saving them $35.

If the couple knows they want to make the same donation in the next two years, they can bunch all of those charitable donations into one year for a total of $30,000.

“Instead of giving $10,000 this year, they can give $30,000. That pushes them $20,000 over the standard deduction, and that will give them a $7,000 savings,” Kelly said. “That’s fantastic when you compare that to the $105 they’d save if they spread it out over three years."

Tried And True Roth Conversions
One obstacle to clients embracing Roth conversions is often the tax bill that goes along with it, Kelly said.

“Charitably inclined clients can make a donation to offset that big tax bill, and that’s an absolute no-brainer,” Kelly said.

For example, if a client converts a $500,000 traditional IRA to a Roth, there would be an IRS tax bill of $185,000. However, if the client makes the conversation at the same time as she makes a $100,000 donation, it reduces the tax bill to $148,000.

“This isn’t going to reduce the cost dollar for dollar, but it is the easiest tax planning strategy for them to take advantage of when doing a Roth conversion,” Kelly said.