It’s #GivingTuesday week, and the year’s end is close. Colleges, universities and other large nonprofits are acutely aware that this is the season to encourage well-to-do alums and supporters to make gifts and wrap up one last tax deduction.
Let’s look at the ways to donate that nonprofits promote in the holiday appeals that are sitting in your clients’ inboxes and mailboxes today. Which are most efficient in saving your clients money in taxes? Which ways should clients choose if they want their gifts put to a particular use, such as scholarships, facilities, academic chairs, or other purposes?
Making gifts of stock or other appreciated securities
Advisors can recommend to clients, usually while working, that they donate appreciated stock to a donor-advised fund (DAF), available on many investment platforms, such as Fidelity, Charles Schwab, and others.
With DAFs, clients benefit from an itemized tax deduction equal to the stock’s value (up to 60% of their income) and avoid paying taxes on significant capital gains. A client takes the deduction in the year the DAF is created but can make grants from the fund to nonprofits in future years.
Clients may be tempted (prompted sometimes by their alma maters) to make gifts of appreciated stock. Such gifts, however, are far less flexible than a DAF. I also know from personal experience that a university receives the stock in “street name” (e.g., IBM from Merrill Lynch) and can become confused about who the donor is.
There are donor-advised funds based at some colleges and universities, but they have thresholds that only very wealthy investors can meet. They also require donors to commit half of their grants from the DAF to the institution.
Gifts from individual retirement accounts (IRAs)
Nonprofits sometimes tell donors that an easy option is to make gifts from individual retirement accounts (IRAs), a process known as a charitable IRA rollover. Clients over age 70½ can make a gift from an IRA as a qualified charitable distribution. Those 72 or older can satisfy their required minimum distribution (RMDs) obligations with gifts.
It may be indelicate to suggest, but nonprofits are not looking out for your clients or their retirement goals. You are. Part of your work involves managing the effects of RMDs on tax liability and income.
Few clients benefit from making charitable donations from university sponsored IRA rollovers. For most, it’s still wiser to create a donor-advised fund.
Gifts that promise lifetime income and the benefits of institutional investing
Many higher education institutions invite alums and other donors to participate in charitable remainder trusts (CRTs) or charitable annuity trusts (CATs).
The pitch goes like this: “Benefit from the investing prowess of our high-profile endowment managers and access to an array of options, such as private equity, and venture capital, available to them. And receive income from those investments while you are living.”
The counterargument is this: Multi-billion-dollar endowments pay high management fees that may more than offset any gains to the endowment and donors along for the ride. Income from these trusts is not guaranteed and depends on endowment returns.
Donors also receive only about half the value of their investment gains through income. The other half reverts to grants to the institution. In effect, such trusts offer only half the tax advantages of donating appreciated stock to a donor-advised fund.
Universities deftly market CRTs and CATs: Class reunions include sessions led by the development office and featuring endowment managers. But if clients ask you about them, use the opportunity to probe why they are interested. Maybe they’re seeking more financial security. There are other options, such as an income annuity, you can offer in that case.
Make it easier as clients age
Some clients find that their enthusiasm for managing their investments and philanthropy wanes as they age. They may become comfortable with their advisor setting a glide path for investing, spending, and gifting that lifts them out of the pilot seat.
In these cases, advisors may recommend trusts and delegation of investment and philanthropic authority. Legacy gifts, to be made after clients’ deaths, also can satisfy the wishes of many to make meaningful contributions to institutions or causes after their deaths. Donor-advised funds, too, can be set up to pass grant-making authority to the next generation.
On a personal note: My family chooses a DAF
We’re an MIT family. My father taught there for almost 70 years. My wife, son, brother, sister, and I all received graduate degrees. I learned to swim in one MIT pool (and still swim in another, larger pool).
Our gifts to MIT vary in size and purpose from year to year. Like many others, we make gifts to address a particular situation or appeal, such as donating to a named chair or a contribution memorializing a professor.
A donor-advised fund is the most tax-efficient and adaptable way for us to manage our philanthropy.
Paul R. Samuelson is the chief investment officer and co-founder of LifeYield.