December, the month of gift-giving and good cheer, has long been the time when clients dispense their largesse to secure a year-end tax-deduction. And a growing number of these charitable contributions are not the one-time variety, but planned gifts that, funded with life insurance, form part of a comprehensive wealth transfer plan.
"There is a new awareness of the opportunities that have arisen in the charitable giving arena," says Teresa Cherry, a certified financial planner and principal at Wealth Design Network, Chicago, Ill. "There is a greater interest among donors to explore ways of giving that achieve legacy planning objectives and tax savings."
The latter can indeed be substantial. When donors contribute assets to a charitable trust, they can receive a charitable tax deduction for (typically) 20% of their adjusted gross income, a deduction they can carry forward for 5 years. The donor can additionally defer and/or avoid long-term capital gains tax on assets sold by the trust to generate income for the charity and non-charitable beneficiaries. And, structured properly, the vehicle can zero out their estate tax.
The tax advantages, combined with the less tangible but often equally rewarding experience of giving, are fueling a surge in donations. According to the Giving USA Foundation, charitable contributions in 2005 topped $260 billion, a nearly 5% gain from the $245 billion recorded in 2004. At $199 billion, individual donations accounted for the lion's share of the total. Donations by foundations, charitable bequests and corporations totaled $30 billion, $17 billion and $14 billion, respectively.
To be sure, a still substantial percentage of these gifts are one-time contributions, many of them made during charities' capital campaigns. The challenge for advisors, says Cherry, is to identify clients' charitable inclinations and channel them into a comprehensive plan that fulfills long-term goals. High among these are securing a comfortable retirement income, passing on an inheritance to children and grandchildren, minimizing income and estate taxes and, if the client is a business owner, engineering a graceful exit from the firm.
The charitable component of an all-inclusive wealth transfer plan starts with the discovery or fact-finding process. R. Clifford Berg, a chartered financial consultant at Financial House, Centreville, Del., and a member of the board of directors of the Society of Financial Service Professionals, Newtown Square, Pa., says he reviews clients' tax returns to identify organizations to which they had previously contributed one-time gifts. Still more can be learned, he adds, by asking clients questions about the reasons underpinning their contributable donations.
Are they motivated to give primarily because of the tax advantages afforded by charitable gifts or from a desire to advance a cause? With which organizations are they actively involved in the non-profit community? Are they looking to generate a greater income stream on highly appreciated assets than they can currently?
Often, sources say, philanthropic intentions hinge on a combination of factors–including the element of surprise. Sources point out that many clients who have established an estate plan are ignorant of the fact that Uncle Sam might still be entitled to part of their accumulated wealth.
"After the estate planning, there will potentially be an exposure subject to the death tax when mom and dad die based on certain exclusions," says Aubrey Morrow, host of MoneyTalkRadio.com and president of Financial Designs Ltd., San Diego, Calif. "In a recent case, I told 2 clients of mine–a Jehovah's Witnesses couple who held $11 million in real estate–that without advanced planning, they would elect by default the IRS 'charity,' as opposed to a charity of their choice. That hit them like a ton of bricks."
And it spurred them to establish a planned gift for their church. But wherever the client's interest may lie–be it proselytizing to the unconverted, saving the environment or offering succor to populations suffering from disease and hunger–clients need to bring their charitable inclinations into focus if they're to have a meaningful impact.
To that end, says Cherry, advisors can help them formulate a philanthropic mission statement. Clients also need to identify charities that can make the best use of their money–a task that may require the assistance of a consultant who can properly research organizations of interest.
Clients need to decide, too, on which assets to gift. Generally, sources say, these encompass highly appreciated assets that, absent a charitable plan, would be subject to not only estate tax, but also long-term capital gains tax that would result from the property's sale.
Such assets commonly include closely held businesses, equity portfolios and real estate. They may also extend to antiques, artworks and collectibles. Example: a 17th century sofa worth $1.7 million that a client of Morrow's, an antique store owner, had acquired.
