Use tax reform to start the conversation about charitable giving.
Nearly half of investors say they want more from their wealth advisors when it comes to philanthropic planning and guidance.1 This conversation can be a hard one to start, but this year, advisors have an especially timely way to broach the topic with clients: the passage of the Tax Cuts and Jobs Act (the Act), which was signed into law in the waning days of 2017. As with any major change in law that could impact investors, there are a lot of unanswered questions about how this new tax policy will impact investors and specifically, their charitable giving.
Americans now contribute nearly half a trillion dollars annually to charitable causes that are near and dear to their hearts, crossing the $400 billion mark for the first time in 2017. The stock market and strong economic conditions helped drive solid growth in contributions to charity across the board.2 With philanthropy increasingly becoming a core aspect of our value system, advisors who tackle the challenges of an ever-changing Tax Code head on to help clients integrate their philanthropic goals into their financial plans can seize a unique opportunity to create a higher level of engagement and improve the client experience.
Key Act Provisions
Signed into law on Dec. 22, 2017, the Act made sweeping changes to the Internal Revenue Code that continue to grab headlines. Here’s a brief overview of the key provisions of the Act that impact the charitable giving landscape:
Increased standard deduction. The Act nearly doubled the standard deduction for individuals from $6,350 in 2017 to $12,000 in 2018. Similarly, for married couples filing jointly, the deduction rose from $12,700 in 2017 to $24,000 in 2018. These substantial increases coupled with new limits on the state and local tax deductions are expected to dramatically reduce the number of taxpayers who itemize deductions.
According to one report, the number of taxpayers who itemize could drop by more than 56 percent from 37 million to 16 million.3 Consequently, the number of households that will benefit from itemizing charitable contributions could fall at a similar rate.
Despite this decline, donors with high incomes are less likely to be impacted by the higher standard deductions and will continue to benefit from itemized charitable deductions.
While increased standard deductions are widely expected to have a negative impact on charitable giving, with some analysts projecting that total charitable contributions could be reduced by approximately 5 percent,4 the Act included provisions that could potentially help offset any declines.
Adjusted gross income (AGI) deductions. Before the Act became effective on Jan. 1, 2018, taxpayers were generally allowed to deduct up to 50 percent of their AGI for charitable contributions. The Act increased this limit to 60 percent of AGI for cash contributions made in taxable years beginning after 2017.
Pease limitation repealed. The Act repealed the Pease limit, which specified that the total amount of certain otherwise allowable itemized deductions (including charitable contributions) was limited for certain upper income taxpayers (for 2018, the income threshold above which the otherwise allowable itemized deductions are reduced would have been $266,700 for single filers and $320,000 for joint filers).
Motivations Driving Giving
The motivations driving giving go far beyond tax benefits. Our research reveals a disconnect between the actual motivations behind investors’ generosity and financial advisors’ perceptions of what stimulates philanthropy. Notably, advisors significantly overweigh the impact tax deductions have on clients’ philanthropic giving decisions. See “Motivations for Philanthropy,” this page.
This research is consistent with a recent survey conducted by U.S. Trust after the Act was signed into law that found advisors were overestimating the negative impact tax reform would have on giving among their clients. Only 35 percent of advisors believed their clients wouldn’t change giving levels in response to the 2017 tax policy while 58 percent of high-net-worth (HNW) consumers stated that the 2017 tax policy wouldn’t change the amount they give.5
For most clients, philanthropy provides a level of fulfillment that far exceeds any satisfaction gained by tax incentives and deductions. It’s a reflection of their values and experiences.
Opportunity for Advisors
Incorporating personal values into goals-based wealth management to help clients experience a greater sense of purpose through their financial capital can reap rewards for financial advisors and clients alike.
Increasing assets. Bringing together giving and investing often expands opportunities with donor-advised funds (DAFs), charitable remainder trusts (CRTs) and socially responsible investment (SRI) strategies. Further, 62 percent of investors believe that philanthropy is important to educating the next generation on family values and legacy,6 and 42 percent of Millennial heirs are more likely to stay with their benefactor’s advisor if the advisor was helping with family philanthropy.7
Higher satisfaction rates. Helping clients define an efficient strategy for giving to causes near and dear to their hearts can create better relationships. Clients with advisors who guide them on philanthropic planning are 40 percent more likely to be very satisfied with their advisors.8
Improved retention rates. Conversations about philanthropy are inherently more personal and meaningful than those about asset allocation changes or the impact of trade talks on the markets. Helping clients find their paths to a deeper purpose by collaborating to define goals and develop a high impact, integrated plan for efficient giving strengthens relationships and enhances the client’s overall experience.
For example, an advisor’s new 71-year-old female client with no children explained, “I worked for a publicly traded company for 41 years, and I bought a little bit of company stock whenever I could. Now it comprises the majority of my net worth, but it pays nothing in dividends, and I feel like all my eggs are in one basket. I want to diversify more, but the tax liability is too high. What should I do?” The advisor gave his answer: a CRT. After he described how a CRT works, the client said, “You mean I can leave my company stock to my church?” She went on to donate to her church and two additional causes. The client was gratified to learn that one solution would allow her to accomplish so many objectives.9
The uptick in charitable donations and recent rise of SRI strategies—assets have increased from $3.7 trillion in 2012 to $6.6 trillion in 201410—provide compelling evidence that a growing universe of clients are looking for more than just asset allocation and accumulation strategies.
Best Practices From the Field
While tax reform can be used as a good opportunity to broach the topic of philanthropy with clients, there’s more to the conversation than taxes. Several best practices can help to make for a more fruitful conversation and deeper relationship.
Understand the client’s mission and values. While there may be some common themes for charitable giving that loosely span across clients (for example, creating a lasting legacy), the values, personal experiences and sense of responsibility that dictate donations are usually highly personal and not always obvious. The investment in time to fully understand how a client’s experiences, values and motivations shape his priorities will help clients in a meaningful way.
Encourage clients to hold family meetings. For many clients, philanthropy provides a unique opportunity to engage the next generation of investors. Family meetings on philanthropy offer an opportunity for families to frame multi-generational conversations around values and the importance of giving while building stronger ties. Providing heirs with a meaningful opportunity to shape philanthropic decisions will increase their engagement and financial literacy.
Have the philanthropy conversation with all clients. Philanthropy isn’t only interesting to clients with millions of dollars to donate. Each client has passions, goals and values that can be enriched through strategic philanthropy with the help of a financial advisor. Wealth management should focus on each investor’s personal priorities and values—his goals and aspirations. Philanthropic giving and impact investing are a reflection of personal values and naturally align with financial goals.
While conversations with HNW clients may focus on different elements or tactics around giving, the rewards of helping clients achieve a higher level of financial fulfillment aren’t asset based.
Treat strategic philanthropy as a part of continuing education. Becoming and staying fluent on the full spectrum of options for charitable giving and impact investing requires a certain level of commitment. Philanthropy hasn’t traditionally been viewed as a core component to a wealth advisor’s value proposition, but an abundance of resources exist for those willing to seek them out.
With the growth of impact investing and DAFs leading the way, the lines that once separated investing and philanthropy are rapidly dissolving. Given the very personal nature of philanthropy, having investment solutions and ideas suitable for various levels of interest is important to meeting the evolving needs of your clients.
Changes to the law have the potential to impact investors, and advisors should work with clients to proactively address questions and develop a personalized decision-making framework. As with any other aspect of wealth management, planning ahead for philanthropic giving can only open up more options and create greater efficiencies that will make a difference in your clients’ own lives and with those causes close to their heart.
Endnotes
1. State Street Global Advisors, “The Transformative Power of Philanthropy: An Exploration of How the Desire to Make an Impact is Evolving Advisor-Client Relationships” (2016).
2. “Giving USA 2018: The Annual Report on Philanthropy for the Year 2017,” https://givingusa.org/tag/giving-usa-2018/.
3. Mark Hrywna, “Number Of Itemizers Estimated To Drop 56.7%,” The NonProfit Times (Jan. 15, 2018).
4. Joyce Beebe, “Charitable Contributions and the Tax Cuts and Jobs Act of 2017,” Rice University’s Baker Institute for Public Policy (March 30, 2018).
5. “The U.S. Trust Study of The Philanthropic Conversation: Understanding advisor approaches and client expectations” (July 2018), www.bankofamerica.com/content/documents/philanthropic/Philanthropic_Conversation_
Executive%20_Summary.pdf.
6. State Street Global Advisors’ survey, “Money in Motion” (2015).
7. Ibid.
8. Supra note 1.
9. Ibid.
10. The Forum for Sustainable and Responsible Investment, “U.S. SIF Foundation Report on U.S. Sustainable, Responsible and Impact Investing Trends” (2016), www.ussif.org/trends.