ELITE ADVISOR BEST PRACTICES

The Power of Charitable Capital Planning

Planned giving redefined

By Nick Gregory

Key Takeaways:

  • Raise your firm’s level of value-added as both a planned giving and financial solutions provider.
  • Help clients understand the power of the third form of financial capital.
  • Enhance your firm’s brand and position in your community through charitable capital planning.
  • Simplify the complexity of planned giving in order to motivate clients more effectively to do what is in their best interest.

In order to respect wealth and to maximize its use in helping clients achieve their true financial and charitable objectives, it is important to understand that wealth can be broken down into three forms of financial capital within the financial life support systems of clients who are surrounded by the following financial engineering areas:

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The three forms of financial capital are:

1. Personal Capital: This is capital in which clients have control, use and ownership. This capital can be sold, consumed, passed on to heirs or used to satisfy their giving desires.

2. Taxable Capital: The ownership, use and control of this type of capital must be given up and passed on to the U.S. Treasury for the general welfare of America and the world through ordinary income tax, capital gain taxation and, at death, estate taxation.

3. Charitable Capital: This type of capital is created through the conversion of taxable capital by leveraging the heart of tax law dating back to 1969. That’s when Congress passed into law IRC Section 664 in order to motivate American citizens to give more while sidestepping the inefficiencies of our governmental revenue and disbursement systems. Although ownership of capital is given up in this scenario, capital can be maintained while the contributions of Americans are self-directed to society through custom-designed planned giving programs. This way, clients can pinpoint exactly where they wish funds to be contributed to satisfy their heartfelt giving objectives.

Most Americans are not aware of the charitable incentives that Congress created over 30 years ago. Meanwhile, charitable organizations and financial advisors have not been very effective in educating their clients about how to convert taxable capital into charitable capital.

As shown in the diagram below, the desire to have ownership can generate maximum taxation … taxable capital. However, the redirection of that desire can allow for increased income, decreased taxation, increased inheritance and increased giving — Charitable Capital.

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Why not assist your clients by using the Charitable Capital planning tools that Congress has made available for over 30 years — planning tools such as these below?

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Each of these tools above can be used to generate substantial income tax deductions and cut away capital gains and estate taxation while achieving the “heartfelt” giving desires of clients.

As reflected in the following diagram, Americans are all philanthropists in one form or another. Either by government-directed or by self-directed actions, they are moving large portions of Taxable Capital into Charitable Capital.

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So, which type of philanthropist do clients and their families desire to be? Why not understand and respect the opportunities and pitfalls that surround the financial life support systems of clients? Why not use tax law effectively and take an intelligently planned course of action for helping clients address their needs, concerns and objectives. Such an approach can allow clients, their families and future generations to experience the incredible joy of Charitable Capital planning.

A Lead Annuity Trust Case Study — A $1 million contribution becomes $5,212,836

Bill, age 60, is a Connecticut resident. As reflected in the diagram below, desiring to give more and frustrated with his combined state and federal tax rate of 46.3 percent, Bill and his advisors decide to establish a lead annuity trust. Their financial engineering plan includes a 6 percent annuity payout (fixed at 6 percent of the original contribution) to a carefully selected nonprofit. They establish the trust duration of 20 years and project a tax deferred investment return within the trust of 8 percent annually.

With this design, Bill will generate an income tax deduction of $972,000(1) in 2015 to offset taxable income from other sources, while giving back annually for the 20-year period. Considering his tax rate of 46.3 percent, the tax deduction is equivalent to a personal tax savings of $450,036. Utilizing a tax deferred chassis, his financial advisor intends to invest that amount for him personally, outside of the trust, with a projected return of 8 percent.

So, at the end of 20 years, Bill’s original contribution of $1 million will have accomplished a great deal.

He will have a projected $4,012,836 of financial capital available, and the very grateful nonprofit will have received $1.2 million . . . charitable capital.

(1)Tax deduction calculated as of 11/01/2015. Assumes full tax deduction utilized in 2015.

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A Pooled Income Trust Summary

Coupling tax advantaged asset management and lifetime income with post mortem giving

Suppose your wealth management clients make contributions to a pooled income trust (PIT) established by a nonprofit organization in exchange for lifetime income while taking advantage of all other PIT program benefits. The nonprofit administers income payments and approves and oversees an income-oriented investment portfolio while providing reporting and tax accounting. The PIT investment portfolio is managed by your firm. At the death of all living beneficiaries, the remaining principal is distributed to donor advised funds for continued investment management and disbursement to previously designated charities.

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About the Author

Nick Gregory is Managing Director and CEO of both The Financial Engineering Institute and The Charitable Capital Design Center. He is also Board Chairman and Founder of Give Back Nation, a national community foundation. Nick and his team provide training, marketing and advanced case design for financial advisory firms, law firms and accounting firms as well as nonprofit organizations across the country. He can be reached at 888-884-3332.