ELITE ADVISOR BEST PRACTICES
Leading Experts Weigh in on the Future of Charitable Planning
Numerous surveys confirm that there has been a significant shift in gift planning expertise from the nonprofit sector to the for-profit (professional advisor) sector. Here’s how advisors can enhance clients relationships
By Michael King
- Numerous surveys confirm that there has been a significant shift in gift planning expertise from the nonprofit sector to the for-profit (professional advisor) sector.
- Nearly 70 percent of donors to charitable remainder trusts learned about this planning vehicle from their legal and financial advisors.
- Savvy advisors always have clients’ best interests in mind—even if it means giving up some AUM in the short run.
If you think wealth advisors are playing a greater role in their clients’ philanthropic decisions, you’re not alone. I attended some of the nation’s most important charitable planning conferences, seminars and presentations this year, and it’s clear that wealth advisors not only have a great opportunity to help clients with charitable planning—but they’re also increasingly being expected to do so. Here are some pearls of wisdom I gleaned from top thought leaders in our profession.
The next tsunami—charitable giving with non-charitable trusts
Generally when we think of charitable giving and trusts, charitable remainder trusts and charitable lead trusts immediately come to mind. We seldom think about charitable giving in the context of non-charitable trusts, but Al W. King III, co-founder and co-CEO of South Dakota Trust Company, revealed tremendous, though often overlooked, opportunities for planning in this context. At the Advisors in Philanthropy Annual Conference, King said the amount of wealth that high-net-worth individuals own in trusts is surprising. “The top 1 percent currently have 38 percent of their assets in trusts, and the next 9 percent have 43 percent of their assets in trust,” observed Mr. King, citing Edward Wolff’s The Asset Price Meltdown and the Wealth of the Middle Class.
Some families intentionally incorporate charitable planning and provisions into trusts they create. You can also include such tactics as:
- Setting a target value for the trust that will be available for family members with any growth and appreciation above that amount being directed to charity
- Supplementing distributions to family members who work for a charitable organization
- Matching beneficiaries’ personal charitable contributions
However, King said families are also discovering strategies to incorporate charitable goals and objectives into trusts that were initially created with no charitable intentions. This is often achieved by changing the trust’s situs (legal jurisdiction), reforming or modifying the trust, or “decanting” in states with flexible decanting statutes that allow trustees to change the terms of an otherwise irrevocable trust, which may include adding discretionary charitable beneficiaries.
Common trusts and trust strategies that are increasingly incorporating charitable goals, objectives and planning include:
- Dynasty trusts—Because of the long-term nature of these trusts, families often desire to make provisions and provide flexibility for both family and charitable goals and objectives.
- Existing non-charitable trusts—Irrevocable trusts can sometimes be reformed or modified to allow for distributions to charitable organizations. Depending on the applicable state law governing the trusts, it may be necessary or helpful to change the situs of a trust to a state that has more flexible trust decanting laws.
- Purpose trusts—Some trusts are created for a specific purpose, often to care for “something” rather than for “someone.” For example, a trust may be created to care for a pet; to maintain family property such as antiques, cars, jewelry or memorabilia; or to maintain a family residence or vacation home. Once the pet dies or the property is sold or otherwise disposed of, the remaining assets might pass to charity.
- Health and education exclusion trusts—These trusts provide support to beneficiaries over multiple generations for certain education and health-related costs. As long as distributions to cover such costs are made directly to an educational or health care institution, then gift taxes and generation-skipping transfer taxes can be avoided indefinitely. However, in order for the vehicle to qualify as a health and education exclusion trust, one or more charitable beneficiaries must have a substantial present economic interest—something most professional advisors consider to be satisfied if charitable beneficiaries receive at least a 10 percent unitrust amount paid annually.
Eleven lessons from 35+ years of charitable planning
At the National Conference on Philanthropic Planning, Laura Peebles, former tax director of the national office of Deloitte and a consultant to Charitable Solutions, shared these nuggets of wisdom gained from nearly four decades in the charitable planning arena:
- The donor’s charitable intent determines whether a gift is made. However, the tax benefits can influence the fulfillment of the giver’s charitable intent in terms of the asset that is ultimately given, when the asset is given, and the manner and structure through which the asset is given.
- Proceed with caution if a potential donor asks about the tax benefits of a charitable gift before expressing any charitable intent.
- A confused donor is not a happy donor.
- Some tax aspects of charitable giving don’t have good answers, some don’t have inexpensive answers and some don’t have any answers at all.
Charitable giving with retirement benefits
According to author and attorney Natalie Choate, an estate planning and retirement benefits consultant, advisors and many charitably inclined clients are well-aware of the substantial tax advantages of giving retirement benefits to charity, particularly in a testamentary capacity. In addition to avoiding any estate tax liability that might otherwise apply, the charity also avoids tax on “income in respect of a decedent” that would otherwise result in the imposition of income tax on retirement benefits received by the owner’s children or other heirs.
As was discussed at the North Carolina Bar Association’s 36th Annual Estate Planning & Fiduciary Law Program, in some cases planning charitably with retirement benefits can be quite simple; for example, if a charity is named as the sole retirement plan beneficiary. However, other planning scenarios—such as those involving charitable and non-charitable beneficiaries of the same plan, using formula bequests in beneficiary designations, leaving retirement benefits to charity through a trust or estate, and disclaimer-activated gifts to charity—can involve complex issues and obstacles that must be carefully navigated.
Strategic partnerships: Working together to assist donors/clients
At Crescendo’s Practical Planned Giving Conference, Robert Wahlers, vice president of development and gift planning for Meridian Health, revealed the eroding presence of charitable gift planners within charitable organizations and the corresponding shift toward the professional advisor community in providing charitable counsel and planning advice to charitably inclined clients and the charitable organizations they support.
Wahlers suggested that donors trust their advisors more than they do nonprofits to provide technical gift planning advice. This conclusion seems logical, since individual charities may be perceived as having an inherent conflict because they represent the charity soliciting gifts. Advisors, on the other hand, have no such conflict, and in fact may be perceived as actually encouraging charitable giving against their personal interests—for example, by reducing the amount of assets under management, in the case of investment advisors.
The shift in gift planning expertise from the nonprofit sector to the for-profit (professional advisor) sector is evidenced by donor surveys conducted by the National Committee on Planning Giving. These studies revealed that the number of donors who reported learning about the most basic planned gift option—a charitable bequest—from their legal or financial advisors increased to 28 percent in 2000 from 4 percent in 1992. In addition, nearly 70 percent of charitable remainder trust donors reported learning about the planning vehicle from their advisors.
These trends indicate a growing opportunity for professional advisors to serve generous clients and charitable organizations by driving the charitable planning process and conversation and becoming more knowledgeable about charitable methods that meet personal planning goals.
In addition to helping professional advisors satisfy their continuing education requirements, professional conferences also provide great environments and opportunities for learning, growing and networking with fellow advisors. Consider attending a charitable planning conference next year to enhance your ability to effectively serve your clients in this field of growing importance. Mark your calendar now and plan to attend one or more of the conferences already being planned for 2016:
- Advisors in Philanthropy Annual Conference: May 9-11 in Chicago
- Crescendo’s Practical Planned Giving Conference: September 26-27 in Chicago
- Partnership for Philanthropic Planning’s National Conference on Philanthropic Planning: October 17-19 in Dallas