Every year, the Giving USA study reports the status of charitable giving in America. Adjusted for inflation, 2023 numbers were down, which means it’s been more difficult for our San Diego region’s charities to meet the needs of the people they serve. This is relevant to your clients because, for many of them, philanthropy is an important part of their financial plans and family traditions.
This month, we’re sharing insights to help with your conversations about charitable giving.
- As an advisor, you’ve certainly experienced clients’ emotions running wild. Confronting mortality, addressing complex family relationships, and discussing money all come with financial planning’s often rocky terrain. San Diego Foundation (SDF) can help when you encounter a charitably-minded client who is devoted to a particular stock and may be reluctant to take the tax-savvy step of giving it to charity.
- “Doing well by doing good” is a popular notion in corporate giving programs. Many of your clients may be in positions to influence corporate giving strategies. SDF can support you as you advise clients about avoiding tax pitfalls and conflicts of interest as clients charitable giving strategies that align with business purposes.
- If it feels like the topic of the estate tax exemption sunset is heating up, you are right. More and more of your clients are becoming aware of the change in the law that is slated to occur at the end of 2025 unless legislation intervenes. Be sure you know the basics about how this change could impact your clients, including the ways charitable giving and SDF can fit into smart planning.
Of course, please reach out anytime. It’s our pleasure to work with you as you help your clients achieve their charitable giving goals for this year and many years to come.
Gifts of Appreciated Stock: Picking Favorites
You’re well aware that donating highly appreciated stock to a fund at SDF offers significant advantages for your clients over making cash gifts. Communicating this benefit, however, can be challenging when clients have emotional attachments to their shares.
How can you overcome this hurdle and help optimize your clients’ charitable giving strategies?
Start by understanding the reasons a client might be reluctant to part with certain stocks in the first place:
- Legacy: “These shares have been in my family for generations.”
- Professional: “I worked at this company for decades; it’s the source of my wealth.”
- Simple preference: “I just love this stock.”
Emotional ties like these can create psychological barriers to effective charitable planning. However, there is a potential solution that can satisfy both your clients’ emotional needs and their philanthropic goals: The client donates shares of the highly appreciated, emotionally significant stock to their donor-advised fund (DAF) at San Diego Foundation, and then the client purchases shares of the same stock in their personal investment portfolio.
Here are four reasons why this can be such an effective strategy:
- Maximize tax deductions: Publicly traded securities are typically deductible at fair market value (and the tax savings could potentially help fund the repurchase).
- Reset cost basis: This transaction effectively resets the cost basis of the stock in the client’s personal portfolio to its current market price, potentially reducing future capital gains taxes.
- Emotional satisfaction: Clients can support charities while maintaining their shareholder status in the company they like.
- Community impact: SDF can sell the donated shares tax-free, thereby maximizing the proceeds flowing into the client’s DAF, which can then be used to support the client’s favorite causes.
As you share this strategy with a client, be sure to acknowledge the emotional value of the stock and emphasize the client’s opportunity to maintain ownership in the company. Building on this, you can show the client how the tax benefits of giving stock allow the client to make an even bigger difference than if they’d given cash instead.
As always, we can help you assist your clients with selecting the best assets to give to charity, evaluating the tax implications of various giving strategies, and structuring gifts to achieve strong community benefits.
Mixing Business & Charity: Keep it Ethical, Legal & Transparent
Your clients who are corporate executives have likely wondered at some point about the benefits of aligning their companies with philanthropy, whether specific causes or particular organizations.
In general, a community engagement strategy can be good for business, if well-executed. For example, almost half of consumers view a brand favorably when the brand supports a charitable cause. Community engagement programs can help with employee retention, too.
But what are the risks involved in mixing business with charity?
Download our Custom Corporate Giving Guide
In the spirit of aligning doing good with doing well, some companies would love to set up their own nonprofit organizations as “charitable arms” of their enterprises. Corporate leadership may like the idea of efficiency, control and tight alignment between the company’s offerings and the charity’s mission.
For example, a company that makes swimming pools might think it’s a great idea to set up a charity to build swimming pools at community centers to give more kids access to water sports. The company would like to donate tax-deductible dollars to the charity and ask its suppliers and customers to do the same. The company’s executives would serve on the charity’s board, and the charity would purchase swimming pools from the company to carry out its mission.
Is this a good idea?
No.
This strategy plays fast and loose with the rules. Beyond setting up an obvious conflict of interest, this practice would mean that a company would effectively use charitable funds to benefit itself. This is not a “charitable purpose” in the eyes of the IRS and could result in the loss of the charity’s tax exemption. Plus, if the news got out about this structure, the company could suffer reputational damage.
The company, its executives, and the community would all benefit from more transparent and ethical charitable strategies, such as establishing a corporate fund at SDF, setting up a volunteer program for employees, establishing a matching gifts program, or aligning with wholly independent charities on cause-related marketing partnerships.
At SDF, we partner with some of San Diego’s largest companies, including Cox Communications, the WD-40 Company, SDG&Em Qualcomm and Hologic, on their custom corporate giving strategies.
Download our Custom Corporate Giving Guide
Planning for a Sunset: Lock In a Higher Exemption, Unlock a Legacy
Without legislation to prevent it, the sunsetting of current estate tax laws at the end of 2025 will dramatically reduce the federal estate tax exemption from $13.61 million per person in 2024 to approximately $7 million in 2026 (this includes adjustments for inflation). This change would affect many high-net-worth individuals and families, likely exposing many more estates to federal estate taxes.
It is impossible to predict whether legislation will prevent the sunset. Even so, advisors should prepare for client discussions and start considering estate planning strategies now, especially techniques that incorporate multi-generational gifts and charitable planning.
Indeed, for a client who is charitably inclined, making larger lifetime gifts to charity and arranging for charitable bequests will help reduce the client’s taxable estate because of the charitable estate and gift tax deduction. Donor-advised, field-of-interest, designated, unrestricted and endowment funds at SDF are flexible and effective charitable recipients of both lifetime and estate gifts.
For some clients, you may wish to begin exploring a comprehensive, multi-generational wealth transfer plan, potentially using key tax-planning vehicles:
Charitable Lead Trust
Charitable lead trusts (CLTs) may be particularly effective in the current environment. These trusts can provide income to your client’s fund at SDF for a set period of time, with the remaining assets passing to family members. Right now, the higher exemption allows for potentially significant initial funding of such trusts. This is because the value of the remainder interest counts toward the client’s estate and gift tax exemption.
Generation-Skipping Trust
A generation-skipping trust is an irrevocable trust that can benefit a client’s grandchildren and later generations. This trust utilizes a client’s generation-skipping transfer (GST) tax exemption (which parallels the estate and gift tax exemption). It could allow a client to take advantage of the higher exemption before it potentially decreases in 2026. It is possible under some states’ laws for these trusts to go on for many generations in a “dynasty” format, such that each generation benefits from the trust’s income (and potentially principal for health and education) without the trust’s assets being included in the beneficiaries’ estates for estate tax purposes.
Multi-Generational Fund
Alongside a charitable lead trust or generation-skipping trust, or as a standalone, a client can establish a DAF that can function much like a family foundation with successive generations serving as advisors, or San Diego Foundation stepping in after the first or second generation, to recommend grants from the fund to carry on a tradition of supporting the causes that have been most important to the client during the client’s lifetime.
Our team looks forward to working with you to achieve your clients’ long-term charitable goals, even in the midst of uncertainty concerning the estate tax laws.
Learn More
For nearly 50 years, we have partnered with an extensive network of wealth advisors, estate planning attorneys, tax planners and other financial advisors to help high-net-worth clients and families achieve financial planning objectives and charitable giving goals while maximizing tax deductions.
If you want to learn how we can help meet your clients’ financial planning and charitable giving goals in 2024, contact me at (858) 245-1508 or jrogers@sdfoundation.org.
