As current events continue to present challenges for so many, there’s no doubt your clients are relying on you more than ever to help them weather the storms of inflation, financial markets impacted by global unrest and the looming potential of changes to tax laws.
As is so often the case during periods of volatility, philanthropy can be a calming force.
Lately, our team has been particularly interested in the latest research on the importance of meaningful relationships between professional advisors and clients, and we strive to help you create those strong bonds of loyalty.
In particular, we are struck by the results of a study recently published in the Journal of Financial Planning, which illuminated the disconnect between how advisors perceive their effectiveness versus how their clients actually rate it.
Related to charitable giving, for example, 68 percent of financial planners said they made an effort to gather information about their clients’ cultural values, but only 41 percent of clients agreed.
Philanthropy, and partnering with The San Diego Foundation, can help you close that gap.
Charitable giving is a natural and easy way to start a conversation with clients about their values and what’s important to them in their estate plans and financial plans beyond just dotting the i’s and crossing the t’s.
With that in mind, we’re focusing this issue on topics that may help you start even more meaningful conversations with clients as we navigate the rollercoaster of 2022’s first quarter.
Inflation’s Impact on Clients & Charitable Giving
Charities are impacted by inflation, and your clients may wish to take that into account in their charitable giving plans for 2022.
Certainly as your clients’ purchasing power dips, so does their ability to make charitable contributions.
The Great Recession was an extreme example of this. Total giving dropped by 7.2 percent in 2008, and then decreased by another 8 percent in 2009, according to Patrick Rooney, an economist at the Indiana University Lilly Family School of Philanthropy, and Jon Bergdoll, a philanthropy statistician
But, it’s possible that the charities your clients love to support are feeling the sting to an even greater degree. This might sway your clients toward maintaining – or even increasing – their historical charitable giving budgets and perhaps even adjusting those budgets for inflation.
Be mindful, though, that even the possibility of inflation can have a significant psychological effect on your clients, impacting everything from their confidence as consumers to attitudes toward Girl Scout Cookies.
Our team has decades of experience working with advisors and donors through economic ups and downs.
We’re happy to be a sounding board as your clients evaluate whether and how to adjust their charitable giving in 2022, especially in cases where establishing a donor-advised fund (DAF) at The San Diego Foundation can help achieve both a client’s and nonprofit’s objectives.
Closely-Held Business Interests: Adventuresome Giving
Only a tiny fraction of the 27 million businesses in the U.S. are publicly traded. Even so, your clients still have plenty of opportunities to give highly-appreciated marketable securities to fund their charitable endeavors.
With the millions of closely-held businesses that aren’t publicly-traded, though, many of your clients may have an untapped opportunity to give corporate interests, especially considering that private equity fundraising continues to soar.
As you talk with your clients about giving LLC and partnership interests, keep in mind that complex tax and legal rules may apply.
For example, the operating agreement or partnership agreement will indicate whether interests can be gifted to charity in the first place. Another consideration in the case of an LLC is whether the entity is taxed as a partnership
Finally, if the interests are given to a public charity, such as a fund at the San Diego Foundation, in general, the contribution is deductible up to the fair market value of the gifted property (minus reductions for certain components that may include liabilities, short-term capital gain and ordinary income).
If you’re ready to explore ways your clients can fund their charitable giving strategies through gifts of closely-held business interests, our team is happy to help.
Crypto & CRTs: Buried Treasure or Hidden Pitfalls?
“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”
That’s a key phrase in IRS Notice 2014-21, where the Internal Revenue Service outlined its position on the tax treatment of the disposition of cryptocurrency. In other words, a taxpayer’s disposition of cryptocurrency will generally be treated as triggering a gain or a loss.
With this core principle at its foundation, taxpayers have been using cryptocurrency to fund their charitable goals, including establishing charitable remainder trusts with gifts of bitcoin and other cryptocurrencies.
While this is certainly a strategy worth exploring for some of your clients, beware that the IRS’ commitment to increased enforcement, coupled with the purported widespread underreporting of cryptocurrency-related income and corresponding tax revenue losses, clients should proceed with caution.
The IRS has even launched a special initiative to audit crypto reporting and catch fraud, calling the effort Operation Hidden Treasure.
As always, keep in mind the old saying that a client “should not give away a dollar to save 50 cents.”
As is the case with any legal structure that results in tax consequences, there are pros and con or “charms and dangers”. Think of a charitable remainder trust – including one funded with cryptocurrency – as a vehicle for helping clients support the nonprofits they love, not simply a tax-planning tool.
Viewed through that lens, clients will be pleased that a charitable remainder trust not only provides them with an income stream, but also can offer flexibility in the ways they provide for their intended charitable beneficiaries, especially when aligned with a program or fund at The San Diego Foundation that supports your client’s philanthropic goals.
Learn More
For more than 45 years, we have partnered with a large network of wealth advisors, estate planning attorneys, tax planners and other advisors to help high-net-worth clients and families achieve financial planning objectives and charitable giving goals, while maximizing tax deductions.
From establishing donor-advised funds to building your clients’ legacies and providing them with grantmaking guidance on community needs, we act as your team’s charitable partner, supporting your clients through the giving process as you retain complete control of your relationships.
If you’re interested in learning how we can help meet your clients’ financial planning and charitable giving goals, contact me at (858) 245-1508 or jrogers@sdfoundation.org.
