Help clients maximize their charitable impact through tax-smart planning

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Schwab Charitable offers tips and strategies for advisors looking to strengthen client relationships and maximize philanthropic impact through donor-advised funds

CHARITABLE GIVING holds significance, with 85 percent of advisors in the US currently providing charitable planning services to their clients. The benefits are numerous: It not only allows clients to enhance their philanthropic influence while reducing tax liabilities, but it also enables financial advisors to strengthen their position as reliable advisors; enrich connections with clients, charities, and communities; and foster relationships with future generations. Moreover, engaging in charitable activities offers both parties the rewarding experience of contributing positively to global welfare and establishing an enduring legacy. Schwab Charitable donor-advised funds provide clients with a straightforward and tax-efficient method for donating to charities, investing charitable contributions for tax-free growth, and increasing philanthropic impact. Industry experts: Hayden Adams, CPA, CFP®, director of tax and financial planning, Schwab Center for Financial Research; and Ruby Pediangco, senior manager, Charitable Strategies Group For anyone not familiar, can you share what Schwab Charitable is and what your role is within the organization? Ruby: Schwab Charitable™ is one of the largest national donor-advised funds. As an independent 501(c)(3) public charity, our mission is to increase giving in the US by offering donor-advised funds and philanthropic resources that make charitable giving tax-smart, simple, and efficient. In 2023, Schwab Charitable donors granted more than $6.1 billion to charity, with more than a million grants supporting over 127,000 organizations. My role is to educate registered independent advisors (RIAs) and individual donors on the tax and legal issues associated with complex gifts, and I conduct due-diligence reviews on donated assets. Hayden: As part of the Schwab Center for Financial Research, I provide analysis and insights on topics related to tax planning, tax-smart investing, asset location, charitable donations, and retirement strategies for both Schwab clients and RIAs.

Schwab Charitable™ is an independent 501(c)(3) with a mission to increase charitable giving in the US by providing a tax-smart and simple giving solution to donors and their investment advisors. Since inception, our donors have granted over $33 billion to charity. A Schwab Charitable donor-advised fund account enables donors to contribute cash or appreciated assets to a charitable account to help realize the greatest possible tax benefits – and then support their favorite charities over time. With Schwab Charitable, donors are empowered to incorporate charitable planning into their everyday lives, giving them the potential to make a bigger difference in the world.

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“Charitable planning offers advisors an opportunity to help clients achieve their aspirations in an area that is deeply personal. The result is often deeper – and “stickier” – client relationships and referrals”

Ruby Pediangco, Schwab Charitable

Can you give an overview of what a donor-advised fund is? From a tax perspective, why would someone choose to use this type of giving vehicle? Hayden: Donor-advised funds offer a tax-smart way to give to charity, invest charitable assets for growth, and support charities now or over time. Think of them as a charitable investment account with the sole purpose of helping donors maximize their support of their favorite causes while also offering potential tax benefits. A donor-advised fund is a qualified 501(c)(3) organization, so when you make a donation, it qualifies for a tax deduction. The assets you donate to the fund can be invested and potentially

grow tax-free, and then donors can recommend grants from their accounts to other eligible public charities of their choice at any time. What motivates your clients to give? Are they driven by the tax benefits? And are there benefits to advisors who incorporate charitable planning into their offerings? Hayden: Clients who give to charity are primarily motivated by causes near and dear to their hearts. Tax-smart giving allows them to maximize their impact on those causes. Advisors who incorporate a strategic charitable plan into wealth management can help clients unlock tax benefits while also helping a worthy cause. Ruby: Charitable planning offers advisors an opportunity to help clients achieve their aspirations in an area that is deeply personal. The result is often deeper – and “stickier” – client relationships and referrals. And when the whole family gets involved in charitable giving, advisors can build a bridge to a younger generation that will inherit trillions of dollars in the coming years. According to a report by Cerulli, $84 trillion has started moving across generations, and, of this, $12 trillion is expected to go to charity. The report states that more than 70 percent of heirs are likely to fire or change financial advisors after inheriting their parents’ wealth, so building this bridge between generations has become increasingly important for advisors. Schwab Charitable’s 2023 Giving Report highlights that 64 percent of contributions to Schwab Charitable were non-cash assets, such as appreciated stock or private business interests. What are the benefits of donating non-cash assets? Ruby: Donating non-cash assets can increase the amount available for charities and save on taxes. This applies to assets that have grown in value and are held for more than one year. Long-term capital gains tax is typically 15 percent or 20 percent – with a possible additional 3.8 percent surtax on net investment income – depending on the donor’s income level. Donating appreciated non-cash assets held longer than one year directly to charity or a donor-advised fund potentially eliminates the capital gains tax otherwise incurred if a donor sells the assets first and donates the cash proceeds. Hayden: When donating non-assets, you can usually deduct the full fair market value of appreciated long-term assets that you’ve held for more than a year – such as stocks, bonds, mutual funds, or other personal assets like real estate. An additional benefit is you don’t have to recognize any gains on that donation, which means you pay no capital gains tax on that property. Donating highly appreciated long-term assets – especially highly appreciated securities – instead of cash can be a very effective and tax-efficient way to support a charity. Donating in this manner has the potential to increase the overall gift while also maximizing the client’s possible tax deduction.

“The [claims] that are more infrequent but create the most challenge to resolve are of course sexual abuse,” Davis says. “We were one of the first carriers to offer an affirmative sexual abuse policy back in the late ’80s – so we actually said, ‘This is what we will cover’ and didn’t go silent on it.” In the face of market upheaval, insurers are promoting their offerings or planning new products. At AmTrust, Sree says, the focus has been on “cross-selling to provide more broad-based coverage and providing enhanced coverage for our insureds.” Meanwhile, Convelo is developing a few new tech-driven programs, which will be available over the next six months or so. Smith says the company is “highly focused on technology to deliver top-of-the-market products to our broker partners in an efficient, easy-to-use platform. We are using this technology not only to automate systems and make the buying process easier, but also to improve in risk selection and lower claims costs.” NIA has responded to the pandemic by rolling out a new communicable disease form on the liability side. “That’s something that really nobody else has done,” Davis says. “But we saw that we have nonprofits who have to continue housing the homeless; they have to continue to work.” The coverage form delivers $250,000 of defense inside the limits. “It’s trying to be the coverage that nonprofits need without offering limits that might become opportunistic with some plaintiff attorneys,” Davis says.

“Generally, if a client is looking to donate an investment that has lost value, we recommend selling investments first and then donating the cash. Making the donation in this way allows the donor to incur a capital loss that can be used to offset other capital gains”

Hayden Adams, Schwab Center for Financial Research

What about depreciated securities? Can donor-advised funds help offset losses? Hayden: Yes, charitable giving can be part of tax-loss harvesting. Generally, if a client is looking to donate an investment that has lost value, we recommend selling investments first and then donating the cash. Making the donation in this way allows the donor to incur a capital loss that can be used to offset other capital gains. Then they can donate the cash proceeds of the sale to a charity and potentially get an itemized deduction. It’s potentially a double tax benefit. What are other strategies that donors and the advisors who support them should consider?

Ruby: Those who are charitably inclined and find themselves on the margin between taking the standard deduction or itemizing could maximize their tax benefits by “bunching” two years of charitable contributions into one year, itemizing deductions for that year, and taking the standard deduction the next year. For example, donors can combine or “bunch” their 2024 and 2025 tax year contributions into one year – 2024 – and itemize on their 2024 tax return and take the standard deduction on 2025 taxes. Using both the standard and itemized deductions, “bunching” can provide a larger two-year deduction than two separate years of standard deductions. Any contributions of cash or non-cash assets received by December 31 into a donor-advised fund are eligible for a 2024 tax deduction. Our Bunching and Tax Savings Calculator can help you determine if bunching contributions might provide you with more tax deductions. Simply select your 2024 filing status and your estimated annual income/tax bracket and provide your estimated deductions. We’ll then calculate whether bunching contributions may increase your tax savings. Hayden: Another strategy is combining charitable giving with an investment-portfolio rebalancing. Donors can use a part-donation, part-sale strategy to potentially reduce the tax impact of the rebalancing. It works like this: The donor can sell a portion of the appreciated investments that have exceeded target allocations and use proceeds to buy more of the assets that have become underrepresented in a portfolio. At the same time, they can donate a portion of the long-term appreciated securities to a donor-advised fund and potentially claim an itemized charitable deduction. If done properly, the donation can completely offset the taxable income realized from the sale of the securities. Legacy planning is another key component of charitable giving. How can donors ensure their charitable legacies continue? Hayden: Public charities can be ideal beneficiaries of IRA assets because, for traditional IRAs, heirs pay income taxes on the inherited assets at their own income tax rate when withdrawals are made. Because public charities do not pay tax on IRA distributions, every penny of the donation can be directed to support the donor’s charitable goals beyond their lifetime. Donors can also ask their advisors about using IRA assets to fund a charitable remainder trust, which will combine a gift to charity with income to heirs. Ruby: Advisors who help clients with legacy planning can also build relationships with charities, which often boosts their visibility and recognition within their community. I recommend advisors consider, with client permission, reaching out to charities that clients have named in estate planning to build these types of relationships. In my previous experience fundraising for a charity, if asked by a donor for advisor recommendations, it would always be the “philanthropic-friendly” advisors that would be top of mind. And on the donor side, those who choose to name a charity in their estate planning are often invited to join that charity’s “legacy society,” which comes with additional benefits, experiences, and recognition. At Schwab Charitable, we also offer legacy planning options with a donor-advised fund. We find that philanthropic legacy planning is a way for families to help pass down their values, create a lasting legacy, and connect with family members in a meaningful way. Donors with a Schwab Charitable account can recommend family members as account successors or identify charities to receive remaining grant dollars over a specified time frame. What resources does Schwab Charitable offer to people looking for tax-smart strategies to maximize their charitable giving? Ruby: Schwab Charitable provides an array of experts and specialized programs to guide donors through charitable giving, including a complex assets team, international granting specialists, a legacy program, as well as a donor-relations team with advisor solutions experts. Hayden: Schwab Charitable also provides articles, tools, and other online resources that highlight useful information for donors on charitable giving. One in particular is the Schwab Charitable Giving Guide, which includes interactive components related to budgeting, understanding tax deductibility rates, and using giving vehicles. The website also offers a Bunching and Tax Savings Calculator and a Charitable Donation Calculator wherein donors can effectively develop and calculate their giving plans. Anything else you’d like to share? Ruby: As charitable giving increases in popularity, so does the necessity of having a well-informed advisor. Eighty-eight percent of RIAs surveyed in Schwab’s 2023 RIA Benchmarking Study reported offering charitable planning to their clients, more than those offering tax planning or estate planning. By supporting charitable planning for clients, advisors can expand their role as a trusted partner, deepen client relationships, build their reputation, and form connections with the next generation – all while helping clients make a positive difference in the world.

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Published Mar 25, 2024

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