Bank Investment Consultant
As baby boomers inherit and retire, their plans are likely to include some form of giving back.
According to the Center on Wealth and Philanthropy, roughly $41 trillion is expected to change hands through bequests and charitable giving from now until 2055. So it would behoove advisers to know about charitable giving.
"This is an area where advisers need to be actively involved," said Peter Radloff, vice president of Jackson National Life's retirement and wealth strategies group. "You don't have to be a multimillionaire to give. There is a lot of it going on even in the middle-income ranks. People want to make an impact on the world they live in before they leave this earth."
Wealthy clients have an incentive to give away money to teach their children to contribute to society, Mr. Radloff said.
When it comes to counseling people on charitable giving, advisers should tread lightly, at least until the client's wishes are indisputably clear. Mr. Radloff recommends raising the topic early in the relationship, even during the initial fact-finding phase. This gives the adviser two ways to create value for the client.
First, if the client is already actively donating to charities, there may be ways to maximize both the dollar amount received by the charity and donor tax breaks that the client may be unaware of. Second, if the client hasn't yet acted on his or her charitable intentions, the adviser can earn that business by presenting options for fulfilling the client's charitable goals.
Brick Sturgeon, a Raymond James adviser with PrimeTrust Financial Services in Nashville, recalls helping one of his clients use a vacation home to donate to a favorite charity. "She wanted to make a gift to a large university that was near and dear to her heart," he said. "She owned a beach house worth about $600,000."
The university actually supplied the lawyer and legal documents to set up a charitable remainder trust, which allowed the client to donate the property to the university but continue receiving rental income on it during her lifetime.
"At death, the university would get the property and likely be able to sell it tax free," Mr. Sturgeon said. "This gave the client an immediate tax deduction for the present value of the future gift and kept the asset from being part of her taxable estate at death."
The charitable remainder trust is one of the most popular vehicles for people looking to make a donation other than a bequest, said Sal Marone, a vice president and wealth manager for Primevest at Fulton Financial Advisors.
"Charitable remainder trusts are fantastic opportunities for clients to provide themselves with a level of income and to transfer assets that might not currently be producing income and that have a small cost basis in exchange for current and future income tax deductions," he said.
There are several types of charitable remainder trusts, including an annuity trust that pays the donor or his designee a fixed amount each year, a charitable remainder unitrust that pays a set percentage of the fund's value on an annual basis, and the less common charitable pooled income fund that allows multiple donors to give to the same trust.
A knowledgeable adviser can be invaluable for clients who are balancing the desire to leave some sort of philanthropic legacy, while simultaneously providing a significant nest egg for their heirs. Mr. Marone's firm offers such clients a twist on the charitable remainder trust that he calls a "wealth replacement trust."
For example, a client with an art collection would like to donate it to a museum but is concerned doing so would deplete the estate's value. According to Mr. Marone, the client could create a trust and donate the art to it, specifying the museum as the ultimate beneficiary on her death. The next step would be to have the trustee sell the art to the museum — avoiding both capital gains and income tax for all parties — and invest in income-producing assets.
Depending on the terms of the trust, the donor could receive a stream of income from the trust until death, at which time the balance would revert to the museum.
The final step involves creating a second trust that allows the donor to "replace" the wealth lost to her estate by the donation. The client would donate a portion of the income stream generated by the first trust to the second trust, which would then purchase life insurance on the client with a benefit equal to the value of the original donation.
Another way to pass along appreciated investments is available to people who have reached the mandatory withdrawal phase in an IRA. People who withdraw funds from an IRA to donate to charity are spared the income tax on the distributions.
Mr. Marone said there are other ways to give, such as gift annuities. There are programs that help individuals donate in exchange for a guaranteed annual return.
Advising clients on philanthropy doesn't usually do much for an adviser's bottom line, because it reduces assets under management and may involve directing assets to other professionals. But helping an investor achieve his goals is often an inroad to the next generation.
Mr. Radloff said, "You have to go in with the goal of helping the client, creating a more holistic approach to their wealth management strategy, and creating value."
