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Planning to Give –?Planning and Budgeting are the Key to Wealth Management and Philanthropy

Giving Story Photos
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Wealth advisors recommend a strategy to maximize the impact of gifts and minimize mistakes

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During the holidays, many people consider charitable giving by offering a one-time gift. But what about deciding to give more and more regularly? How will that affect your finances and your family? That is when a wealth advisor can be very helpful to describe the benefits, both tangible and intangible, that planned philanthropic giving can offer.

“People who are charitably inclined are more strategic about giving,” said Pam Lucina, chief fiduciary officer of Northern Trust, a financial services firm.

“If you are making smaller gifts, you may never get a benefit from that. Driven by that challenge, we are seeing people look at their overall charitable strategy.” The non-monetary benefits of planning can include creating a family giving strategy that helps parents teach children lessons about money while sharing values.

Factors that impact philanthropy include taxes, but those considerations are usually secondary when deciding to support a cause. Many supporters consider their personal financial position in relation to the overall economy when making donations. In a declining economy, charities tend to receive less while people focus on giving (and are more strategic about it) as markets go up.

Nevertheless, once the decision is made to give, wealth advisors recommend that clients consider ways to maximize their donations by taking advantage of tax deductions. There were significant changes implemented to the tax code by the Tax Cuts and Jobs Act of 2017 that impacted nonprofit contributions. One of the most significant changes was a higher standard deduction and fewer itemized deductions. According to the Internal Revenue Service, taxpayers claimed itemized deductions on almost 47 million tax returns in calendar year 2017 (before the 2017 tax act took effect), while that number decreased to fewer than 18 million tax returns in calendar year 2019.

The standard deduction increased to $27,700 for married couples in 2023 and will jump to $29,200 in 2024. One source of itemized deductions that is still available is charitable contributions, but it’s only beneficial to claim when itemized deductions exceed the standard deduction, and millions of taxpayers who previously itemized now fall below that threshold. Wealth managers suggest several ways to take advantage of the deduction while supporting their desired charities. Strategies include bunching contributions in a particular calendar year, utilizing donor-advised funds, contributing appreciated stock and making qualified charitable distributions from retirement accounts.

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Online donation platform offer modish money sending system for people to transfer on the internet
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“Bunching” is a strategy to make several years’ worth of contributions in a single year so that the amount exceeds the standard deduction, especially if there is a one-time event such as selling a business or prior to retirement. Some people combine this strategy with a donor-advised fund to give consistent gifts to charities spread over several years.

Donor-advised funds are accounts managed by a charitable foundation that allow for an up-front tax deduction and investment of charitable funds that can then be distributed later. The third-party foundation provides shared administrative functions for a fee that is typically lower cost and less burdensome than operating a private foundation. Accounts usually have a minimum contribution for the initial setup. “Clients are utilizing donor-advised funds such as those offered by Pasadena Community Foundation,” said Peter Boyle, chief executive at Clifford Swan Investment Counselors, a Pasadenabased wealth management firm. “You get the up-front deduction and can then dole out funds later to make sure that charities are taken care of.”

Boyle added that private foundations have declined in popularity due to higher operating costs and additional regulatory requirements. Meanwhile, other methods of charitable contributions are being utilized more such as qualified charitable distributions (QCD) from a retirement account. These distributions allow for tax-deferred retirement funds to be directly contributed to charities without recognition of income for tax purposes. “For most clients, non-recognition of income is powerful because it can keep you in a lower tax bracket,” said Boyle. He added that the benefits extend to other elements of personal finance such as Medicare costs, which are tied to income.

Another tactic to maximize charitable giving includes donating appreciated stock instead of cash. The benefit is that the full amount of the securities’ fair market value is deductible without the added step of recognizing the income and paying capital gains tax. Stock can be distributed directly to charities if they allow this type of donation or to a donor-advised fund. It can be a more cumbersome process than writing a check, but Lucina says that patience and following a plan are key to avoiding the mistake of donating cash.

“The stock market has been on a nice climb. By giving appreciated stock, you avoid the capital gains,” Lucina said. “The other mistake is giving a stock that has depreciated. Sell that, take the loss and then give the cash.”

Once the decision has been made to donate and the tax benefits have been maximized, Lucina recommends avoiding micromanaging donations. Many people want to tell organizations how to spend their money, but she says that it’s important to trust people who are closest to the cause. Instead, clients can focus on a family giving strategy. They can talk about values with children and teach lessons about money. “They need to trust the people who work the charities and live and breathe the cause every day,” she said.

-David Nusbaum

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