what is most important to your client?
by anthony glomski
a growing number of successful people like your clients want to have a major positive impact in their communities and on the world at large. facilitating and increasing the effectiveness of charitable intent is very important to a burgeoning segment of high-net-worth investors.
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this area of advanced planning is all about helping your client fulfill their philanthropic goals – and maximizing the effectiveness of any charitable intent they may have. it’s very important to learn and use strategies that enable your client to give larger amounts than they would have been able to give otherwise.
the actions involved in a charitable giving strategy include evaluating your client’s charitable options and determining how those options fit in with their other goals, such as retirement income needs and wealth transfer goals. various trusts, funds, foundations and gifting methods – including private foundations, donor-advised funds, charitable remainder trusts and charitable lead trusts – are routinely used to ensure one’s giving has the maximum positive impact.
real world example
here is an example of utilizing effective charitable giving with tax efficiency.
like many of our clients, tom and tina are a very charitably inclined couple. in recent years, they have contributed $100,000 annually to various causes they support. as california residents, they are subject to taxes on more than 50 percent of what they earn. so, their philanthropic efforts have provided them with a nice tax break along with the satisfaction of supporting worthy people and organizations.
tom and tina’s goal was to maintain their annual giving of $100,000 a year after having a liquidity event. they have a large chunk of appreciated stock in their company. by pushing the stock into a private foundation, they pay no taxes when the stock is sold. in addition, they get a write-off for the stock they contributed to the foundation. that’s especially helpful for mitigating the tax bill when it coincides with a large liquidity event.
in this case, tom and tina accomplished four important goals:
- they maintained their annual gifting at the level they desired.
- they dramatically reduced their tax bill in a high tax year.
- they lowered their overall tax rate to 30 percent from 50 percent after exiting the business – using trusts and other advanced planning techniques.
- they accelerated the deduction provided them with immediate and accelerated tax savings.
there are also options that aren’t entirely philanthropy-based, but that are still designed to support causes and interests about which people are passionate.
for example, your clients can mimic what facebook’s mark zuckerberg (and ebay’s pierre omidyar) did: set up a limited liability company (llc) for charitable giving. this approach comes without the tax deductions that are part of some of the other options noted above, but it allows for maximum flexibility.
think of the llc as a “private foundation 2.0,” in which the llc structure allows philanthropists to use their money just about any way they see fit – including as investments in for-profit companies that are trying to solve societal challenges. (in contrast, strictly charitable vehicles only allow donors to make grants to tax-exempt nonprofits.) warning: if you come across a charitable llc that drives a tax break, this is a major red flag. these structures are riddled with major issues and suggest that you may not be working with a consummate professional and could be putting your client at risk.
before going further down the charitable planning road with your clients, you should ask them basic questions like these:
- what are some causes that you care about deeply?
- what do you want to do for the world at large?
- how important to you are the schools you attended?
- are there organizations or programs in your community that you’d like to support in a big way?
- how important is it to you and your family to give back?
i’ve found that planned giving is not important to about one-fifth (20%) of successful entrepreneurs. but for the remaining four out of five (80%), you’ll probably need to ask a deeper set of questions such as these:
- do you want to leave a legacy?
- is there something you want to endow and leave your name behind?
- how would you like your spouse and children involved in your giving plans?
these fundamental questions will help you drive philanthropic discussions with your client and better tailor solutions to get them what they want. there are numerous options for your charitably inclined clients that can drive tremendous income tax savings, estate tax savings and more. however, you absolutely do not want to lead this discussion with a product. charitable trusts come in a wide variety of flavors, but at the end of the day they are all products. your client doesn’t need a product. your client needs a process to help them think through what’s important to them, their spouse, their family, their legacy, etc.
sometimes, after going through all these questions with your client, you find that they’re in that 20 percent for whom charitable giving is not important. that’s okay. now you know philanthropy is not where you want to focus your efforts when putting together a comprehensive wealth management plan for your client.
all too often, after doing a deep discovery with a client or prospect, i see advisors continue to harp on the tax benefits of planned giving products. again, it’s not about products. it’s about understanding who you are working with; what’s important to them and providing them with the best possible giving options. bottom line: just because you’re a cpa doesn’t mean you should always lead with tax. think of the tax implications last and focus first on your client’s own unique needs and desires first.
when it comes to giving, there are numerous structures and strategies you can recommend. but that’s not what this is about. it’s about understanding what’s most important to your client.