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Beyond Cash: Planning Strategies for Complex Charitable Contributions

August 06, 2020

During Dynamic’s June Resource Call, guest Mark Ricketson, vice president and charitable planning consultant for Fidelity CharitableSM, let advisors in on a charitable giving strategy that’s little-known among clients: If you give long-term appreciated securities to charity, you avoid the long-term capital gain and you still get the tax deduction.

And that’s not all.

For more than 20 years, Ricketson has been in the business of helping advisors help their clients support nonprofits and minimize taxes along the way. On the webinar, he discussed various ways advisors can help charitable-minded clients maximize their tax deductions as they support the causes that are near and dear to their hearts: From complex assets and the new tax code’s increased itemized deductions, to how to leverage a donor-advised fund for convenience, strategy and tax savings.

According to Fidelity Charitable:

80% of donors have appreciated assets such as stocks, mutual funds, ETFs or bonds. But only 20% of these donors contributed this type of asset to a charity.

“That means that a vast majority of your clients are giving cash,” said Ricketson. “Cash is the absolute worst asset to give to charity if you have long-term appreciated securities, and most of your clients will have long-term appreciated securities if they’ve been in the market at all. By long-term, I mean one year or more.”

He explained, “Had they given a long-term appreciated security instead, they may have avoided that long-term capital gain.

“Not a lot of your clients that own a mom and pop shop or the entrepreneur that created some app know these rules. So, when they’re exposed to the strategy, a lot of times they’re quickly blown away. Like, ‘Well, I’m charitably minded, but I give cash. And now I know from working with my advisor that that’s not the best way to do it.’”

According to Ricketson, it’s a “massive opportunity” to help clients give the right asset at the right time. The “tidbit of knowledge around the donation of long-term appreciated assets” can be a game changer—as well as a differentiator to win business—for advisors. According to Fidelity Charitable, when it comes to charitable giving:

Advisors are instrumental in client education: 50% of donors have had a specific charitable planning conversation with an advisor; 1 out of 2 said the discussion helped make ongoing decisions about what or how much to contribute to charity.

In more ways than one, the COVID-19 crisis has served as a sobering reminder of the critical role the advisor plays as educator. Specifically, as it relates to charitable giving, as people started working from home and fear was setting in, Fidelity Charitable saw outflows from its donor-advised fund. “And quickly, everybody realized that the question became, ‘Well, where do I support?’” said Ricketson.

“The need was so overreaching…Normally there is a hurricane in Houston or in the Gulf, or Houston floods or we get an earthquake in Haiti, and it is very targeted and we can easily figure out how to support for a specific reason—a specific cause.

“With this (COVID-19), it is so far-reaching, it is global, and between the medical, the financial and even the mental health aspect that goes on and on, it became very overwhelming.”

In addition to Fidelity Charitable, there are other donor-advised fund sponsors and community foundations around the country—all motivated to try and pinpoint needs regionally. “It (the pandemic) really added a new layer to how donor-advised funds can help those philanthropically-minded clients to really achieve their charitable giving goals when a lot of the time, they don’t even know what those goals are. They know they want to make a difference. They just don’t know how or where.”

What’s a donor-advised fund, exactly? Ricketson explained, it’s a charitable giving account sponsored by a public charity. “You have a lot of accounts in life that do a lot of different things. You have a brokerage account to trade stocks, you have a 401(k), you have an IRA, you have a 529 plan…You have a checking account to pay your bills.

“All of these accounts have different objectives. But a lot of times, if you peel them back, most of them—your retirement, your 401(k), your 529—there is a tax benefit and then there is an ease of use benefit. So, there is a convenience and then there is a strategy.

“With a donor-advised fund, the convenience is having all your charitable giving located in one place.”

Here’s how the strategy works, according to Ricketson:

When making an irrevocable contribution to a public charity that sponsors a donor-advised fund program, a donor is eligible for an immediate tax deduction, regardless of the asset. Donors can advise on an investment strategy for the charitable funds —stocks, bonds, mutual funds, ETFs—and those chartable dollars are growing tax free.

Fidelity Charitable donors can log onto their phone and support the causes that matter most to them; they can view every charitable gift they’ve made through the account. One charitable donation is a one-line item when itemizing taxes. Two donations over the course of a year is two-line items. After contributing to their donor-advised fund, a client has a ready reserve of funds dedicated to charitable giving. Making a grant recommendation is easy – with the option of using a mobile app, donors can support virtually any charity from wherever they are, and there is no limit on the number of grants made in a year.

Especially in the face of a pandemic, donor-advised funds have come to be seen as charitable “rainy day funds,” evidenced by the fact that Fidelity Charitable donors have been granting more frequently to provide aid in their communities when it was most urgently needed.

“So, advisors can help clients go from convenience to strategy, to the ability to receive a tax deduction when they wish to receive it versus when they wish to give to the end charity,” said Ricketson.

For more win-win ways to leverage strategies to help clients maximize their tax deductions while they’re supporting their favorite causes, listen to the webinar in its entirety as a podcast on the Dynamic site.

 

Fidelity Charitable is the brand name for the Fidelity® Charitable Gift Fund, an independent public charity with a donor-advised fund program. Various Fidelity companies provide services to Fidelity Charitable. The Fidelity Charitable name and logo and Fidelity are registered service marks of FMR LLC, used by Fidelity Charitable under license. 939239.1.0