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Charitable Giving Is Often About Legacy

Beyond supporting causes, high net worth clients like to leave a lasting impact

By Greg Paeth

The purely fictional Joe Jones often finds a good reason for making a philanthropic gift somewhere near the intersection of high-minded, passionate altruism and a desire to ensure the federal or state governments don’t consume every available tax nickel they can.

Generally speaking, a substantial gift to a legitimate charitable organization will reduce but not eliminate taxes for the giver, as the benefit rarely equals the value of the gift dollar-for-dollar. But that doesn’t dissuade most people who have the financial resources from making gifts to schools, churches, hospitals and causes they support philosophically.

“The tax benefits are always sort of a nice thing, but they are definitely not the driving force” of philanthropy, said Damon Massey, an investment adviser who works for Louisville-based Stock Yards Bank & Trust. “Again, the math never ‘works.’ The cost of making the contribution is never fully offset by the tax benefit, so the tax benefit is just a little extra incentive, a little gravy on top, if you will.

“It’s never going to be the driver of philanthropy (for) churches, schools, advocacy groups, you name it. It gets back to personal values. We see churches (as recipients) a lot,” Massey said. “But in terms of larger gifts, it seems like they go to universities, their schools, their high schools, their colleges, the pet organizations that they like to support.”

As might be expected in a year dominated by a global pandemic, some regulations on philanthropic giving have changed under provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act, said Brian Cohoon, chief development officer for the trust and wealth management group at Commonwealth Bank & Trust in Louisville.

In the past, taxpayers could donate as much as 60% of their net income to a charity and eliminate taxes on that amount and perhaps reduce their tax rate for the other 40% as well. A temporary provision of CARES legislation allows a taxpayer to claim a deduction of 100% of their annual income in an effort to pump up donations at a time when millions of Americans may need assistance, Cohoon said.

“This provides more freedom to give to charities this year because of the impact of COVID-19,” he said. “Most people we work with will have some kind of philanthropic desire—whether it’s their church, their alma mater, their local hospital. They will have some type of philanthropic drive.”

And that inclination isn’t unique to Kentucky.

Americans gave just under $450 billion to charities last year, an increase of 5% over 2018, according to Giving USA, which tracks philanthropy from its headquarters in Chicago, and the Pennsylvania-based National Philanthropic Trust, which describes itself as the largest sponsor of Donor Advised Funds (DAFs) in the country.

Nearly 70% of that $450 billion was contributed by individuals rather than corporations, according to the trust, and 29% of donations went to religious organizations. The broad category of “education” was the second most popular recipient at 14%.

In Kentucky, about 7,000 charity organizations are registered as legitimate recipients with the attorney general’s office. The list includes the American Association of Retired Persons (AARP), the National Corvette Museum Foundation in Bowling Green and the American Contract Bridge League Educational Foundation in Horn Lake, Miss.

About 1.1 million charities are registered with the IRS in addition to an estimated 300,000 religious organizations. Most of these recipients have a 501(c)(3) designation from the IRS as a tax-exempt nonprofit.

Kentucky ranked 28th in WalletHub’s Most Charitable States report, which compared 2018 data for 19 key indicators. Minnesota and Utah ranked first and second for generosity, while New Mexico and Arizona came in 49th and 50th.

Discussing philanthropy is a basic exercise at every bank or investment firm that commented for this story. And when that conversation occurs, an overwhelming number of people say they want to support a cause or an institution, wealth managers said.

“That’s certainly always a part of the overall financial plan—discovering not only their capacity to give but their willingness to give. … We want to coordinate with their attorney and their CPA to ensure a coordinated and effective giving strategy,” said Jeff Schriefer, vice president and senior wealth adviser at Bank of the Bluegrass & Trust Co. in Lexington.

“Our experience is (they donate because of) their profound interest in the mission of the charity. It’s not usually only a function of a tax advantage,” said Schriefer, though he added that his bank does emphasize how to most efficiently make the gift from a tax standpoint.

That view is shared by Jason L. Lee, senior vice president and private wealth services manager of Community Trust and Investment in Lexington.

“Let’s remember, people give to charity because they are charitably inclined,” Lee said in an email. “Favorable tax out-comes can be achieved through charitable giving, but tax reduction is not the driver of charitable giving. That said, charitable gifts can serve to reduce income tax and estate tax liabilities.”

Lee stressed that it’s difficult to generalize about philanthropists.

“Typically, the size of the donation is not reflective of the client’s net worth,” Lee said.

He’s seen gifts range from “…a token amount to an amount well north of seven figures.” The most popular categories of recipients are higher education, medical research and animal welfare, he said.

“In my experience,” said Neil Byrne, senior wealth strategist with PNC Financial Services, “making charitable gifts is a personal choice based on each person’s motivations. That said, there are some common motivating factors. Both income and estate tax considerations are popular reasons for giving, especially if someone is highly attentive to taxes. Another popular reason for giving is for religious reasons, such as donations to a church or synagogue. Finally, many clients simply give because they feel it is a good thing to do.”

Every situation is unique

There is no definitive rule of thumb or general guideline among wealth management professionals about the average tax savings that can be realized by making a charitable gift of cash or property. They stress that tax benefits vary greatly for each client and hinge on a long list of factors that get plugged into a tax return.

“Every client is different. Every situation has its own little nuances and so there’s no one-size-fits-all,” Massey said. “You have to really dive in and take a look at what’s best for each situation.”

The recipient can be a factor also.

“There are potential tax advantages with making donations to nonprofit organizations,” said Emily Trujillo, content and communications strategist for ARGI Investment Services, which is headquartered in Louisville and has five of its nine offices in Kentucky. “Since everyone’s situation is different, we highly recommend speaking with a tax professional regarding your personal situation.”

Although the wealth managers never said it directly, this advice does not apply to someone who donates a box of items to Goodwill as tax time approaches.

In the past, taxpayers could get credit for relatively small donations to charity. But since the standard deduction nearly doubled for 2018 and now stands at $12,400 for an individual taxpayer, the rules have changed.

“This means that fewer people itemize, and fewer people receive income tax deductions for charitable gifts. In light of this, a common approach is to ‘bunch’ charitable gifts into one year, so that a person itemizes in one year (i.e. the year when ‘bunched’ charitable gifts were made) and not in future years,” PNC’s Byrne said in an email.

“There are numerous other approaches to philanthropic giving. Donor advised funds (DAFs) can be a great resource, and there are many options in our community,” added Byrne, one of several who mentioned DAFs.

Generally speaking, wealth managers described a typical client as a “high net worth individual,” a term that often refers to someone with liquid assets of at least $1 million. But most of the wealth managers were hesitant to attach any specific dollar amount to that “high net worth” designation because it might discourage the prospective client with $990,000 in assets from seeking their advice.

Massey, however, provided some general numbers.

“Our clients run the spectrum from a million in assets to hundreds of millions of dollars. Our bread and butter is in that $2 to $5 million asset class,” he said.

“Gifting tends to be significantly more with the older generation. Whether it is the accumulation of wealth or the recognition that they have made enough that they will not spend it all, as they age most of our clients are thinking about gifting and how to gift wisely,” said Quin Broadbent, vice president, director of portfolio management and a wealth adviser for Kentucky Bank, which is headquartered in Paris.

“We routinely ask clients whether they would like to give, but most of the time we know our clients well enough to know their habits and to know the causes they are passionate about. Whether it is city- or county-based or cause-based, we assist them with their giving,” Broadbent said.

Around 70% of the bank’s clients express interest in philanthropic giving, he said, agreeing that tax benefits aren’t typically the primary motive for making contributions.

Most people make gifts “to support their community,” Broadbent said. “In other cases, it can be a cause that touches that individual. (Decisions are made) person by person and each person has a cause that means something to them.”

Broadbent and Cohoon both said financially secure older clients are far more likely to make gifts.

At the other end of the spectrum are millennials who often consider the importance of “connecting their values to their valuables,” Cohoon said. “(They) really like the idea of ‘ESG investing,’ which is environmental, social and governance—how their dollars are being used by investment companies and (that) it is supporting a mission in line with their values.”

Most clients of Asio, a wealth management firm in Lexington, have ample resources for their lifetime, said Erin H. Serrate, one of the founders and a senior wealth strategist.

“We have discussions around what type of legacy they want to leave once they are gone,” Serrate said. “Typically, this discussion occurs going through the estate planning process with an attorney. Most often during that time we have discussions about making larger gifts both during and after their lifetime.”

Serrate and Byrne both mentioned gifts made through qualified charitable distributions from retirement accounts. Taxpayers who are the age of 70½ with IRAs are required by law to take a required minimum distribution.

A qualified charitable distribution “has the dual benefit of allowing them to support a charity or cause that they care about as well as reducing their taxable income,” Serrate said.

There are plenty of alternatives to writing big checks or donating a piece of property or shares of stock, said Steven Beck, a financial adviser, legal strategist and certified financial planner with ARGI Investment Services in Louisville.

“Many clients mention gifting or making gifts, but philanthropy can encompass a lot more than that. It can be serving on boards, volunteer work, or setting up one’s own donor advised fund or foundation,” Beck said.

Beck and others talked about creating DAFs, foundations, trusts and endowments as philanthropic alternatives to help a favorite charity.

Fidelity Charitable, a division of the huge investment firm, describes DAFs as the “fastest-growing charitable-giving vehicle” in the country and one of the most “tax advantageous.”

Donors who contribute to a DAF through some investment firms or a public charity can, in most cases, take an immediate tax deduction. Their irrevocable gift is invested to grow tax-free, and the donor can recommend or guide grants from the DAF to IRS-approved charities, according to the Fidelity Charitable website.

“An estimated 20-40% of clients discuss their philanthropic wishes early in the financial planning process. Generally, these clients have specific wishes and philanthropic goals in mind,” said Christian Schnabel, a managing director with Northwestern Mutual. “However, approximately 20% of clients of our clients incorporate charitable giving over the course of their financial plan and can be driven more by specific opportunities from an organization.”

The largest givers are confident not only in their own financial independence but that of their children and grandchildren.

“With exception of more prominent mega-donors, the largest and most frequent percentage of giving comes from the middle and upper-middle class families,” said Patricia K Vanaman, a financial advisor with Northwestern Mutual. “Their average donation is not as large as mega-donors, but their gift typically represents a much larger percentage of their assets.”

Many churchgoers tithe, so if we are including a 10% tithe, the average middle/upper-middle class donor is giving an estimated 15%, based on income, not assets, Vanaman said.   

“One area we see our clients give is through the purchase of a life insurance policy,” she said. “This allows them to donate a substantially larger gift by making a charity the beneficiary of the policy and creates more flexibility by keeping others assets. Additional tax benefits can come into play as well.”

Schriefer with Bank of the Bluegrass said he sees “more and more structured and deliberate giving” when a client’s net worth approaches $10 million or more.

“Above $10 million, they are more likely to establish a private foundation, charitable trust or endowments that will help them fulfill their charitable wishes,” he said.

“Philanthropists who donate stocks, real estate or other assets they own with a low cost-basis may be able to deduct the full market value of the gift while also avoiding capital gains taxes,” Schriefer said. “The charity can then sell the asset without realizing the capital gains as well.  That’s a win-win for both parties.”

DAFs are fairly simple to start, while establishing and administering trusts and foundations can be more complicated.

“They (foundations) are more expensive to set up and administer on an ongoing basis,” according to Schriefer. “They require special tax returns each year. Private foundations also have a payout requirement that requires the foundation to spend a percentage of its assets each year on charitable purposes, so it’s a lot more complex; you generally have to have a larger amount of assets to make that kind of charitable vehicle worthwhile (to the donor).”

Every wealth manager interviewed said their firms practice what they preach and have long, generous track records of supporting charitable causes in their communities and beyond.

Bank of the Bluegrass, for example, lists 60 organizations that it has donated time or money or both to in the last year. ARGI created ARGI Gives, a corporate philanthropy program, said Trujillo, who chairs the effort.

Pittsburg-based PNC, the nation’s seventh largest bank with $455 billion in assets and a major presence in Kentucky, where it has had the largest share of deposits for more than a decade, works on a scale far larger than banks and investment firms headquartered in the state. In June, for example, PNC announced a $1 billion commitment “to help end systemic racism and support economic empowerment of African Americans and low- to moderate-income communities,” Byrne said.

Regardless of who’s doing the giving and who’s on the receiving end, Cohoon of Commonwealth Bank & Trust provided a pretty good capsule summary of philanthropy.

“You’re going to be a philan-thropist involuntarily in the form of taxes or voluntarily in the form of gifts to local charities,” he said. “There’s money that has to go back to society in one form or another. It’s going to be either taxes or charitable gifts.” n

Greg Paeth is a correspondent for The Lane Report. He can be reached at [email protected]

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