More use in estate planning; deduction saved from ‘cliff’
While a broad swath of economic activities retracted during the recession, a recent report by the country’s leading institute on philanthropy showed that one activity — charitable giving — has continued going strong.
It is a trend that holds true in the North Bay, where financial and philanthropic leaders said that donors have become increasingly sophisticated and embraced “strategic giving” as part of a holistic wealth management strategy. A strategic approach both leverages the tax benefits of charitable giving in advance of anticipated changes and maximizes the charitable impact of those funds, either while the donor is alive or as part of an estate plan.
“Think about the most basic charitable gift — sitting down at the kitchen table and writing a check to a charity,” said Dr. Thomas Peters, president and CEO of the Marin Community Foundation. The Novato-based nonprofit supports numerous causes in Marin County, offering advising to individuals and financial planners so that “people can make financial decisions that are most advantageous from a planning standpoint,” he said.
The semi-annual report, a collaboration between the Center on Philanthropy at Indiana University and Bank of America, found that 95 percent of households earning more than $200,000 per year donate to at least one charity. That compares to 65 percent of households nationally. The level of giving has also held steady since 2009, with the average wealthy household donating approximately 9 percent of annual income and planning to donate more in the coming years.
Motivations vary, but nearly one-third of those surveyed in The 2012 Bank of America Study of High Net Worth Philanthropy cited tax advantages as among their chief motivators for giving.
While 50 percent of responders said that they would maintain their level of giving if the federal income tax deduction for charitable contributions was eliminated, limits to the total allowable deductions for wealthy individuals included in the American Taxpayer Relief Act or “fiscal cliff” deal have raised questions among clients of some North Bay wealth managers.
“A lot of our clients were concerned about the charitable deduction going away,” said John Burns, financial planner with Bingham, Osborn & Scarborough, which has an office in Healdsburg. “It you take away that motivation to give, nobody knows how it would have affected things. It seems to be off the table for now.”
Mr. Burns said that the looming fiscal cliff inspired many of the firm’s clients to look comprehensively at their estates, including plans for charitable giving. With the chance that the deduction could be eliminated, some gave larger-than-usual sums to donor-advised funds like the Bingham, Osborn & Scarborough Foundation, which shielded those gifts from future changes. Other clients have employed a perk continued in the new tax legislation — the ability to gift directly from a tax-free retirement account, which avoids taxes and increases the value of those contributions while retaining other funds for heirs.
“It was a busy 2012,” Mr. Burns said. “The opportunity to load it up has come and gone. But, looking ahead, it looks like a good time to plan.”
In the North Bay, a region often cited for its density of charitable nonprofits, donors give most heavily to organizations focused on human services and education, Mr. Peters said.
Some donors chose to allocate charitable contributions as a bequest in their estate, a gesture that can lower the estate tax impact for heirs with a very large inheritance. In addition, a trust established as part of an estate plan can provide income for heirs while distributing the remainder to a charitable cause.
Similar mechanisms, like charitable remainder trusts, can provide income during a person’s lifetime, drawing on value in property or investments while avoiding some taxes related to those assets, according to the Foundation.
Several wealth advisers noted that, despite the passage of the new tax legislation, debate continues on the federal level. High-profile tax perks, including the charity deduction, could be subject to future changes and cause some clients to revisit how they allocate their philanthropic contributions.
Yet for some, tax increases from the fiscal cliff deal were lighter than anticipated, potentially freeing income for charitable purposes in 2013.
“There is a lot of uncertainty due to taxes. On the high net worth side, people see it as a good time to plan,” said Matthew Delaney, partner at JDH Wealth Management in Santa Rosa. “Yet for the very wealthy, it’s not a tax issue anymore. You have amassed enough wealth that you can give $2 million to charity, and you can see the benefit in that.”
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