Integrating Philanthropic Planning into Your Financial Advisory Practice
There are over 1.8 million recognized 501(c) organizations in the United States today. With so many charitable causes to consider, philanthropic planning enables families and individuals to make value-based decisions. Financial advisors are seeing increasing client interest in aligning values with finances, especially capital. People today are interested in investing in sustainable housing, recovery services, and arts and culture nonprofits.
The significant amount of wealth created in the Internet era has added pressure for tax relief and the desire to leave a lasting legacy. Philanthropic financial planning is increasingly important to clients and plays a role in holistic financial planning.
If you don’t currently offer philanthropic planning as a service, consider expanding to include it in your practice. This article provides practical strategies and insights for financial advisors to integrate philanthropic planning effectively into their service offerings.
Acknowledging Your Client's Philanthropic Goals
An advisor should first understand their client’s values and goals in philanthropic financial planning. Conduct thorough client discovery to ascertain their values, passions, and charitable interests. Don’t only inquire about specific charitable contributions but also explore the underlying motivations for giving. This gives you a solid foundation for philanthropic planning.
Facilitate meaningful conversations to understand why a client wants to donate to a specific charitable organization. When asking questions, use active listening techniques, show empathy, and build rapport to create a comfortable and conducive environment for clients.
You can even use visual tools like Asset-Map to organize and present a client’s current financial inventory and help identify which capital should be used for philanthropic endeavors. Asset-Map can also include charities and foundations, Donor-Advised Funds, Charitable Remainder Trusts (CRT), Charitable Remainder Unitrusts (CRUT), and charitable annuities.
Strategies for Integrating Philanthropy into Financial Plans
What are the best ways to integrate philanthropy into financial plans? While many options exist, we’ll review a few top strategies to consider.
Tax-efficient Giving Strategies
Tax-efficient giving strategies are designed to reduce three kinds of federal taxes: income, capital gains, and estate taxes. These strategies can simultaneously lower tax liability and contribute to a good cause.
Donor-Advised Funds (DAFs)
DAFs are essentially charitable investment accounts. Clients can contribute funds to a DAF at a public charity and receive a charitable income tax deduction. The contributed funds can then be invested for tax-free growth while the client chooses which charities to support. Then, the client can recommend grants for specific nonprofits or charities to the sponsoring organization to fulfill.
The benefits of DAFs include getting an immediate tax deduction and seeing tax-free growth for charitable giving.
Charitable Remainder Trusts (CRTs)
In a CRT, a donor will transfer funds or assets into an irrevocable trust. The trust then pays income to at least one named living beneficiary. Income payments can either be made for a term of 20 years or until the beneficiary’s end of life. When the payment term concludes, any remaining funds pass to a U.S. charity. This remainder must be at least “10% of the initial net fair market value of all property placed in the trust,” according to the IRS.
The benefits of CRTs include deferring income taxes on the assets transferred to the trust, a potential partial charitable deduction based on the trust’s interest, and providing predictable income for life.
Qualified Charitable Distributions (QCDs)
Older individuals can use QCDs to make tax-free charitable donations. The IRS states that individual retirement arrangement (IRA) owners age 70½ or over can transfer up to $100,000 to charity tax-free annually. IRA distributions are generally taxable when received, but distributions paid directly to an eligible charity become tax-free. Married couples can each make up to $100,000 in charitable donations, meaning an overall impact of up to $200,000 annually.
This method of charitable giving is a fantastic way for older clients to donate to causes they are passionate about while receiving tax benefits.
Gifting Appreciated Assets
Another option is to gift appreciated assets to charity during one’s lifetime. When a donor gifts an appreciated asset, they can take a tax deduction equal to the gift's fair market value. Additionally, if a donor gifts an appreciated asset to a loved one, the capital gains tax will be based on the donor’s cost basis, not the cost of shares when gifted.
This means the giftee will pay less taxes on the appreciated assets than the donor.
Coordination with Estate Planning
Aligning philanthropic giving with estate planning allows financial planners to maximize a client’s impact and minimize potential tax liabilities. Charitable giving can help honor the legacy a client wants to leave and ensure their wealth is transferred tax-efficiently. Advisors can add philanthropic financial planning into their estate planning services for more comprehensive support.
Incorporation of Philanthropy into Asset Allocation
Investment strategies can also be aligned with philanthropic objectives. A couple of methods fall into this category, including:
Socially responsible investing (SRI). This is when someone invests in companies making a positive social or environmental impact and avoids investing in companies with questionable ethics.
Impact investing. Impact investing aims to generate financial returns while also creating measurable positive change.
By incorporating philanthropy into asset allocation, financial planners can encourage clients to stay true to their values when investing. Impact investing and SRI both prioritize investing in companies dedicated to doing good.
Building a Philanthropic Planning Practice
When looking to expand your practice and provide philanthropic planning services, advisors can take the following steps:
1. Develop Expertise and Resources
It’s important to enhance your knowledge and expertise in philanthropic planning before offering it as a service area. Some options for developing expertise include pursuing relevant certifications, designations, or continuing education opportunities. Consider the Chartered Advisor in Philanthropy (CAP) designation by The American College of Financial Services to set yourself apart.
2. Communicate Your Value Proposition
When expanding your practice areas to include philanthropic planning, you must clearly communicate your unique value proposition. Evaluate what differentiates your practice from others in this field. Your key differentiator could be certain designations, such as the CAP, experience working at nonprofits, or something else entirely.
3. Collaborate with Allied Professionals
It is critical to establish and maintain collaborative relationships with other professionals, such as estate planning attorneys, tax advisors, and representatives from nonprofit organizations. Asset-Map enables advisors to share a household’s data under a joint practice agreement to support collaborative planning. At the very least, a client can share a read-only version of the client portal with tax or legal professionals to get guidance on appropriate strategies, given their fact pattern.
Empower Your Philanthropic Clients
If you are interested in philanthropic financial planning, it is important to understand client motivations and implement tax-efficient giving strategies. Providing philanthropic planning enables you to strengthen client relationships and create a holistic financial plan.
Advisors can use Asset-Map to help clients make the best philanthropic financial decisions. Asset-Map visualizes a household’s entire financial picture to support more meaningful client conversations. Learn more about Asset-Map’s features or schedule a free demo to see how our platform can elevate your practice.