The industry’s approach to charitable planning is broken. Today we’ll focus on one way in which it’s broken. We hope understanding the problem, and the solution, will help you help your clients, and perhaps also help you gain valuable assets under management.
 
Myth – Taxes Drive Year-End Giving
One myth that hovers over the charitable world is that people give because of the tax benefits.
 
While there is an important category of charitable giving that is driven by tax benefits, taxes are actually not the major driver for most regular year-end giving. That’s because donating to charity still costs the donor money on an after-tax basis — even if the donor is in a high tax bracket (such as the 50% or more that hits the top bracket payers in California, with similar numbers in New York and other high state and local tax areas).
 
For example, consider a donor with a taxable income of $1 million, in a state where the effective combined Federal plus State tax rate is 50%.[1] If the donor does nothing, the 50% tax takes $500,000, and the donor keeps the other $500,000.
 
Now suppose the same donor contributes $250,000 of that $1 million to a qualified charity, and receives an income tax deduction of $250,000. The donor’s taxable income now is $750,000, on which the tax is 50%, or $375,000. The donor keeps the $375,000.
 
This math that we’ve just shown can be more complicated, but most all the time for straightforward gifts of cash or assets, the donor will end up with fewer dollars in his or her personal account even after taking into account the tax reduction.
 
Why Do People Give?
Why people give is an important question. Many people have chimed in on the question of why people give, but the quality of the literature on why people give leaves something to be desired. But year-end is the wrong time for the question, and so we will address it at another time.
 
For now, we want to make the perhaps surprising claim that when it comes to year-end giving, it doesn’t matter why your client is doing it.
 
Year-end Giving — Problem
Many clients who give to charity wait until the end of the year to make gifts. The problem is that they often fail to make their charitable giving as tax-efficient as possible. In other words, poor planning causes them to lose money that could go either to the charities they support, or to their families, or both.
 
That’s where a good financial advisor comes in.
 
The Role of the Financial Advisor
Chances are, each of your clients who does give to charity donates for a unique set of reasons. Financial considerations may or may not be a major reason, but by the nature of the activity, financial considerations are always an important factor, whether the client realizes it or not. And unless they get help from an advisor, too often clients do not focus, or don’t know how to focus, on optimizing the financial aspects of their clients’ giving.
                  
That’s where, as a financial advisor, you are properly positioned to offer advice to your clients about the financial aspects of their charitable activity.
 
And it’s where we, as experts in the intersection of finance and philanthropy, can help you grow your business, add assets under management, and deepen relationships with key clients in ways that you may not have been able to do before.
 
How Sterling Can Help
If you have clients who give more than $25,000 per year to charity, now is the time to work with them to optimize that giving. We have written two books on the subject, and between now and year end we’re pretty sure you won’t want to read those books.
 
But you don’t have to. If you have clients making year end gifts, we’ll be happy to give you the benefit of our experience and expertise, and if there is optimization to be done, taxes to be saved, or assets to be gathered, we’ll make it as easy as possible for you to do.
 
Please click here to request a consultation, call us, or email [email protected]. We’ll help you make an initial assessment, and then arrange an in-depth consultation (no charge) with one of our senior planning experts. Call and ask for Connor or Katherine. The number is (703) 437-9720.

[1] We’re ignoring the various tax brackets to make the math easier to follow. The analysis as shown is pretty much correct for the top, or “marginal” dollars of income.