A partner in Lathrop GPM’s estate-planning practice addresses questions top of mind for an emerging philanthropic class, as well as and long-time donors.
Q: If there’s a deeper economic downturn in 2023, should we expect changes in levels of giving?
A: I haven’t seen numbers from the past, but logic would dictate that when people are watching their budgets more closely and cutting their expenses, that discretionary charitable gifts might fall as a result. But what’s interesting in the numbers from the pandemic in 2020 and 2021, in which you’d think that with the uncertainty of everything going on, that charitable gifts would fall, but actually, charitable contributions have gone up. That’s something I found interesting and reflects what we’ve seen. We certainly haven’t seen a dip in interest from our clients with their charitable giving or their philanthropic planning, and the numbers back that up.
Q: Are there recommended steps that donors need to be thinking about?
A: It would be wise any time there’s a significant market correction or broader downturn, to re-evaluate as part of a comprehensive review of your finances, to see whether certain expenses still make sense.
If charitable giving is part of your budget, you’d want to evaluate that. It’s clear that people are making gifts because those causes are important to them, especially when there are events occurring that highlight various needs, whether that’s disaster response for the war in Ukraine, the pandemic response—people are responding to those needs, which reflects well on us all, in general.
Q: When you talk about a comprehensive review, what’s the process?
A: A lot of times with our clients, we’re part of a team they have assembled, we’re on the legal side, so they have separate tax advisers, financial advisers, life-insurance professionals. We’re all part of the same team, and we encourage regular discussions with clients, with everyone a that table. If we’re sitting with a client and conditions are such that we think it appropriate that they take a fresh look at their situation, we recommend they get in touch with their financial adviser or tax adviser if they are considering strategies that affect taxes for that year. Really, any time when it’s apparent to us that they need to be thinking about their financial situation as result of market conditions, or a change in circumstances for the family, retirement—the big changes, the life changes they are encountering. You always want a re-evaluation of their current situation, looking at their budget, and financial statements, and hoping they have a good team of financial advisers, money managers and whoever else needs to be involved to dig into the numbers there. If charitable planning is part of the normal budget, they just have to evaluate whether it makes sense to stay current, decrease their giving or even increase it if things are going on where they feel compelled to give and can make it work.
Q: Do those same economic concerns dictate any additional caution for those who have been part of the recnet boom in M&A activity?
A: Depending on when those events occur, other factors obviously are in play—buyers are involved and you’re at the mercies of other things that determine when a deal closes. I can tell you when we have clients about to sell or have a significant liquidity event, it’s pretty common for the subject of charity to come up. That’s something we mention as a normal talking point, a pre-sale planning opportunity, making a gift of your business interest before the sale. There can be significant tax benefits if you do so, as opposed to after the sale closes, with those proceeds. I’ll tell you, often, that comes up before we even mention it. These clients have philanthropy in mind and have clearly thought about it. Our job is to steer them in the right direction and advise them on their options. Whether it’s a pre-sale gift or from the proceeds, there are clearly people who are looking to give back in some meaningful way and not doing it just for the tax benefits.
Q: Are you seeing any changes in giving strategies?
A: Some people can contemplate a sizeable charitable gift right away; others are looking at making a sizable gift at death, incorporating that as part of their estate plans. One factor in the equation, and that’s what you’re planning to do after the sale occurs. Some will make the decision to become an active philanthropist, and that’s a natural transition for them, coming out of the business world.
Q: What about numbers of people engaging philanthropically?
A: There’s no shortage of people and families here who are instantly looking to philanthropy when a big event occurs in their lives. If you look around this city at the numbers of foundations set up and non-profits, you can see the tangible impact of the work of charitable dollars both big and small. We have large foundations created by some of the wealthiest families in the city, and organizations funded with smaller contributions from the public at large. We all benefit from that.
Q: What broad trends are you observing in the way planned giving is executed today vs. where it might have been just a few years ago?
A: There definitely has been a trend to donor-advised funds. Those are an extremely popular vehicle. A lot of the attraction is due to the simplicity of creating a fund; the Greater Kansas City Community Foundation and other organizations make that a pretty painless process. The flexibility they have to conduct grant-making out of their fund, and the timing of those contributions, is really attractive. Compared to private foundations or charitable trusts, it’s generally much simpler to create the donor-advised fund and operate it, because you have the backing of a public charity to maintain and operate the fund. There’s definitely a strong trend in that direction.
Q: How are those dollars being directed?
A: Certainly within donor-advised funds, we’ve seen an uptick in more specialized funds—faith-based, in particular. At the same time, we still see a number of private foundations being set up, especially with larger gifts, and if control by the family is a factor.
Q: Any looming changes on the tax front, or related guidance there?
A: The use of qualified plans and IRAs is a trend, as well as a smart tax strategy. If you’re using an IRA to make a qualified charitable distribution from the required minimum distribution, that is really smart tax planning for a lot of retirees. Also, using those same accounts and qualified plans to name charities as beneficiaries at death, because that’s also very tax efficient, as part of the overall estate plant to get more tax-free assets to families. With an IRA or qualified-plan assets passing to charity, due to their tax-exempt status, charities won’t have to pay the tax on those accounts. That’s a common theme when working with clients, to implement testamentary gifts structured through qualified-plan accounts.
Q: Are gift amounts changing?
A: We’ve seen that to be the case, in no small part because of how large IRAs are proportionally on people balance sheets, especially with recent retirees and the Baby Boomer generation. So there’s been growth in IRAs over the past 20 or so years, and with the numbers of employer-sponsored plans, remainder interests for beneficiaries have grown. You have a generation who has spent all these years in the work force and have these accounts that have grown tax-free over decades, and we’re seeing some huge retirement accounts that make up the largest asset on people’s balance sheets. Planning for those accounts is a big part of what we do and our estate-planning process. If there are charitable goals, it’s natural to look at those account as a way to facilitate charitable contributions.
Q: Are you seeing significant shifts in the causes and organizations that receive funding from donors?
A: Traditionally, a lot of our clients include their church or school or college they’ve attended or supported, or where their kids attended. Those are always going to be popular. What I think has been a trend since the pandemic, if you go back to that first summer with social unrest and issues, a number of natural disasters occurred, and more recently, the Ukraine war, we’ve seen the numbers reflect increased giving to human-service organizations and also environmental organizations. What you see
is just with current events and what’s going on the world, people are responding to where the needs are and giving to those types of organizations. You’re always going to have causes that are deeply personal and important for individuals that are not driven by the news or what’s going on largely in society—it’s about their church, their school, organizations they have volunteer with are always important in giving.
Q: Anything looming on the tax front for donors?
A: Nothing significant. We’re looking at going into 2023, no significant changes are on the horizon, but like any year-end, there’s always an opportunity for individuals to take advantage of tax planning strategies. As part of the 2017 tax changes, we had an increase in the standard deduction, which resulted in fewer itemized returns, and a doubling of the estate-tax exemption; those are big changes that can create less incentive to make charitable or planned gifts at death. From my standpoint, I haven’t seen any large trend that way—people who want to make a gift are going to do it. The tax planning is great and should be part of the discussion, but people want to support things that are important to them. Bunching of charitable gifts have become more popular. A taxpayer who decides to make a gift to charity over multiple years can bunch that in one tax year so he can itemizes, then in subsequent years, use the standard deduction. Previously, you would have charitable gifts at the same amount each year, but the tax law suggest it may be better to bunch in one year. And the transfer of appreciated stock is always popular, are there appreciated stocks that can be given.
Q: What about the challenge of giving on a family level?
A: That’s always an interesting part of our practice, dealing with multiple generations. For the senior generation, it’s part of the broader issue in terms of communicating to their kids the things that relate to their estate plan and their legacy. It’s hurdle for a lot of people to get over in terms of bringing their kids into the discussion. Once they’ve cleared that hurdle, it’s easier to bring the kids into the fold on the more philanthropic side, because that’s part of the plan. When a client sets up a donor-advised fund or private foundation, they’re instantly thinking about where their kids fit in, whether as trustees of the foundation or advisers on the donor-advised fund, deciding what role their kids will play. If they are comfortable with having them take part, then yeah, it’s a process of getting them acclimated and educating them on what the family goals are and the types of organizations they’ll support.