Cultivating Charitable Clients

A consultative approach and a willingness to work with others are critical first steps.

By Lisa Wahlgren

Charitable planning presents invaluable opportunities to build your business, broaden your network and serve as a critical link to a wealth of worthy causes.

The concept of giving back is deeply ingrained in the American psyche. As a nation, we are well-known for rising to the occasion when there is a need. Increasingly, this generosity is being extended well into the future through the integration of charitable giving into estate planning.

LIFE INSURANCE IS OFTEN KEY TO CHARITABLE-GIVING STRATEGIES.

Indeed, since the 1980s, as the pendulum has shifted from government funding to private funding for social programs, charitable planning has emerged as one of the fastest-growing sectors within the estate-planning field.

At the same time, high-net-worth individuals are carefully considering the potential counter-productivity of passing on too much wealth to their heirs. As renowned billionaire Warren Buffett said, “The perfect inheritance is enough money so that they could do anything, but not so much that they could do nothing.”

Most clients are aware that charitable donations can be carried out upon their death via bequests specified in their wills. They are often surprised, however, to hear about the breadth of possibilities to optimize both charitable contributions and cash flow by engaging in philanthropic planning while they are alive.

Charitable planning
Charitable planning is a multifaceted field that advisors approach in a variety of ways, but there is widespread agreement concerning the depth and breadth of rewards.

“My work with both individual donors and charitable foundations provides interesting and invaluable access to the community,” says Kent E. Irwin, CLU, ChFC, CAP, advanced markets consultant with Nationwide Financial in Columbus, Ohio.

“The most satisfying aspect of charitable planning is the contacts that you make,” which can lead to untold and often unexpected opportunities, adds Richard G. Volpe, CPCU, LUTCF, managing general partner of Planning Solutions of Colorado, LLC, in Littleton, Colo. Compared with standard estate planning, he says “the referrals are bigger and better, but fewer and farther between.”

“Some years ago, I decided that my practice would focus on charitable estate planning—helping clients turn tax dollars into charitable dollars,” says Joseph Casselli of Joseph Casselli & Associates in Dublin, Ohio, and author of Tax Planning From the Heart. “My goal has been to get people to think about charitable work in a nonthreatening way and to realize that there are many ways to become benevolent without giving cash away today or without an impact on current lifestyle.”

Myriad options
In addition to gifting life insurance policies to charity, more complex instruments that include charitable remainder trusts (CRTs), charitable lead trusts (CLTs) and donor advised funds (DAFs) are increasingly being used to support clients’ charitable-giving objectives.

Life insurance is often key to charitable-giving strategies. Philanthropic policyholders can designate a charity as the beneficiary of the policy and make tax-deductible premium payments to the policy.

For many clients, however, a CRT offers a broader array of benefits as a charitable-planning vehicle. CRTs are some of the most widely used charitable-planning techniques, Casselli notes. Even though they have been around since the Tax Reform Act of 1969, as recently as 15 years ago, knowledge and use of CRTs was very limited. “There was virtually no information available,” Casselli says. Today, on the other hand, a Google web search on CRTs yields more than 1.5 million links.

DONOR-ADVISED FUNDS CREATE A FOUNDATION FOR INDIVIDUALS, FAMILIES, CORPORATIONS OR CHARITABLE ENTITIES.

A CRT is an irrevocable trust designed to convert a highly appreciated asset into a lifetime income stream that sidesteps capital gains and estate taxes. Using a CRT, a donor transfers assets to the trustee of the CRT, thereby eliminating capital-gains taxes on the asset gifted into the trust. The donor can also take an income-tax deduction on the fair market value of the transferred asset. Considered by the IRS to be outside the client’s estate, CRTs remain outside the reach of creditors, as well.

Federal government or favorite charity?
It’s usually safe to assume, asserts Steve Merdinger, CFP, ChFC, with Financial Strategy Network in Chicago and a NAIFA member, that when faced with the prospect of paying capital-gains taxes on a highly appreciated asset, “most clients would pick their favorite charity over the federal government.”

Volpe cites an example of a client who purchased a condominium in Colorado a few decades ago for $25,000. At the time of the sale, the condo was worth $1 million. If sold outright, the client would have faced capital-gains taxes on $975,000. Instead, a CRT was set up on the client’s behalf. The property was transferred to the trust and the trust sold the property. The transferred assets were exempted from capital-gains taxes, and the full market value of the gift to the CRT was tax deductible.

A TAXING QUESTION Uncertainty over the future of estate taxes is not helping charitable-planning initiatives, but advisors agree that the current ambiguity is not having as much of an impact as some had thought. Joseph Casselli, of Joseph Casselli & Associates, says that in the current climate, he avoids viewing tax savings as the overriding objective of charitable planning. And many advisors believe that estate tax uncertainty is in no way bringing charitable planning to a standstill. When questioned about estate taxes, Steve Merdinger, CFP, ChFC, with Financial Strategy Network and a NAIFA member, says he asks clients if they believe that eliminating estate taxes today would eliminate them forever. He also points out that most states have a death tax. Federal estate taxes are currently credited toward the death tax, but if federal estate taxes go away, the state death taxes would then apply. Ultimately, “the bigger picture of charitable planning is not driven by estate taxes,” Merdinger says. Indeed, in a nationwide Gallup Poll survey of personal motivations for giving, “keeping taxes down” ranked below “those with more should help” and “giving back to society.”

How CRTs work
CRTs essentially provide for two sets of beneficiaries. The donor and his or her spouse are the income beneficiaries who receive lifetime income from the trust. The second beneficiary is the named charity or charities that receive the principal from the trust upon the death of the income beneficiaries.

In the end, “everybody wins,” Casselli says. “The charity wins as the ultimate recipient of the residual trust assets. The donor wins, making a substantial contribution to a favorite charity while eliminating capital-gains taxes on an asset that produces lifetime income.” The federal government also wins, Casselli says, pointing out that the government has created tax incentives for charitable donations as an acknowledgment that private citizens are more efficient and do a better job of serving charitable needs in the community than the government does.

“Just because a CRT is a magnificent planning tool does not mean it is appropriate for everyone,” Casselli emphasizes. He advises against touting the benefits of CRTs to clients, or even approaching the issue of charitable planning until all of the relevant data has been gathered and the client’s objectives have been reviewed.

Reverse strategy
Oftentimes, donors or their designated charities have a different objective from what is achieved by a CRT. Donors might want to pass the asset on to their heirs and may not need the income. The charity might need cash flow or an income stream more than an endowment. When this is the case, a CLT or a “reverse CRT” offers the reverse set of benefits.

A CLT provides the same set of tax advantages as a CRT. The beneficiaries are just reversed. The charity becomes the income beneficiary during the donor’s lifetime. Upon death, the designated heirs become the beneficiary of the residual trust assets.

More flexibility with DAFs
When selecting charitable-giving vehicles, flexibility is an increasingly important attribute for donors. While both CRTs and CLTs are irrevocable trust instruments, DAFs are inherently flexible vehicles that can grow and turn with the times. DAFs are currently the fastest-growing vehicles on the charitable-giving landscape, notes Theodore S. Rusinoff, CFP, vice president of marketing development with Ash Brokerage Corp., in Fort Wayne, Ind.

DAFs essentially create a foundation for individuals, families, corporations or charitable entities, Rusinoff explains. The start-up costs are relatively low, and donors can make tax-deductible gifts to the fund on an ongoing basis. The fund can be built up over time and drawn upon in the form of grants to charitable entities as opportunities are identified. In keeping with the increased level of flexibility, Rusinoff adds that DAFs entail fewer layers of management and legal administration than trusts.

A number of organizations, including the Million Dollar Round Table Foundation, are now administering DAFs. “The beauty of the MDRT program is that it is marketed through insurance agents,” Rusinoff says.

Putting the client first
While the DAF is a highly flexible and attractive vehicle, Rusinoff emphasizes there is considerable gray area on the charitable-giving landscape. It’s not a question of the right or wrong instrument, but rather the clients’ objectives and expectations.

To this point, Merdinger adds, “I never begin a conversation with a potential donor by trying to convince them of the advantages of a particular strategy. We look at the overall financial situation, and the planning process helps them to see goals and understand whether or not they have a surplus. The tools themselves are less important than already believing that they have enough.”

Consultative approach
An equally significant trend within the field of charitable planning is the expanded focus of many financial advisors, Rusinoff points out. In addition to helping individual donors optimize charitable-giving objectives, advisors are working with charitable boards and foundations to help with planning and to educate donors on tax-advantaged giving strategies.

WHEN SELECTING CHARITABLE-GIVING VEHICLES, FLEXIBILITY IS AN IMPORTANT ATTRIBUTE FOR DONORS.

Just as individual policy owners across the country are participating in life insurance policy reviews or audits, advisors are approaching charities and offering their services as consultants to provide a “charitable audit” to review all policies and recommend changes to existing policies in cases where a significant advantage can be achieved. “Usually there is a lot of cooperation from all sides,” Rusinoff says.

Opening doors
While the compensation associated with serving as a consultant can be vague, many advisors note that the opportunities to build business can be very significant. “There are many times that I don’t receive any remuneration,” Volpe says. He gives an example of a “little charitable remainder trust” that consisted largely of asset transfers. The attorney on the case “liked the work I did, which led to the structuring of a large bond issue, and then to another large case that involved working with a church to create a foundation,” he adds.

Recognizing the various financial situations and objectives among the church’s membership, he structured three separate funding approaches. Some church members are donating money directly into the trust; others are setting up an irrevocable life insurance trust with the church as the designated beneficiary; and others are renaming the church as the beneficiary of a portion of their existing life insurance. “I’ve also structured a CLT that will provide immediate income for the church,” Volpe says.

Having attended intensive training sessions on charitable giving the Salvation Army and the Boy Scouts of America sponsored, Volpe says that he’s been very successful at “coming up with funding strategies and approaches to present to attorneys and accountants.”

The results can be as rewarding as they are unpredictable, Volpe says, referring to a meeting he had with a director of planned giving at a hospital. He had referred a prominent attorney to serve on the hospital’s board of trustees, which led to a hospital-sponsored meeting during which Volpe addressed a large group of doctors on sophisticated planning strategies.

“The key to success is to serve as a true consultant, cultivate the respect of attorneys and accountants, and try not to find an insurance solution to every problem,” Volpe says.

Lisa Wahlgren is a contributor to Advisor Today.