A widely circulated report among fundraising professionals found that the number of charitable donors has declined steadily over the past four years. Further, a Giving USA report found that the total amount of giving has also declined in recent years on an inflation-adjusted basis. Researchers attributed the drop in giving to everything from the state of the economy and the high cost of living to student loan debts, the decline in organized religion and people losing faith in U.S. institutions.
They’re missing the bigger picture. Financial advisors aren’t giving their clients the right guidance about the huge philanthropic potential of their low-basis real estate, closely held business interests, appreciated stocks and other non-cash assets. And it’s not just a problem among those counseling the ultra-high-net-worth set.
Too many advisors still think charitable giving is code for “migration of assets under management.” And they don’t seem to know how to help clients give money away the right way. When they hear the words “donation” or “giving,” they instinctively look for clients’ spare cash. But as you go higher up the income ladder, you see people have less wealth in liquid cash. Among those with $10 million-plus in net worth, they have on average 2% of their wealth in cash compared to 23% in real estate and 41% in businesses. Despite a recent pullback in the market, most of your clients still have plenty of highly appreciated assets languishing on their balance sheets.
Cash is a precious resource for UHNW clients. Giving cash can make them feel like they’re losing their security blanket. Also, cash represents after-tax proceeds. Donating appreciated assets instead avoids future taxes (capital gains as well as realizing the charitable income tax deduction), which is a double benefit.
Contrary to what you hear in the daily headlines, the sky isn’t falling. It’s time to put those appreciated assets to work instead of hoarding them.
But the battle to close the philanthropic education gap among advisors continues. According to a new Society of Trust and Estate Practitioners survey of nearly 1,000 advisors worldwide, roughly half of client families expect to make major gifts in their lifetimes, but only 8% of advisors feel such giving is a “driving force” for affluent clients.
Case in point: several advisors called me last week because they didn’t know what a donor-advised fund was and needed to help a UHNW client make a large donation. On the other hand, advisors call me about all kinds of highly risky charitable structures they’re considering for clients (some under IRS scrutiny) instead of doing basic blocking and tackling.
Clients who are corporate executives may have a decent amount of cash stockpiled, but that’s not where the real wealth in this country resides. It’s found among people who have real estate holdings and who own businesses. Again, most of their wealth is tied up in non-liquid assets that are just sitting there idly in their accounts. These assets could be doing great things for charitable organizations while giving the holders a tax-advantaged way to reduce their estates, not to mention the psychological satisfaction of giving.
Real World Example
My firm helped a client who was selling his closely held business to a private equity firm. We carved off part of the non-cash portion of his asset sale and donated the assets to a special charitable trust. We effectively helped the owner avoid capital gains tax on over $10 million of a $30 million sale and realize a $5 million tax deduction that sheltered a portion of the non-charitable portion.
A Charities Aid Foundation survey of more than 200 independent financial advisors, wealth managers and planners found that just 5% felt “very confident” discussing philanthropy with clients—much less advising them on it. Nearly three-quarters of surveyed advisors (72%) said they didn’t include philanthropy as part of their initial fact-finding with clients, even though one in five (21%) said they saw a direct link between providing philanthropic advice and winning new business. Why? Most often, it’s due to “lack of available training,” according to the report.
Where to Find Philanthropic Training
The Chartered Advisor in Philanthropy program is one place to start. Also, attend Planned Giving Council meetings or other educational events. You must be proactive about becoming fluent in the language of giving. Or find a fellow professional with whom you can do joint work while you learn (clients don’t mind).
You may not feel you have the time to get that training, but if you’re hoping work with the next generation of affluent clients consider this: A separate CAF study found that one-third of young HNW individuals (under 34) consider themselves philanthropists, and nearly two-thirds say that giving to charity is an important part of their lives. But they’re often not getting the help they seek from advisors.
The next move is up to you. It’s not up to your clients to ask.