Michael Metzger, CFP, CRPC, is a member of The Minneapolis Foundation’s Professional Advisor Committee and a Financial Advisor at TruCairn Advisors, a private wealth advisory practice of Ameriprise Financial Services. With the holiday giving season (not to mention the year-end tax rush!) just around the corner, we asked Michael how he helps clients integrate their charitable and tax planning to make the most of their giving.
Foundation: Why does it make sense for clients to think about philanthropy as they plan their taxes?
Michael: In addition to making a difference in the community, charitable giving can have tax benefits that are well worth talking about with your CPA. We advise our clients to consider giving more in years when they have a higher income tax rate, thus enabling them to reap a higher tax savings. We know that income is frequently at its highest the year you leave a company, as well as the years just before retirement. It can also be higher after age 70 ½, when you must take required minimum distributions from your IRAs and 401(k)s.
We like to try minimizing clients’ taxes for a lifetime by encouraging them to gift into Donor Advised Funds in the years of their highest income taxation. Depending on your situation contributions to a Donor Advised Fund receive an immediate tax benefit, so establishing one can be especially useful for clients who want time to choose charitable recipients, or who want to spread their giving over a period of years. Once the gift is in the Donor Advised Fund, our clients’ giving can become less about tax strategies and more about fulfilling their strategic giving plans.
Because of the tax advantages mentioned above, we suggest completing a year-end tax projection with your CPA. If your income taxes are higher than desired, consider gifting. If you expect your future tax rate to increase due to required minimum distributions from an IRA, deferred compensation, or other reasons, consider pairing a charitable gift with that income event to try to reduce your future tax consequences. A Roth IRA conversion paired with a charitable gift is an example of one strategy many clients consider.
Foundation: Do you ever advise clients to consider making a gift of appreciated securities?
Michael: Yes. When you give stock with unrealized capital gains, neither you nor the charity pays tax on that gain. The larger the unrealized capital gain, the larger the tax avoidance. That’s in addition to the normal income tax deduction associated with a charitable donation.
Charitable gifting of appreciated assets often helps our clients appropriately re-balance their portfolios in a tax-efficient way. Another benefit of gifting stock to a Donor Advised Fund is that you can make the gift when you believe the stock price to be high rather than when a charity calls you for a contribution. By doing so, you end up giving more and getting more deductions because you often end up gifting the stock at higher prices.
Finally, some mutual funds distribute capital gains toward the end of the calendar year. Gifting a mutual fund with an unrealized gain prior to the planned distribution of capital gain can be another way to avoid multiple taxable events and support your charitable giving plans.
Foundation: December is a busy month for tax advisors, but the holiday season is also a time when many families give to charity. What do your clients do at this time of year to support the causes they care about?
Michael: Some of our clients use year-end holiday time to involve their entire family in planning their charitable legacy. Children frequently have an opinion on the issues they care about, and some clients have family conversations about the causes that are most meaningful to them. Even with young children, there are lots of ways to start passing on the value of giving back. For example, we encourage parents to teach their children to spend, save, and share a portion of their “income” each week. We also know that monetary gifts and volunteering go hand in hand, and many families take time during the holidays to volunteer for an organization that they support.
Foundation: All year round, how do you help your clients plan their giving?
Michael: Jenna Dubuc, a financial advisor on our team, worked to develop a process that we use to help our clients think strategically about their charitable giving. Using her process, we work with our clients to identify their core values, through conversation or through various exercises. We then coach them through the process of establishing their annual giving plan so that their financial gifts, and even volunteer hours, are in alignment with these core values. Having a strategic giving plan narrows your focus so that you may give the largest percentage of your wealth and time, more consistently, to the causes that are most meaningful to you.
Foundation: Why do you refer clients to The Minneapolis Foundation?
Michael: The Minneapolis Foundation provides important guidance for clients who wish to establish a Donor Advised Fund. They take our clients through the thought process of decisions such as what cause(s) are central to the mission of their fund, who should be in charge of making grant recommendations, and whether and when control should pass to the next generation in the grantmaking process. The Foundation does an excellent job of helping connect its donors with great charitable organizations that are in alignment with the donors’ passions. We also believe in lifelong learning, and The Minneapolis Foundation offers regular events and opportunities for donors to learn about additional ways to continue adding meaning to their wealth.