Recent events have frayed the nerves of many investors. After a collective period of isolation and grief from the pandemic, we are still faced with stress and unease from a never-ending news cycle of international conflict, market volatility, and political debate. In this time of contemplation and change, your clients may be re-evaluating their careers, families, relationships, and where they live.

It’s during times like these that advisors can truly shine.

Beyond delivering calm and steady investment guidance, challenging markets provide an opportunity for you to differentiate your service model via deeper conversations with your clients. By talking to your clients about their hopes and fears, the legacy they want to leave, and their goals and purpose, you can truly illuminate the value you deliver.

When you bring charitable giving into the conversation, you are not only delivering potential tax benefits but also giving your clients an opportunity to support causes they care about at a time when many nonprofits are experiencing urgent needs.

Amid ongoing economic uncertainty, it’s important for your clients to give smarter. Fidelity Charitable® has identified five strategies for your consideration.

1. Select the Right Asset to Give

How it works: Cash is not always the best asset to give due to its lower tax efficiency. Consider substituting it with a donation of long-term appreciated stock (i.e., held for greater than one year) to charity via a donor-advised fund.

May work well for: Investors with long-term appreciated stock where the current value is significantly higher than when it was purchased.

Potential benefits: Tax benefits may include a tax deduction for the fair market value of the investment contribution, and the elimination of the capital gains tax and potential Medicare surtax that they would have otherwise incurred on the sale of the stock.¹ The investor can purchase the same security at a higher basis, which may minimize future tax liability when sold at a later date. Most importantly, this approach may create a larger gift than if the investor sold the securities and contributed the after-tax proceeds.

Note: If cash is the best option for your clients, remember to suggest that employer match opportunities may maximize the contribution.

2. When Rebalancing a Portfolio, Consider Donating Appreciated Positions

How it works: Rather than selling appreciated positions to rebalance a portfolio, an investor can make a charitable gift of the long-term appreciated asset via a donor-advised fund.

May work well for: Client portfolios that have become increasingly exposed to stock market corrections or fallen out of alignment with investment goals. Also, it’s wise to look out for any merger and acquisition activity for companies in your clients’ portfolios that may result in forced capital gains, so your client can take proactive action.

Potential benefits: Investors may be eligible to take a tax deduction for the fair market value of the asset and eliminate the capital gains tax and Medicare surtax.

3. Divest Privately Held Interests via a Donor-advised Fund

How it works: Donate all or a portion of non-publicly traded interests to a charity prior to divestiture. When using a donor-advised fund, this approach may also allow your client to recommend multiple grants to different charities with just one asset. Note that timing is important as the donation must occur before the sale of the asset and that the donor needs a third-party, independent valuation.

May work well for: Portfolios that hold a family business, S-corp shares, or limited partnership interests. Other assets that may be non-publicly traded include cryptocurrency, restricted stock, and some alternative investments. Like other strategies, it is especially beneficial for anyone on the verge of a higher tax bracket.

Potential benefits: Not only is it possible to minimize capital gains exposure under this strategy, but it may also allow for a tax deduction for the current fair market value of the donated assets, rather than the original cost basis (a private foundation must use the cost basis for privately held interests). When donating something personal like a family-owned business to charity, it can bring about positive feelings and stories for a potentially emotional transaction.

4. Elect Charitable Contributions to Offset a High-income Year

How it works: For clients experiencing a particularly high-income year, donating to a donor-advised fund may reduce their taxable income. You may also consider a “bunching” strategy for your clients. By frontloading multiple years of charitable giving in one year, it may allow them to surpass the itemization threshold. They would then elect the standard deduction in subsequent years.

May work well for: Clients on the threshold of a higher tax bracket or if their bracket is higher now than what is expected in the future. It may also work well when there is a unique event (e.g., a financial windfall or work bonus) that is not anticipated to repeat. For those considering a “bunching” strategy, it does require sufficient funds to frontload giving.

Potential benefits: This strategy can reduce taxable income in a given calendar year. When paired with a donor-advised fund, it establishes a charitable nest egg that can grow tax free and support giving now and in the future.

5. During Roth Conversions, Offset Increased Taxable Income with a Charitable Contribution

How it works: When a client’s Roth conversion triggers a taxable event, consider a charitable gift in the same tax year to offset taxable income. To ease the tax burden even further, consider the “bunching” strategy.

May work well for: Those with long investment time frames (ideally over five years) and those who expect higher taxes in the future.² It’s also helpful for anyone who has inherited an IRA and must now withdraw the assets within ten years of the death of the original account holder.

Potential benefits: The charitable deduction can offset the increase in taxable income triggered by the conversion.

What Is a Donor-advised Fund?

We have mentioned a donor-advised fund as an effective tool to pair with these smart strategies. The Fidelity Charitable® Giving Account® is a donor-advised fund that can transform the way your clients give. By establishing a Giving Account®, your clients can:

• Support multiple charities, at virtually any time, with a single contribution.
• Be eligible for an immediate tax deduction for their contributions.
• Contribute stocks, mutual funds, cryptocurrency, or non-publicly traded assets, which other charities may not be able to accept.
• Choose from different investment options, including a program that enables donors to recommend qualified investment advisors to manage assets held in a Giving Account at Fidelity Charitable.
• Streamline their recordkeeping and consolidate tax receipts.
• Create a valuable estate planning tool to support their legacy goals.

Advisors are in a key position to provide the calm perspective and peace of mind that so many investors are searching for during these uncertain times. By incorporating charitable giving into planning conversations with your clients, you not only deepen those relationships, but also demonstrate that you recognize and appreciate their personal goals and values. Reach out to a charitable planning specialist with Fidelity Charitable to learn how donor-advised funds can help your clients give smarter in this turbulent, stressful world.

¹ Assumes all realized gains are subject to the maximum federal long-term capital gain tax rate of 20% and the potential of Medicare surtax of 3.8%. This does not take into account state or local taxes if any.

² If you are considering making a qualified charitable distribution (QCD) from an IRA account, remember that some charities are not eligible recipients. This includes donor-advised funds, private foundations, and supporting organizations as described in IRC Section 509(a)(3).

DISCLAIMER:

eMoney Advisor LLC is a Fidelity Investments company and an affiliate of Fidelity Brokerage Services LLC and National Financial Services LLC.

Fidelity Charitable is the brand name for the Fidelity® Charitable Gift Fund, an independent public charity with a donor-advised fund program. Various Fidelity companies provide investment management and administrative services to Fidelity Charitable. Fidelity Charitable logo is a service mark of FMR LLC.

Fidelity Charitable is the brand name for the Fidelity Investments® Charitable Gift Fund, an independent public charity with a donor-advised fund program. Various Fidelity companies provide services to Fidelity Charitable. The Fidelity Charitable name and logo, and Fidelity are registered service marks of FMR LLC, used by Fidelity Charitable under license. Giving Account is a registered service mark of the Trustees of Fidelity Charitable.

The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.

The views and opinions expressed by this blog post guest are solely those of the guest and do not necessarily reflect the opinions of eMoney Advisor, LLC. eMoney Advisor is not responsible for the content, views or opinions presented by our guest, nor may eMoney Advisor be held liable for any actions taken by you based on the content, views or opinions of the guest.

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