Altruism and taxes
Changes in overhaul law present unique opportunity for older retirees’ portfolios.
Older retirees may save Christmas for charities.
Donors gave a record $410 billion to nonprofit causes last year, according to Giving USA Foundation, in part because taxpayers were bunching contributions ahead of this year's higher standard income tax deduction, experts say. That led to worries that 2018 might be a down year for philanthropy. The higher standard deduction means fewer people will likely itemize and claim charitable deductions.
And as this fall's stock market correction continues, donors overall may be feeling less capacity to give this holiday season, typically the biggest time of year for donations.
Enter older retirees, who typically have more conservative portfolios, so thus may not be feeling the recent stock market plunges as keenly as younger people. They also may be feeling generous after a recent tax-law overhaul left in place the ability to donate their required minimum distributions from IRA funds directly to charity tax free.
Darin Shebesta, a financial adviser in Scottsdale, Ariz., recently advised a client in her mid-70s that she could save about $5,000 in taxes by donating her required distributions directly to a half-dozen charities. Of course, the tax savings only makes sense if retirees don't need the funds for expenses.
One of the recipients was a nonprofit dance school she attended 60 years ago but still remembered fondly.
“We got her connected back to the school, and she donated the funds in honor of her husband,” who died about two years ago, Shebasta said. “She had been underspending her withdrawal strategy and she had no kids,” so the money had been earmarked for friends after her death, he said. The idea of seeing the money put to work now at an organization that mattered to her gave her a chance to, in effect, enjoy the money during her lifetime, he said.
Financial advisers say charitable giving strategies can be a way for them to better connect to clients, which has obvious marketing appeal. But it can also help retirees clarify their overall financial goals, prioritize spending and generally feel good about putting their life savings to work after focusing for decades on saving.
After working for 14 years in nonprofit fundraising, Juan Ros became a financial adviser about six years ago.
“I make it a point with every prospective client to talk about their charitable objectives,” he said. Not everyone has them, which came as a bit of a surprise to Ros after spending so many years around donors. But the conversations produce a broad sense of a client's interests in the world at large, he says, a point of learning that can help him frame retirement-timing and spending plans in addition to understanding charitable goals.
Other advisers, meanwhile, said clients are flocking to donor-advised funds this year as a result of the new tax law. The vehicles allow donors to take the standard deduction one year and then itemize the next year, spreading out the actual gifting of money to the charities at the donor's leisure.
Adviser Mark Wilson encourages clients to donate appreciated securities equaling two years' worth of donations to donor-advised funds. This allows them to avoid the capital gains taxes due on the investments (which are in taxable accounts) and control the timing of the gifts, he said.
So, are you giving more or less this year, and to what organizations? How will the higher standard deduction change your giving? How does it fit into your overall retirement strategy? Send me your thoughts at journey@janetkiddstewart.com.