October 20, 2022

The “i’s” have it: Two key topics for client meetings

Inflation, interest rates, income tax, and the IRS are ever-present topics during discussions with your clients. There’s a lot to talk about, especially concerning charitable giving.

Wealth planning priorities are impacted by interest rates. Charitable components of estate and financial plans are no exception. When interest rates are high, your clients may want to look closely at annuity vehicles that leave a gift to charity, such as a charitable remainder annuity trust or a charitable gift annuity.

Creating a charitable remainder annuity trust in a high-interest rate environment versus a low-interest rate environment drives down the present value of your client’s income stream, which means that the value of the remainder passing to charity is relatively high and therefore, so is the client’s upfront tax deduction for the charitable portion of the gift.

Charitable gift annuities also are becoming more attractive to philanthropic clients for different reasons. Thanks to the recent increase in the rate of return assumptions for charitable gift annuities, this planned giving vehicle is now more attractive to donors who like the idea of a higher payout rate for their lifetime annuity.

Our second hot topic relates to the IRS. Projected increases in the IRS’s ranks may raise more advisors’ and clients’ eyebrows than tax hikes. The much-anticipated Inflation Reduction Act is now law. While the Act did include changes to a few income tax provisions, many tax professionals view the Act’s $80 billion in funding increases for the IRS to be the bigger headliner.

Some commentators worry that the IRS may still be unable to build its staff and update technology as quickly as the legislation anticipated. Nonetheless, financial advisors, attorneys, and accountants are taking note. In all likelihood, shoring up the IRS’s operations means that the chances of client audits will increase. Your clients may even be reading up on this in the mainstream media, which frequently cites substantial charitable deductions as a potential trigger for an IRS audit.

Now is the time to ensure your clients understand the rules for charitable deductions and commit to keeping track of their donations in detail. Establishing a fund at the Foundation is easy for clients to organize and track their annual giving.

Some clients, for example, make a single, tax-deductible transfer of highly-appreciated stock each year to their fund at the Foundation. The proceeds from the sale of that stock are then used for distributions from the fund to the client’s favorite charities. In this situation, no matter how many different charities benefit from the fund, the client still has just one receipt to keep track of charitable donations for income tax deduction purposes.

The Foundation for Delaware County team is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to help as a secondary source as you manage the primary relationship with your clients. This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.