As the end of the year approaches, it’s an opportune time for clients to utilize strategies that align charitable goals with their financial objectives. In this article, we will explore various charitable planning opportunities and strategies to leverage to help our clients optimize their giving while improving their overall financial situation.

Tax Efficient Charitable Giving Opportunities

One of the primary incentives for charitable giving is the potential to reduce taxable income. However, timing and method play a crucial role in maximizing these benefits. Below are several techniques to consider as part of year-end planning:

Donating Appreciated Securities: Instead of giving cash, clients can donate appreciated stocks, bonds, or mutual funds directly to a charity. This strategy offers two key benefits:

• Avoiding Capital Gains Tax: Donors avoid paying capital gains tax on the appreciation of the asset.
• Maximized Tax Deduction: They receive a charitable deduction for the fair market value of the donated securities, provided they’ve held the asset for more than one year.
• Watch Your Limits: The IRS places limits on the amount clients can deduct for charitable contributions. For cash donations, the limit is typically 60% of AGI, while donations of appreciated assets are limited to 30% of AGI. If the total contributions exceed these limits, the excess can be carried forward for up to five years.
• Helps Portfolios: This strategy is particularly useful in bull markets, where many clients may have appreciated assets they would otherwise sell to rebalance their portfolios.

Qualified Charitable Distributions (QCDs): Clients aged 70½ or older can make a QCD of up to $105,000 annually (indexed annually to inflation) directly from their IRA to a qualified charity. QCDs offer several advantages:

• Satisfies Required Minimum Distributions (RMDs): For clients who have reached their required beginning date, QCDs can reduce taxable income by offsetting RMDs.  However you need to be careful to make QCDs first, before taking any other income yourself.  The first dollars out of a qualified account are the RMD dollars; if you take your RMD first and then try to make a QCD later, it won’t count.

• Tax-Free Distribution: Unlike regular withdrawals, the QCD is excluded from the client’s taxable income, offering a substantial benefit for those who don’t itemize deductions, which can help clients stay within lower tax brackets or avoid Medicare premium increases.
• This strategy is particularly advantageous for clients who may no longer need the full amount of their RMD for living expenses but are still required to take it.

Consider a Multi-generational Advisory Relationship

Over 50% of our clients are multigenerational, meaning we have family members in more than one generation who we are serving. Often children are clients with their parents from a young age, but as they become adults, they become more independent and establish their own relationship with us as their advisor. Another common situation is when clients refer their parents to us, forming a multigenerational relationship from the other direction. Still another way this happens is when adult children establish a relationship with us as their parents (who are clients already) age and it becomes even more important to all be on the same page.

Even if you are not a Confluence client, we would encourage you to find an advisor and a firm that is making multi-generational wealth considerations a priority. Your advisor should help you bridge the gap between the wealth that you’ve built and the next generation for whom you hope that wealth will be a blessing. We have shepherded many families through this difficult period already, and the whole process is undoubtedly much easier if the parents and the children share the same advisor.

Take Another Look at Your Estate Plan

When was the last time you had your estate plan reviewed? If you are like most Americans, it’s probably been a few years. The typical estate plan is adequate for only a certain season of life, and it will need to be redone as children get older and circumstances change. Like a financial plan or an investment portfolio, an estate plan should be periodically updated as goals change. An estate plan update is almost always needed after a major life event such as a birth, a death, or a change in marital status.

Sometimes an estate plan can be as simple as a pair of wills and power of attorney documents. More often, however, trusts should be involved and more careful consideration should be taken to help ensure that wishes are carried out. For example, what would happen in the event of a death or divorce of a child? If protections aren’t built into the estate plan, it’s possible that a parent’s wealth ends up with a child’s ex-spouse instead of the grandchildren. That is an avoidable scenario, but it’s important to ask the right questions and think critically about the key factors that will cause the plan to either be successful or not.

We don’t have attorneys at Confluence, but we do have a robust process for reviewing your existing estate plan so that you understand your current situation. Once we learn where you are today, we can help educate you so that you are prepared when you speak to your attorney about updates. We work closely with our clients throughout the whole process and are there to help in every way we can.

Communicate, Communicate, Communicate

The primary reason that the wealth transfer could go poorly for the majority of families is a lack of communication. An inheritance can be a difficult subject to broach, especially for the first time. As a result, many families put these conversations off until it is too late. Don’t let that be your family.

We find that most families assume that their children will handle the inheritance with ease, but that isn’t always the case. We’ve seen many situations in which the heirs were paralyzed by their newfound wealth and the responsibility that comes along with it. They don’t feel prepared to handle the wealth, and so it wears on them. Rather than enjoying the legacy that their parents worked so hard to build, they instead live in fear of losing it all. Fortunately, this can be remedied by simple and consistent communication. Imagine if those same heirs had been let in on the family wealth along the way. Imagine if they knew how the accounts and estate plan were structured. Most importantly, imagine if they understood their parent’s dreams and wishes around the wealth. Imagine they understood the values and expectations that go along with the wealth being transferred.

One question we often ask our clients is this: Will your children still speak to each other after you are gone? Many clients take this for granted, but an estate plan that has not been communicated will inevitably lead to disagreements and fraught relationships. This is especially true in unique situations where the split is not even amongst the heirs, but money can cause even the most reasonable people to turn their backs on each other. Thankfully, again the odds of this happening can be greatly reduced with solid and consistent communication on the part of the wealth creators. Don’t leave ambiguities that can be interpreted. Make your wishes known and take the (sometimes) uncomfortable step of starting a pattern of communication.

Have a Family Meeting

One concrete way to start or solidify communication around the great wealth transfer is to have a family meeting. Ideally, this would lead to a regular cadence of meetings, but the first one is usually the hardest. These meetings can take many different forms, but they are typically initiated by the wealth creators of the family and include the adult children in the upcoming generation. Many families want to communicate better about important topics like their estate plan, financial expectations, and charitable goals, but they don’t know where to start. That’s where a family meeting can be a great opportunity to open important lines of communication.

At Confluence, facilitating these family meetings is one of the most important things that we do. We regularly sit down with our client families at our office or their homes to help get everyone on the same page. We don’t believe this type of meeting should be only done in an emergency after a terminal diagnosis, although that may sometimes be necessary. Rather, we think it is essential to start thinking about this now, before there is a crisis of any kind. Communication around wealth transfer that is done while the whole family is focused and not in crisis is ideal because it prepares the family to be ready if or when the crisis does arrive.

Conclusion

The largest wealth transfer that the world has ever seen is coming. For many, it has already started. That transfer is going to go well for some families, but very poorly for many. At Confluence, we’ve made the next generation a priority, right down to the way we have structured our firm. Many advisors work as lone wolves, with no real succession plan or assurance of what will happen to the families they serve once the advisor retires. At Confluence, we are building a firm so that we can help not only our current clients, but their children and grandchildren as well. We work in teams, and we have advisors who are in their 70s all the way down to their 20s. We’ve made significant investments in growing the next generation of advisors so that our clients’ children and grandchildren can be confident in the Confluence of the future.

As you read this today, we implore you to start thinking about what your next step may be towards making sure that your financial legacy is secure. Perhaps you need to have your estate plan reviewed, or you should make that call to your attorney that you’ve been putting off. Maybe you’ve been meaning to ask your advisor about a family meeting or considering introducing your parents or children to your financial team. Whatever the next step is for you on this journey, we ask you to take it. Your family will be grateful that you did.

You can do well by doing some good!  Not only can giving to a charity make a positive impact, it can provide an opportunity for some tax benefits too. If you are a high-income earner or a retiree who plans on writing checks to your favorite charities, then you may benefit from these three wealth and tax planning tips you can take advantage of in the future.

Donor Advised Funds (DAFs)

• An immediate tax deduction can be taken for the amount donated in the year the contribution is made to the DAF.  Then, you as the donor advisor to the DAF decide which 501(c)(3) organizations (e.g., religious organization, college, hospital/clinic, community center, etc.) receive grants from the fund at any time in the future.  DAFs are a great vehicle to us if you have a big cash flow year and you know you want to make a large deductible contribution, but you aren’t sure to which organizations yet. A DAF allows you to get the deduction today and decide which charities will be ultimate beneficiaries at a later date.

• If a client contributes long-term appreciated securities to their DAF, they can avoid capital gains tax on the appreciated portion and receive an immediate charitable tax deduction for the full market value of the gift.

• Assets donated during the life of the client are no longer part of the client’s estate, and therefore, are not subject to probate or estate taxes. The DAF can also be named as a beneficiary to an IRA, a charitable remainder trust, or other asset.

• Unlike private foundations, there are no start-up costs, no tax on the fund’s investment income, no individual payout requirement, and all record keeping services are included.

Qualified Charitable Distributions (QCDs)

• A QCD allows individuals who are 70.5 years of age or older to donate up to $105,000 per year per individual to one or more charities directly from a Traditional IRA (For 2024, QCD limit increased to $105,000 from $100,000 in 2023). The charity must be a 501(c)(3) organization. Private foundations or donor advised funds are not eligible to receive QCDs.  

• QCDs count toward your required minimum distribution (RMD) amount. (Inherited IRAs also qualify for QCD provided you meet the age requirement.)

• QCDs are non-taxable distributions and not included in your adjusted gross income (AGI).  This is important because regular charitable contributions do not lower AGI.  Lowering AGI can have a number of benefits, including bringing down Medicare Part-B premiums, qualifying for certain deductions, and lowering the taxable portion of Social Security.

• Keeping your taxable income lower can help avoid elevating to the next federal tax bracket or potentially provide opportunities for other tax planning considerations.

Donate appreciated investments.

• Look at your portfolio as an opportunity toward donating long-term appreciated securities (e.g., stocks, mutual funds, bonds). 

• Capital gains are eliminated when you contribute long-term appreciated assets directly to a charity (via the charity’s trustee or custodian) instead of selling the assets and donating the after-tax proceeds.

• The charity can then sell the assets and pay no tax on the appreciated gains because of their tax-exempt status.

In Summary

Act today and consult your fiduciary wealth manager and tax professional to develop a plan to best align with your goals and charitable endeavors. You have an opportunity to make a positive IMPACT on charities both today and tomorrow while also receiving some tax benefits along the way. Please do not hesitate to contact us if you have any questions or if we can help in any way.    

About the Author

Known for his professionalism and calming demeanor, Zac is focused on helping his clients reach their financial goals through comprehensive financial planning and unbiased guidance.  Zac and his team support and care for…

Sewickley

724-719-6609

zac.saunders@confluencefp.com

Email Zac

Heading into 2023, the Investment Advisory Committee believes we are beginning to return to a more historically normal, rational economic environment.

The Committee has identified four key themes for 2023 and the years ahead:

1. Fundamentals Matter Again:

• From 2009 to 2021, expansive government and monetary policies kept interest rates and inflation near record lows.
• This environment favored US and growth stocks, whose stock prices are driven primarily by future growth prospects, as opposed to things like profitability and earnings.
• The unwinding of these accommodative policies is leading us back to an environment where strong company fundamentals will likely again be vital when building investment portfolios.

In late December, a $1.7T omnibus spending package was passed in Congress and subsequently signed into law by President Biden. This bill included some significant updates to the landmark 2019 SECURE Act, such that this portion of the legislation is being referred to as SECURE Act 2.0.

The legislation is far-reaching and offers several enhancements intended to strengthen American’s retirement and financial readiness.

While there are many changes that impact personal savers, I’d like to focus on one change that will have a significant impact on 401(k) plans, and the companies that sponsor retirement plans.

Automatic Enrollment

• The new legislation requires businesses creating new 401(k) and 403(b) plans beginning in 2025, to automatically enroll eligible employees, starting at a contribution rate of at least 3%, up to 10% of employee compensation.
• Contribution rates must increase by 1% each year until at least 10% is reached, but not more than 15%. Employees have the option of declining to participate or adjusting their personal savings rate.   

Why is this impactful?

Roughly 25% of working adults have no retirement savings, and fewer than 4 in 10 believe their retirement savings are on track, according to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2019.

• Proponents are hopeful that the provision will increase 401(k) participation rates and raise the amount workers save for retirement.

Signing up for a 401(k) is simple – filling out a form isn’t a difficult task, but research has shown that workers need a nudge. As the data have repeatedly shown, auto enrollment is indeed that nudge.

• According to a Vanguard Research study, among newly hired employees, participation rates were at 91% under auto enrollment, versus 28% under voluntary enrollment. 

The future impact of Automatic Enrollment can be significant. Employees benefit from these automated plan design options. Employers benefit by having engaged employees that are financially fit. 

If you have questions about how this plan design enhancement could affect your retirement program, please call (412)815-4721 to speak with our Retirement Plan Services team today.

See below for additional key provisions in SECURE Act 2.0 for employers:

Are you thinking about hiring a Financial Planner? If you’re under 45, this is a must read…

By: Gregory Weimer, CPA and Chuck Ziants, Wealth Managers

Managing your financial affairs and planning for retirement can be daunting no matter who you are or what your situation is. If you’re like most people, your mind has 60,000-80,000 thoughts per day that could range from paying off debt or planning a vacation to of course… what am I going to have for dinner tonight. The financial aspects of your life such as budgeting, saving, and planning for retirement often get pushed to the side in favor of the thoughts that have more of an immediate impact on your daily life. This is completely normal, but a major mistake that people of all ages make. The earlier you begin to get your financial affairs in order, the easier it will be down the road. Your older self will be thanking your younger self one day!

In our opinion, there are three fundamental reasons when it might be time to talk with a financial planner. Notice, we said the word “might”, this means that if you have had any of the following three thoughts or concerns you should at the minimum have a phone conversation or meeting with a planner. It’s important to determine if it is the right fit before you jump in with both feet.

• You need a basic roadmap to achieve your short, intermediate, and long-term goals.

At a high level, the financial planning process consists of helping you determine your goals, develop a plan, and invest in a way that will meet those goals. Although investments are the primary focus of most financial planners, that is not the only service offered. Through the financial planning process, you will be able to tighten up your budgeting/cash flow, plan for major life events such as having children or purchasing a new home, and put yourself in a position to meet your retirement goals. A financial planner can take all of your information and talk with you about ways to meet those goals.

• You’re not a “money or numbers person”.

 Not everyone understands finance or enjoys following the S&P 500 and that is perfectly fine! That’s what financial planners are here for. There is a reason that they chose the profession they did. Just as some people want help in managing their finances, a financial planner looks to a doctor for medical advice. Having someone else help manage your finances can allow you to spend more time doing what you love.

• You have a handle on your finances, but need a non-emotional third party.

There’s no question about it – investing and financial planning is emotional! Wouldn’t it be nice to have an unrelated party who has your best interest at heart available to you as a sounding board while you go through major life events? Want that shiny new car? Great, it can be helpful to get a neutral opinion from your financial planner. In addition, studies by DALBAR have consistently shown that the average equity investor receives a much lower return than what the actual equity market return was for the same time period. Why is that? Emotions. The individual investor often makes emotional decisions while investing that on average do not result in the best outcome.

At this point of the article, you may have already decided that you want to speak with a financial planner. Then, thought number 60,001 comes into your head… “What do I even ask a planner when I have a conversation?”. This is another potential roadblock on the path to improve your financial life. Please see below for some helpful tips when talking with a prospective advisor.

A financial relationship is based around trust and feeling comfortable with the other party. When you walk out of each meeting with a financial professional you want to have the feeling of confidence that they are putting you and your family’s needs first.

There are benefits to receiving professional advice, but choosing someone to work with can be difficult and we understand that. Here at Confluence Financial Partners, you will receive professional advice that is customized for your financial goals.

If you are interested in speaking with us in greater detail, please contact us at Gregory.Weimer@ConfluenceFP.com or Chuck.Ziants@ConfluenceFP.com

[i] https://www.successconsciousness.com/blog/inner-peace/how-many-thoughts-does-your-mind-think-in-one-hour/