Two Bernstein professionals overseeing tax planning and giving strategies share the conversations that are resonating with donors this year. How is the CARES Act creating a once-in-a-lifetime giving opportunity in 2020? Why are bequests gaining traction right now? And what makes gifting appreciated securities extra appealing amid today’s narrow stock market? We offer prescriptive, compelling angles for your year-end outreach.
00:00 - 00:32
Tis the season, this is a common phrase that so many of us here during the months leading up to calendar year-end, but in wealth management, among other things, tis the season for client conversations on year-end tax planning and charitable giving strategies. Likewise for many nonprofit organizations, it's the season to connect with and shepherd in those critical year-end gifts from donors. So we're going to get the scoop today from some experts on the front lines in those tax and charitable giving conversations, because I think it might be helpful intel for listeners who are either giving or raising money today.
00:36 - 01:05
Welcome to Inspired Investing, I'm your host, Clare Golla, head of Endowment and Foundation Advisory Services at Bernstein. And this is where we strive to connect with and share insights with listeners like you who are engaged in the nonprofit and broader philanthropy sector, or you just want to learn more. So today I'm joined by two colleagues from our National Wealth Strategies team, Chris Clarkson from our Los Angeles office, and Emily Neubert in Denver. Thank you both for joining me today. Great to be here.
01:05 - 01:29
So both of you work with individuals and families with significant wealth. And for many of these folks, charitable giving is a part of their overall financial and tax plan. So you're really in it right now, as I know in year-end conversations about tax planning and giving strategies. So this is all food for thought as the development professionals and boards of directors that we work with are looking for interesting donor engagement strategies at year-end.
01:29 - 01:36
So today we're going to cover three conversations that are really resonating with private clients right now. I'm going to start with you, Emily.
01:36 - 02:06
Let's set the stage with some giving trends that we're seeing out there. Sure. As far as giving trends we're seeing right now, we are definitely seeing our clients giving generously this year and more specifically earlier on in the pandemic, which may seem somewhat surprising given the level of uncertainty that has plagued us all over the last seven to eight months. But based on conversations we're having with our clients, they are motivated to give back and they want to help their communities.
02:07 - 02:41
So we're seeing more gifts from donor advised funds and more grants being made from foundations. In fact, the Chronicle of Philanthropy just released a special report on fundraising, and their findings back up our observations as well. The survey development leaders in 116 large charities, and they found that over 100 of those charities had raised nearly 21 percent more from foundations, corporations, and individuals in the first half of 2020 than they had in the first half of 2019.
02:41 - 03:05
I think it's important to point out that we're also seeing the magnitude of gifts as somewhat uneven, in that wealthy individuals and families haven't been hit as hard by the pandemic economy and that two-thirds of charities who responded to that survey also said they saw an increase in the number of gifts made from wealthy donors in the first six months of 2020.
03:06 - 03:24
I mean, the fact is high-net-worth individuals and families have been driving giving for the last decade. And we're seeing those same people and others who are in a position to give giving the same amount or more this year. But unfortunately, there are tens of millions who aren't in that same position.
03:24 - 03:53
And some nonprofits are particularly concerned that those affluent donors who give a few thousand dollars or more each year may need to cut back more so than the wealthier Americans, just given the unusual circumstances right now and heightened level of uncertainty. So because of that, some fundraisers are pretty anxious about whether people will still be compelled to give at year-end. And I think it remains a big question mark for nonprofits. Thanks, Emily.
03:53 - 04:06
I absolutely agree with what I've seen anecdotally when we're speaking with clients or I'm on a board of a foundation and things like that is that there already was this hollowing out in the middle. Right, for... in terms of philanthropy.
04:06 - 04:38
So we've seen this onslaught of these transformational gifts. I mean, millions and millions of dollars that are meant to absolutely change systems and get at root causes and go over multiple years. And we've seen the advent of crowdsourcing right on the charitable side as well with all of these tiny little micro gifts that hopefully will culminate in a sizable gift. But this sort of bread and butter donor that used to be really the staple and the audience for many, many fundraising campaigns across the United States, it's been a real challenge.
04:38 - 05:04
And so the development officers that we're talking with right now are really trying to look at what we know, that those donors are still out there. Right. They may not be giving a five million dollar gift this year, but they could be giving a few thousand. Right to your point, Emily. And so what is that message that we can really be targeting right at that audience? They have sizable wealth, right? Not transformational gift wealth, but sizable wealth.
05:04 - 05:34
So what should we be, what should we be putting out there to those donors? So I'm going to turn to you, Chris, with this one, because you get into a lot of these conversations with clients as well. If I'm a development officer and I'm thinking about year-end messaging, what might resonate this year? Clare, I think if you're trying to catch donors' attention, one thing that I would find particularly timely and compelling would be to talk about the CARES Act. That was the stimulus bill that was passed in the spring and specifically how it has
05:35 - 05:57
improved the tax incentives for charitable giving. Let's face it, never have nonprofits needed donors' help more than they do today. But now the stars have really aligned from a tax perspective, and it's created a once in a generation opportunity for giving in 2020.
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So what happens?
05:59 - 06:31
Well, for individual donors, the tax deduction for cash gifts had previously been limited to only 60 percent of your adjusted gross income. But the CARES Act suspended that limit for this year. So now donors can deduct up to 100 percent of their income. Now, there are a couple of caveats. I should mention that this is for cash contributions directly to public charities.
06:31 - 06:54
Gifts to donor advised funds or foundations don't qualify for that same higher limit. But I'll tell you where it gets really interesting is for donors who are taking advantage of this by coupling their charitable gifts with other strategies they might be undertaking, which would normally produce or generate extra income.
06:54 - 07:10
So things like a Roth IRA conversion or maybe they're exercising employee stock options. Well, they could size their charitable gift with those strategies and literally pay no tax this year.
07:10 - 07:43
But give it even for someone who has a large IRA that maybe they don't need for their support and they'd like to use it for their charitable giving, well, they could take a withdrawal of any size this year from their IRA. They could turn around and donate those proceeds, those funds to charity and again, not pay any tax on that income. It's a bit like the qualified charitable distribution, but it doesn't have that same 100,000 dollar limit that you normally have.
07:43 - 07:59
You can use it for any size withdrawal from your IRA. One of our nonprofit clients had asked me to craft the language around this topic and so they could send it out in a year-end donor engagement e-mail.
07:59 - 08:23
And, you know, from what I understand, it's been pretty well received. That's great. Well, and Chris, it's funny that you mention that because we've been getting so many requests for... legislation has been moving quickly. Right. It's a fluid time, as everyone is saying. Organizations don't necessarily have the resources to do the research and then create the content to get those messages out in a really timely way.
08:23 - 08:57
So we're actually, based on your work, Chris, we're planning on doing more of that in 2021. So that's, that's excellent. Just one question. Is this available next year also, any of what you just talked about? No. As of right now, all of these provisions expire on December 31st. While I would love to see Congress pass another stimulus bill and extend those provisions, I don't think you can rely on that. So I think those who do want to take advantage really should make a gift in 2020. Nothing like a message with a sense of urgency attached. Right. So thank you.
08:57 - 09:03
Now, that's good to know. And as I mentioned, Emily, it has been this incredibly fluid, fluid year.
09:03 - 09:33
And so we've also seen some changes, I guess are trends, with regard to estate planning. So what are you seeing with our own clients? How has COVID-19 really affected them? Have you seen an estate planning pick up or anything like that? Yeah, I think while people don't like to contemplate their ultimate departure, it's been much harder to avoid thinking about it this year, given the constant reminders that unexpected events can happen any time.
09:34 - 10:05
So I would say we've definitely had more conversations with our clients about the status of their estate plans, whether they need to start planning, whether either a basic plan or a more complex plan or simply revisit the plan they currently have in place. I think the reality right now is forcing our clients to become more aware of their families, their assets, and ultimately how they wish to see their loved ones taken care of if something unexpected does happen.
10:06 - 10:34
What's more interesting, Clare, is that with an increase in estate planning activity, we've also seen a major uptick in new bequest commitments. In fact, in an analysis of estate plans and bequest commitments made from June 2019 to June 2020, over 26 percent of individuals with more than 10 million in assets chose to leave a bequest in their new or
10:34 - 11:01
update estate plan. Wow, that's really interesting because also I know that anecdotally, and I think that you had mentioned the Chronicle of Philanthropy piece, it might have been in there. They mentioned that initially fundraisers were somewhat nervous or tentative about actually reaching out to donors during this time period to talk about planned giving. And so what it sounds like is that those organizations that are reaching out are seeing some success.
11:02 - 11:33
So that is a tip to bring forward. So, Emily, what kind of tools do we have around the case for estate planning? I guess, so to speak, for nonprofits and foundations where they might be able to share that? One of the best things we did early on in the summer was I authored a blog called Life Is Uncertain But Your Estate Plan Shouldn't Be. And this is really an evergreen piece. But given the timing of its release, it's become valuable collateral for people trying to have those more difficult conversations.
11:34 - 12:07
And while the piece doesn't push specific planning strategies like bequests on anyone, it really opens the door to the conversation and gets people thinking and then ultimately acting. It provides a road map of some estate planning basics and an overview of different documents that really everyone should have in place. I completely agree that it can be intimidating to have those types of conversations because it might come across as insensitive.
12:07 - 12:30
And I think what really helped us through that was in the blog we tied in some high profile cases or examples where failing to act was detrimental to the person's overall wishes. For example, we cover stories of Prince, Heath Ledger, and Barry White. And I'll give you a quick little story with Heath Ledger's case.
12:30 - 12:53
He never updated his will after his daughter was born. And unfortunately, when he passed, his assets all went to his parents and his sister and his two-year-old daughter and her mother received nothing. Now, ultimately, his family gave his entire estate to his daughter, but others might not be as lucky to have it work out like that.
12:54 - 13:21
So I think we definitely saw using some of these stories that really helped motivate people to act sooner rather than later, and that bringing... it allowed them to be more proactive. And I think that worked out in our clients' favor. They were allowed to... able to get some of those estate planning strategies in place before some of the year-end chaos has kicked in. I have to say that Prince, Heath Ledger, and the formidable Barry White, they've never been referenced on this podcast before.
13:21 - 13:43
I'm excited for this first, this episode. So thanks for bringing that to us, Emily. And we will include a link to that blog in the episode descriptions just so that folks can have that. It really is a great... I mean, what I'm thinking about here is you could really pair that kind of an article on the importance of estate planning with some messaging around bequests.
13:43 - 14:05
Right. Because this topic is really getting a lot of traction these days. I have to say. I mean, internally for us, we're seeing one of the, I don't know if you want to call it a silver lining of being in this global pandemic is the fact that a number of families are spending a lot of time together and they're talking about issues such as how... what is the change that we want to see in the world? Right.
14:05 - 14:34
How do we, if a family has a foundation and it has a mission that was set by grandma and grandpa or some generation prior, how do we maintain the integrity of that mission but redefine it today in a way that is relevant to the current generation and frankly, the current world that we're living in? And all of those conversations are so critical and bequests and testamentary gifts can also be a part of those conversations. I'm going to turn to the third strategy now.
14:34 - 15:05
Speaking of the passage of time, a lot of securities that people are invested in appreciate over time. Right. They appreciate in value. And so we are seeing this after a decade plus of the stock market and particularly the US stock market really growing pretty consistently. And so, Chris, I'll turn it back to you. We have a wide audience out here. Can you provide just a brief overview of the benefits to donors of donating appreciated securities? Certainly.
15:05 - 15:39
So, I tend to focus on the tax benefits of making donations. And that's not to suggest that taxes are the main reason that donors give, but they matter. Giving appreciated securities is a more tax-efficient way to go about it. And here's why. If you write a check for $100 to a charity, you geta $100 charitable income tax deduction. Now, how much tax that actually saves you? Depends on your tax rate, it depends on the state that you live in.
15:39 - 16:06
So if you live in California like I do, and if you happen to be in the highest federal and state income tax bracket, well, that $100 deduction saves you about $50 in tax. In other words, the after-tax cost, the out-of-pocket cost to a donor of making that $100 deduction is just under $50 dollars.
16:07 - 16:30
But if you donate appreciated securities, you get a double bonus out of that. You not only get if you donate $100 worth of stock, you get the same $100 deduction. But you also get to avoid the embedded capital gains tax that you would otherwise incur if you sold those securities and just donated the cash to charity.
16:31 - 17:04
So that same California taxpayer who gives $100 of stock, let's say, it's doubled in value, well, they save another $18 and change worth of capital gains tax. So add those all together, that out of pocket cost to making that $100 donation. It's only thirty one cents on the dollar. So that's why donating appreciated securities is almost always the better choice. So even if you don't care about taxes at all, that will create more wealth that you can give to more organizations if you're philanthropic.
17:04 - 17:35
Yes, I totally agree. And it's a really good point. I have to say, there is a unique aspect to today's environment. Right. Which is the leaders or the performers across the S&P, for instance, have been very narrow. And so it's created some concentrations in people's portfolios. I'm wondering if you want to speak about how you may have handled that with some clients. Yeah, I definitely think that could be another reason that could motivate donors
17:35 - 18:07
this year. It has nothing to do with taxes, but everything to do with the behavior of the markets. And to your point, even though the markets are up, it has been just a very narrow group of tech stocks, which have led the market up to these heights. I took a measurement at the end of September, the top five stocks in the S&P 500, Apple, Microsoft, Google, Amazon, and Facebook, they accounted for 23 percent, almost a quarter of the total value of the index.
18:07 - 18:22
Now, that's higher even than the level that we saw during the tech bubble when it was below 20 percent. And it's much higher than the average of the last few decades, which has only been about 10 to 15 percent of the index.
18:23 - 18:46
Actually, there's a great blog on this on Bernstein's website titled How Long Can Big Tech Dominate the Market. And what that means is a lot of investors likely have sizable positions, concentrations in their portfolio in those big tech names. By the way, since the election and news about the vaccine, some of those tech stocks have wobbled a little bit.
18:46 - 19:21
They've had some good days and some not so good days. So this might be a pretty good time for them to address that risk in their portfolios. Yeah, thank you. It's definitely a time that a lot of folks that are indexers, right, that are investing in index tracking vehicles are really thinking about, wow, I guess this isn't just fully the full diversification all the time, that you really do have to look under the hood and see what you're invested in. It's a major concentration. The other thing that I know a number of investment advisors are looking at with their clients is there's never been a wider spread, for instance, between US stocks and international stocks.
19:21 - 19:34
Right. In terms of valuation. And so it's a real opportunity for some folks to readjust their portfolios today in different ways. Right. So maybe gifting some of those shares of appreciated US stocks. Right.
19:34 - 19:59
And actually potentially creating a little bit of an increase in the international exposure. There are a lot of different strategies folks can use in order to rebalance their portfolio without having to take that tax bite. So that's I think given where the market is today, that's a really great message that development folks can bring to donors as well. OK, so we've seen some tech stocks wobble.
19:59 - 20:08
We've seen a lot of uncertainty going on. It's been a very uncertain time on multiple levels. One of those uncertainties is the election.
20:08 - 20:30
While we've had some clarification, we're still questioning what exactly is going to go on, for instance, with Senate seats going on. So maybe you could speak, Chris, about what the ramifications might be of different outcomes with the election going forward. Yeah, certainly, although I'm not sure there's any shortage of information in people's news feeds about the election.
20:30 - 20:45
But it is important because I think we thought at this point, we might know the outcome of the election, and barring any legal challenges by President Trump, it's likely that President-Elect Biden will be our 46th president.
20:45 - 21:20
And we know the House of Representatives will stay in Democratic control, but the Senate is going to be up in the air until January 5th because as of today, the Republicans control 50 seats in the Senate and the Democrats, 48. But there are still two seats that in Georgia that are subject to runoff elections. And wow, given Georgia's history, Democrats winning both of those seats might be a tall order. It's not impossible. And if it does, that would leave the House, the Senate, and the White House in Democratic control.
21:20 - 21:55
And in that case, the tax landscape could change pretty dramatically next year. President-Elect Biden would have a much better chance of passing some of the proposals that he made on the campaign trail to increase taxes. Maybe one to focus in on is that he suggested he would like to raise capital gains taxes from their current favored rate and instead tax them as ordinary income, a rate he would like to see raised to 39.6 percent for those investors who have income or capital gains in excess of a million.
21:55 - 22:18
Well, for those investors that have concentrated stock positions with large embedded gains, all of a sudden they're starting to wonder, should they be taking some sort of preemptive action? Should they be selling in today's certain capital gains tax environment, or should they wait to see the whims of the boats of Georgians on January 5th?
22:18 - 22:24
OK, that's interesting. So one way that maybe folks could hedge their bets is, again, to donate appreciated securities.
22:24 - 22:59
And really in the future, looking at what might make sense, would like a donor advised fund makes sense. I think it would. So so for those, for donors who would like to make gifts in 2020, but maybe they aren't yet ready to dole out those funds to the specific nonprofits of their choice, donor advised fund could be a fantastic idea for them to lock in that gift this year when they know the tax rules as opposed to waiting. Chris and Emily, thank you so much for joining us today.
22:59 - 23:33
It sounds like in an era where there is a lot of uncertainty, we keep using that word, that there are some key messages that really can be delivered to potential supporters of organizations and might create meaningful change on some very significant and critical issues out there. So just curious, Emily, any additional thoughts or final wrap-up? I think to reiterate what you were just getting at. Clare, one of the most important things charities can do right now is to continue building strong relationships with their supporters. It can be daunting to have those types of conversations.
23:33 - 23:56
But reassuring donors that it's about making sure their wishes are carried out can be a motivating reason for them to act. And helping them think through what may be an unexpected life event and encouraging them to be proactive could ultimately result in increased giving for nonprofits. That's great. Thanks, Emily. And Chris?
23:56 - 24:17
I'd say just this, that if nonprofits believe donors either don't want to hear about these tax or estate topics or that they're getting this information from somewhere else, then I think those nonprofits, they're making a mistake. I think this can be an excellent touch point and a great way to add value to their donors.
24:17 - 24:38
I couldn't agree more. Thank you both so much. There's so much going on in the world right now that I agree, a lot of really important messages that could result in significant change and significant support, they're getting lost with all of the information out there, they may be getting lost. So to clarify that and to bring that message forward at a critical time is very, very important.
24:38 - 24:53
So thank you both so much for joining us. Thank you all for listening. If you liked what you heard just now, spread the word. And don't forget to subscribe to Inspired Investing on Apple podcasts, Google Play, Spotify, or wherever you listen to podcasts.
24:53 - 25:18
If you'd like to learn more from Bernstein's Endowment and Foundation Advisory team, please explore the link in this episode's description. Also, if you have any topics that you'd like for us to cover, please, please, please e-mail us with your thoughts, questions, and feedback to Insights@Bernstein.com. And be sure to find us on Instagram or Twitter at BernsteinPWM. Thanks, everyone.
25:18 - 25:41
Just a side note that we'll be taking a short hiatus starting next month to focus on the changing post-election investment landscape. We'll be back in February feeling refreshed with some very exciting new episodes. Bernstein: Making money meaningful for individuals, families, and foundations for over 50 years. Visit us at Bernstein.com.
- Clare Golla
- Managing Director—Head of Foundation & Institutional Advisory Services