The Practical Planner Podcast: The Role of Charitable Giving in Estate Planning

Released on December 17, 2024

Hosts:

• Thomas Kopelman – Head of Community at wealth.com, recognized as a Top 100 Advisor by Investopedia in 2022 and 2023, 2023 Young Advisor to Watch, and Top 23 Millennial Financial Advisor by Business Insider.
• Anne Rhodes – Chief Legal Officer at wealth.com, former estate planning attorney at McDermott Will & Emery and Perkins Coie.

Introduction

In this insightful episode of The Practical Planner, hosts Thomas Kopelman and Anne Rhodes delve deep into the intricate relationship between charitable giving and estate planning. Their discussion is tailored for financial advisors aiming to enhance their service offerings to clients while fostering business growth. Unlike superficial content often found on other platforms, Kopelman and Rhodes provide actionable strategies and in-depth analysis to empower advisors in guiding their clients through the estate planning process.

The Intersection of Charity and Estate Planning

00:36 - 01:14
Anne Rhodes opens the conversation by emphasizing the intrinsic link between charitable giving and estate planning. She states, "your estate plan is where are you going to leave your assets when you're done with them, essentially. And for charity, you're making a completed gift." Rhodes explains that clients typically prioritize leaving assets to charity over the government, reflecting their desire to instill charitable values in their heirs.

Donor Advised Funds (DAFs): A Flexible Giving Tool

01:14 - 03:58
Rhodes introduces Donor Advised Funds (DAFs) as a popular and flexible method for charitable giving within estate plans. She highlights several benefits:

• Flexibility: Contributions to a DAF are treated as completed gifts, allowing donors to retain advisory privileges over distributions to individual charities over time.
• Control: Clients can set up DAFs directly, ensuring that their charitable intentions remain adaptable without necessitating changes to the estate documents.
• Family Involvement: DAFs provide a mechanism for involving children in the charitable process. Rhodes explains, "you can appoint children to be the grant advisors on the donor advised fund," fostering a legacy of philanthropy without providing direct financial benefits to the heirs.

Instilling Charitable Values in the Next Generation

03:58 - 07:18
Thomas Kopelman underscores the importance of using estate planning tools like DAFs to pass on values to children. He notes, "this is a guaranteed way to say I'm passing on values to my kids. They can't take this money out; they can only allocate it to places that align with those values." Kopelman further discusses the strategic advantage for advisors in building relationships with the next generation. By engaging children in estate planning discussions, advisors can ensure continued client relationships beyond the primary generation.

Charitable Remainder Trusts (CRTs): Balancing Income and Philanthropy

08:42 - 15:29
Rhodes shifts the focus to Charitable Remainder Trusts (CRTs), detailing their dual role in charitable giving and income tax planning:

• Structure: Assets are placed into a CRT, providing the grantor with income distributions for a specified term or their lifetime. Upon termination, remaining assets flow to designated charities.
• Tax Benefits: CRTs allow donors to defer capital gains taxes and spread income tax liabilities over time. Rhodes explains, "if you have a really large capital gain... you might be able to spread that out over tens of years."
• Complexity: Setting up CRTs requires professional assistance due to intricate calculations and administrative requirements.

Kopelman contrasts CRTs with DAFs, highlighting that "the more income you want from the tool, the less the deduction is going to be." He emphasizes the suitability of CRTs for business owners facing significant liquidity events, enabling them to manage tax liabilities effectively while supporting charitable causes.

Charitable Lead Trusts (CLTs): Leveraging Estate Tax Strategies

16:18 - 18:05
Rhodes introduces Charitable Lead Trusts (CLTs), positioning them as the opposite of CRTs. In a CLT, charitable distributions are made first, with remaining assets eventually passing to family beneficiaries. The primary objective of CLTs is estate tax optimization. Rhodes notes, "it's a way to get assets out of the estate, freeze the value so that they grow over time, they benefit the charity up until the point of death." Although less commonly used, CLTs offer significant estate tax savings, making them a valuable tool for comprehensive estate planning.

Strategic Asset Allocation for Tax Efficiency

18:05 - 22:17
The discussion transitions to best practices in asset allocation for estate planning, with a focus on minimizing tax burdens for heirs. Rhodes advises against the "one big pot mindset," advocating instead for tailored distributions based on the nature of the assets:

• Retirement Accounts: Prioritize donating pre-tax retirement accounts to charity to eliminate potential income tax liabilities for beneficiaries.
• Roth Accounts: Since Roth assets are already tax-advantaged, they can be distributed to heirs without incurring additional taxes.
• Taxable Assets: These can be strategically allocated based on the beneficiaries' tax situations to optimize after-tax inheritance.

Kopelman reinforces the importance of personalized planning, stating, "good tax and estate planning is how do we minimize taxes over not our generation, but the next."

Addressing Life’s Uncertainties

22:17 - 23:59
Rhodes acknowledges that life’s unpredictable nature can impact estate planning effectiveness. Factors such as beneficiaries’ changing incomes, relocations, or personal circumstances can alter the anticipated tax efficiencies. However, she insists that even imperfect plans are superior to non-strategic approaches, as they still confer substantial tax and legacy benefits.

Practical Tips for Advisors

23:59 - 24:25
Kopelman offers actionable advice for financial advisors:

• Engage Multiple Generations: Involve clients’ children in estate planning to foster long-term relationships and ensure ongoing advisory opportunities.
• Educate Without Immediate Returns: Provide educational value through estate planning discussions without pressuring for immediate business gains.
• Holistic Planning: Consider all assets and their tax implications to create comprehensive and tax-efficient estate plans that maximize charitable impact and family inheritance.

Conclusion

In wrapping up, Kopelman and Rhodes reiterate the critical role of charitable giving in estate planning. They encourage advisors to leverage tools like DAFs, CRTs, and CLTs to not only fulfill clients’ philanthropic desires but also to achieve significant tax benefits and strengthen client-advisor relationships across generations.

Notable Quotes:

• Anne Rhodes [00:36]: "Charitable giving and estate planning go hand in hand... Most of the clients are going to say, you know, to some extent, I would like my property to pass to charity."

• Anne Rhodes [01:14]: "With a donor advised fund, you put the money in and then it's a completed gift to charity... you retain a level of control to be able to distribute out to charitable, individual charities either over time or in lump sum."

• Thomas Kopelman [04:37]: "This is a guaranteed way to say I'm passing on values to my kids. They can't take this money out; they can only allocate it to places that align with those values."

• Anne Rhodes [08:58]: "A charitable remainder trust is a unique tool... you get some unique income tax benefits while still getting, retaining control of the assets."

• Thomas Kopelman [11:23]: "The more income you want from the tool, the less the deduction is going to be."

• Anne Rhodes [16:22]: "Charitable lead trust is really a way to get assets out of the estate, freeze the value so that they grow over time... and you get a lot of estate tax savings."

• Thomas Kopelman [18:05]: "Good tax and estate planning is how do we minimize taxes over not our generation, but the next."

Final Thoughts

This episode of The Practical Planner serves as an invaluable resource for financial advisors seeking to deepen their understanding of charitable giving within estate planning. Kopelman and Rhodes adeptly navigate complex topics, offering clarity and practical solutions to ensure advisors can effectively guide their clients in creating meaningful and tax-efficient legacies.