Tax reform threatens a powerful client relationship tool

Charitable deductions are an incentive to giving and a way for advisers to show their humanity

Oct 13, 2017 @ 8:49 am

By Andrew Hibel

This won't be your father's tax reform process – and it may not be the one your business needs either. That's because it might take away investment advisers' number one secret weapon for building strong relationships with their clients – the charitable deduction.

The path to tax code simplicity will not be a simple one. Last time out, President Ronald Reagan's Tax Reform Act of 1986 reduced 14 income brackets to a mere three – a process that, with bipartisan support, went relatively smoothly. In contrast, the Aug. 30 debut of President Donald J. Trump's tax proposal only spurred the posturing that followed: House Republicans floated their blueprint for tax reform; Senate Democrats volleyed back with a letter that lists their non-negotiables for the process.

Speaker Paul Ryan's blueprint called for a doubling of the standard deduction. This proposal would simplify life for many of the nation's tax filers – the 33% of taxpayers who currently rise to the challenge of itemizing all those messy deductions – according to a study by the Charitable Giving Coalition. Yet reduced itemization would come with serious collateral damage for philanthropy, as without itemization there would be no tax advantage to charitable giving.

(More: Trump reconsiders plan to eliminate deduction for state, local taxes.)

The link is clear to Rahul Agrawal, chief investment officer at Advisor Partners: "Charitable giving achieves two important objectives. It provides needed funding to causes that are important to people and improves the social well-being of our community while at the same time allowing the donor to reduce his/her personal tax liability.

"Removing the charitable giving deduction will impact the amount of funds charitable groups receive since people will be disincentivized to donate their wealth. In other words, removing this deduction will adversely impact this country on multiple fronts."


More than 98 percent of high-net-worth households donate to charity, and three-quarters volunteer, according to a 2014 U.S. Trust study. A 2016 study found that 74% of voters would rather give $1,000 to charities than to the federal government, and 88% of them believe it should be easier to deduct charitable gifts from their taxes.

Most financial advisers acknowledge that theirs is a relationship business. Trust, familiarity and philosophical alignment cement client relationships as surely as financial returns do. Yet despite the fact that philanthropy is their clients' passion, surveys have shown that most investment advisers continue to discuss charity mostly from a technical perspective.

In an era when robo-investor services are rapidly stealing market share from financial advisers, one would think those advisers would make the most of their distinguishing advantage: their humanity.


Some advisers do see and act on this big picture. According to Michael E. Pharr, partner at Summit Financial Wealth Advisors, "It's critical for any financial professional working with affluent investors to understand the importance of charitable deductions and the role they play in a client's overall financial plan."

He urges advisers to work closely with the estate and tax professionals of affluent clients, ensuring that any charitable giving is done in a way that not only coincides with clients' overall wealth goals but, more importantly, "gives clients a sense of fulfillment that their hard work and sacrifice will make a difference towards a cause that they believe in."

Because of the conversations it can start, the deduction is a valuable tool for learning your client's heart and mind – and it's a tool your client clearly wants you to use. But many financial advisers continue to miss the boat. What will they do if that ship sails into the tax reform sunset?

Simplifying the tax code is a great idea; dumbing it down is not. The line is a fine one. But gutting the power of the charitable deduction – and suffering the unintended consequences such a move would cause among nonprofit organizations, philanthropically minded investors, and our own businesses – may define that line very clearly.

Andrew Hibel is the founder of The Advise Us Fund, a donor-focused donor-advised fund.


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