6 Costly Charitable Giving Mistakes for Advisors to Avoid
Your clients want to make a real difference with their donations, but if the planning and execution are off, their good intentions could be undermined.
As a financial advisor, you know the importance of maximizing every dollar. The same principle applies when it comes to charitable giving. Your clients want to make a real difference with their donations, but if the planning and execution are off, their good intentions could be undermined.
Let’s dive into six costly charitable giving mistakes to steer clear of, so you can help your clients make the biggest impact with their philanthropy.
1. Giving to the Wrong Charity
• The Problem: Your client’s generous donation, intended to support a cause close to their heart, ended up in the wrong hands due to a simple name mix-up. This mistake can leave your client—and you—feeling frustrated and disillusioned. It may seem obvious, but directing funds to the wrong charity is an easy trap to fall into. • The Solution: Many charities have similar names, not to mention various chapters and suborganizations. Make sure your clients are highly specific when naming the charitable organization they want to support. Ask them to provide the full legal name, tax ID, and address whenever possible.
2. Lack of Gift Guidance
• The Problem: Your clients are over the moon when their beloved alma mater announces a building in their name. Then, horror strikes—they discover it’s slated for a taxidermy class, a gut-wrenching blow to their animal welfare beliefs. Talk about a donor’s worst nightmare! • The Solution: Work with your clients to create a comprehensive gift agreement that clearly outlines the purpose of the donation and any uses that are prohibited.
3. Improper Qualified Charitable Distributions
• The Problem: Your client is disappointed to learn that their well-intentioned qualified charitable distribution (QCD) has triggered unexpected taxes—all because they wrote the check to themselves first. What should have been a moment of generosity has turned into a financial setback, potentially shaking their trust in the giving process. • The Solution: QCDs allow IRA owners to make tax-free charitable gifts up to $105,000 (in 2024) from their accounts but only if the funds are donated directly to the charity. Make sure clients understand the proper QCD process.
• The Problem: Even with the best intentions, a misstep in managing charitable distributions from retirement accounts can have lasting consequences. Your clients may find themselves grappling with reduced tax benefits and missed opportunities to maximize their charitable impact. • The Solution: Make sure clients take their required minimum distributions (RMDs) as a QCD before making any other retirement account withdrawals in a given year. Additionally, make sure they know RMDs cannot be rolled back into the IRA as a 60-day rollover, and QCDs cannot be directed to a donor-advised fund.
5. Assuming Control Over a Donor-Advised Fund
• The Problem: Picture your client’s surprise when they realize their “flexible” giving vehicle doesn’t allow them the flexibility to control their donation—only to make recommendations. • The Solution: Donor-advised funds (DAFs) allow clients to make an irrevocable gift to an account owned by a sponsoring charity. However, it’s crucial for clients to understand that a DAF is an independent charitable entity; the donated funds are no longer theirs, and any distributions cannot benefit the original donor.
6. Donating Assets Under a Binding Sales Agreement
• The Problem: Your client plans to donate an appreciated asset to a charitable remainder trust (CRT), an irrevocable tax-exempt trust, in an effort to reduce their taxable income and avoid capital gains tax on the future sale of the assets. However, there is a binding sales agreement on that asset—which means the donor would be subject to full capital gains tax. • The Solution: CRTs can be a powerful tax and estate planning tool. It’s crucial for clients to consult with their tax advisors before finalizing any charitable plans involving assets under a binding sales agreement, however, as any documentation binding the sale of an asset within a CRT to a given buyer would make the sale fully taxable.
Maximizing Impact: Your Role in Charitable Giving Success
As a trusted advisor, your role extends beyond just avoiding charitable giving mistakes; it’s about empowering clients to create meaningful legacies. What causes do they care about most? What kind of legacy do they want to leave? By fostering open dialogues about goals and leveraging your knowledge of effective giving vehicles, you can help clients execute their philanthropic vision with confidence.
Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
This post originally appeared on Insights, a blog authored by subject-matter experts at Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
