A longtime client called me to say he wanted to do "more good" in the world with his investment account. He is 52 and giving to charity but only small checks here and there. He plans on leaving some money to his local library in his will, but he is young and that seems far off.
In other words, his current gifting program wasn't enough, he wanted to do more.
After our conversation, I came back to him with two easy solutions to get more out his saving and charitable endeavors. I also whetted his appetite for a third strategy that if he does in the future will really step up his charitable giving. That last strategy will ensure he leaves a legacy to his church, his school and to his other favorite causes while also providing for the kids. A win-win.
Step 1: Socially Conscious Investing
Investing in companies that promote certain social ideals is not new, but the way to invest in them has changed dramatically. Today, there are all sorts of socially responsible mutual funds and exchange-traded funds. These funds invest in companies that meet certain criteria, such as being environmentally friendly or having a track record for promoting equal pay for women.
My client liked the idea of investing in companies that met an ESG criteria — high marks for Environmental, Social and positive corporate Governance. We went with an individual stock portfolio made up of companies that score high on the ESG concept.
Step 2: Donating the Profits
At the time of this writing, early December 2019, this client's ESG stock portfolio was up. (Which isn't always the case, as ESG stocks will fluctuate with the broad market just like any investment in the stock market.) I asked him if he wanted to donate some of his appreciated ESG stocks to his church and alma mater. I suggested he open a donor advised fund (DAF) to facilitate his giving.
He gifted some of the appreciated stocks from the ESG portfolio to the DAF and realized an immediate tax deduction in this year. He plans on dolling out some of the money from the DAF to his church and college next year. All in all, he was happy he invested in companies that shared his values and was even more happy to use the profits to help his local charities. It was truly a win-win.
Step 3: Taking it up a notch
Though my client felt better after we put Steps 1 and 2 in place, I suggested, in time, he could do more. He's a little young for more advanced charitable planning, but perhaps in retirement he can gift his ESG stocks to a charitable trust. The trust will pay him an annual income stream, and he will receive a partial tax deduction with each withdrawal. What is left in the trust after a certain number of years will go to the charity.
But wait, he said, "What about my kids?"
Good question. After he passes the kids do lose the asset to the charity, but there is a solution. He can purchase a whole life or universal life insurance policy for the benefit of the kids. He can even use the income from the charitable trust to pay the insurance premium. The life insurance death benefit "replaces" the asset gifted to the charity. Life insurance death benefits are not taxable, and if the policy is held in a certain type of trust, the benefits are excluded from estate taxes, making it an ideal asset to pass to the next generation.
Charitable planning can create powerful win-win opportunities for investors, and it doesn't have to be for the super-rich. There are several ways to invest in companies that advocate for positive change in the world, whether it be through a socially responsible mutual fund or an individual stock manager who specializes in ESG.
The point is, you can start small and as your income and net worth grow, the tools available for charitable giving evolve too. Donor advised funds and charitable trusts are two examples. Ultimately, it's about having a plan.
Giving to or investing in the causes that are important to us can help take saving and investing from the mundane to the fulfilling, from success to significance. That is the ultimate reward.
Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.
Michael Aloi (opens in new tab) is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC. With 21 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.