Charitable planning can be one of the most satisfying areas in which an advisor can practice. When your clients' interests and charitable organizations' interests are in line, the results can be terrific. Charitable planning is a specialty, however, with technical rules and an abundance of potential pitfalls. The purpose of this article is to alert you to some of the pitfalls you may encounter, enabling you to do a better job for your clients. In our experience helping many clients fulfill their philanthropic objectives and in sharing experiences with other advisors, we have come across some common traps for the unwary. Disengage Yourself From the Outcome As human beings, advisors can sometimes lose sight of their biases. If you hold yourself out as a charitable planner, sit on charitable boards or have seen the positive results of charitable planning in other clients' situations, it pays to remember to approach each client with a fresh perspective and to stay objective. As advisors, your first duty is to your clients. This responsibility as advisors means helping them uncover their goals and priorities, including any charitable goals. The most successful approaches endeavor to educate clients about the costs, benefits, risks and rewards of charitable planning. Detailed explanations of the various planning vehicles, illustrations and schedules can all aid in conveying this information. It is important to discuss with your clients and agree upon assumptions, including rates of return, inflation and life expectancy. Using software that can predict the probability of what the client considers a successful outcome is helpful. The client can then make an informed decision. Consult Other Experts Charitable planning and implementation often cross many disciplines, including law, accounting, investments, insurance and strategic philanthropy. It is unlikely that there is even one advisor who possesses genuine expertise in all of these areas, so for those who don't have all these skills, there are teams. Teams can be formal business relationships or informal alliances. Taking a team approach to charitable planning could avert many of the errors discussed below. Errors in Drafting Trust companies, investment firms, charitable organizations, even the IRS, distribute form documents for charitable vehicles. While this may add value for a client or prospective donor, it is important that the client retain an attorney experienced in charitable planning to draft the document, rather than relying on a form to save expenses. Look out for these provisions in charitable remainder trust (CRT) forms:
Investing and Administrative Errors In addition to skilled drafting, careful investment and administration of charitable trusts are essential. Charitable trusts, like all split-interest trusts, require a sound investment policy that balances the interests of the life and remainder interests. The Prudent Investor Rule charges the trustee to consider each investment in the context of the whole portfolio and does not eliminate per se any particular investment. In addition, complex tax rules apply to charitable trust investments and cannot be overlooked. Here are some of the most common issues we have come across in our practices:
Be a Better Planner With care, you can use charitable planning to help your clients meet their financial and philanthropic goals. You should understand the costs and benefits of charitable planning to properly educate clients about these techniques, and also be aware of the potential pitfalls to avoid in implementation. Working in teams of advisors from different disciplines with charitable experience is probably one of the best ways to serve clients competently in this area. Please call Tim Enstice at 757-962-8213, or e-mail us at firstname.lastname@example.org, for more information.
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