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TEXT ON SCREEN:PIMCO EDUCATION – TITLE – An Introduction to Charitable Giving with John Nersesian (10 minutes)

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TEXT ON SCREEN: John Nersesian, Head of Advisor Education

John: Welcome everybody. Thank you for spending some time with us today to discuss this very important topic on charitable giving.

And now some prefacing remarks. The conversation is not about convincing clients to give away more of their wealth. The conversation is focused around the idea of providing advice on how to make our charitable giving more effective, both for the donor and for the recipient organization.

Text on screen: TITLE – Philanthropic trends; SUBTITLE – The gap: Services desired vs. services received

Image on screen: A bar chart highlights the difference between 8 services desired and received with respect to philanthropy. The bars are arranged horizontally, projecting from the left-hand axis of the chart. The services arranged as a list, moving from the most desired expressed as a percentage. Investment management is at the top of the list, with 92% desiring the service, shown with a blue bar extending across the page. By contrast, only 73% say they received the service, indicated by a horizontal green bar. Next, financial planning is also desired by 92%, but only 59% report receiving the service. For estate planning, its 91% versus 22%. For tax planning, it’s 89% versus 25%. For charitable giving, highlighted in red, 87% report desiring the service, yet only 6% receive it. Similarly large gaps between desire versus receipt of service are noted for loan and credit management, educational financing advice and banking services.

Over 87% of wealthy families suggest that they would like some help, guidance or education around their charitable giving activities, but for the majority of them, they're not having this conversation with their advisors.

We hope that today's primer allows you to facilitate those conversations in a more productive manner.

So, here's what we plan on covering today.

Text on screen: TITLE – Agenda

Image on screen: A graphic lists three items on the agenda for the presentation: what to give, when to give, and how to give.

We're going to talk a little bit about what to give, when to give it, and how to give, to make this giving more impactful, both for the donor and for the recipient organizations.

When it comes to what to give, there are a couple of different variables that determine the tax benefit that we might derive.

Text on screen: TITLE: What to give – SUBTITLE – Deduction limits for charitable gifts

Image on screen: A table shows the deduction limits for different types of charitable gifts, for both public charity and private foundations. A column in the middle shows public charity parameters in terms of whether the deduction uses fair market value (FMV) or cost basis, and the limit based on adjusted gross income (AGI). On the far right, another column covers the same rules for donating to private foundations. The first row at the top of the table lists cash. The deduction to public charity uses FMV and subject to a limit of 60% of AGI. Cash to private foundations also uses FMV, but with a limit of 30% of AGI. The next row in the table, ordinary income property, notes cost basis is required for tax purposes for each type of donation, but has a 50% AGI limit for public charity, and 30% for private foundations. Next on the list, long-term capital gain property, requires FMV for both types of donor recipients, with an AGI limit of 30% for public charities, and 20% for private foundations. The fourth category is personal property-same use, which requires FMV and has a 30% AGI limit for public charities, whereas private foundations requires cost basis with a 20% limit. Last on the list, personal property-not same use, uses cost basis for both types of donor recipients, with a 50% AGI limit for public charities, and a 20% limit for private foundations. Below the chart, some additional considerations are listed: the gift must be completed by year-end, the donor must give up control, the IRS requires documentation from the charity, and excess gifts carryover up to five years.

Number one, the entity that receives the gift, whether it's a public charity, like most donor-advised funds and large nonprofit organizations, or a private foundation that a few wealthy families may establish during their lives, but the key driver of the tax benefit is the type of property that's used to fulfill this charitable gift. Let's focus on two examples, specifically cash, which is a really convenient way to give where we receive a fair market value deduction, capped at 60% of our adjusted gross income in a single calendar year.

The second type of property that is often given is long-term capital gain property. Think about stocks, bonds and other securities, where the deduction once again, is the fair market value of the property given with a 30% cap, maximum of AGI deductible in a single calendar year. Any gift that exceeds those limitations by the way, can be carried forward for five years. When we talk about what to give, it's often suggested that giving appreciated property provides an even greater benefit than giving of cash.

Here's a quick illustration to demonstrate that point.

Text on screen: TITLE – What to give – hypothetical example; SUBTITLE – Giving appreciated property to reduce capital gain liability

Image on screen: The diagram shows the advantage of giving appreciated property to reduce capital gain liability. Two scenarios are presented for an asset worth $100,000: selling it and contributing the cash, versus contributing the appreciated asset directly to the charity. Both scenarios have a cost basis of $20,000, but show the advantage of contributing the asset. On the left, which shows the scenario of contributing cash, the accounting shows a realized capital gain of $80,000, with capital gains tax rate of 23.8% resulting in a tax of $19,040, with the remainder of the $100,000 – $80,960 – being donated. The value of the deduction to the donor at an overall tax rate of 37% is $30,683. On the right, the numbers for contributing the asset show a better outcome for the charity and donor. Cost basis is still $20,000, but realized capital gain is zero, and thus there’s no tax. So the charitable contribution is worth $100,000, and the value of the deduction to the donor at a 37.9% tax rate is $37,900, or $7,217 better than selling the asset and contributing the cash. The charity also does better by gaining $19,040 by receiving the asset versus a cash contribution. 

Let's assume that our client holds property that's currently worth one hundred thousand dollars, and the original cost basis was $20,000. If the client sold the property, they'd have a realized capital gain of $80,000 and an associated capital gain tax of just over $19,000. This would allow them to contribute about $80,000 to their intended charity, and the value of the deduction at 37% would slightly exceed $30,000.

But what if this client were advised instead to give the appreciated property as opposed to liquidating it and giving the resulting proceeds. We can see, of course, the hundred thousand dollars capital asset today with a $20,000 cost basis because it's not sold, would result in no capital gain taxes paid, and the charitable contribution would be the full hundred thousand dollars fair market value, producing a deduction worth over $37,000 to the client.

We refer to this as a win-win. The charity receives more, and of course, the individual investor derives an even greater tax benefit.

When it comes to the idea of when to give, let's do a quick little review of tax rates to illustrate this concept that giving while we're in a higher bracket, produces a greater tax benefit to the donor.

Text on screen: TITLE What to give; SUBTITLE – Ordinary and Alternative Minimum Tax (AMT) income tax rates – 2023

Image on screen: A diagram includes tables showing the tax rate for ordinary and alternative minimum tax rates for 2023. The ordinary tax table, up top, shows seven tax rates, breaking down the qualifying income ranges for married-filing jointly and single for each tier. The table starts with the lowest tax rate, at 10%, which applies to married couples filing jointly making between zero and $22,000. For single, the range is zero to $11,000. The table breaks down the income ranges next for the subsequent tiers: 12%, 22%, 24%, 32%, 25%, and 37%. The top tier of 37% applies to married couples filing jointly, or those who make $693,750 or more, and single filers making $578,125 and up. The second table show the AMT rates of 26% and 28%. The 26% level applies to married couples filing separately making up to $110,350, after which the tax rate is 28%. For all others, the AMT rate is 26% up to $220,700, after which the rate is 28%.

We know the tax rates here are progressive, starting at 10%, and the maximum marginal tax bracket today is 37% for families with income levels of around $700,000.

For those individuals who may find themselves in the AMT, a much lesser percentage of the taxpaying population, it's important to note that the maximum AMT tax rate is 28%. Now, we know that the standard deduction today is significantly higher than it's been in past years. That number is $27,700 for the year 2023.

Alternatively, clients, of course, have the opportunity to itemize their deductions if that total figure exceeds the standard number.

Text on screen: TITLE – What to give; SUBTITLE – Charitable giving remains an itemized deduction

Image on screen: A diagram uses two tables to show the standard and itemized deductions for 2023. A table on the right shows standard deductions of $27,700 for married-filing jointly, $13,850 for single, $20,800 for head of household, and $13,850 for married-filing separately. The table notes that additional deductions for those 65 or older or blind of $1,500 for married, and $1,850 for single. On the left, a table lists itemized deductions: medical expenses, which are subject to a 7.5% floor; state, local, sales and property taxes, or SALT, which are capped at $10,000; mortgage interest, which is capped based on the size of the loan; and charitable gifts, limited based on the type of donation and recipient.

The four primary itemized deductions are medical expenses, assuming they exceed 7.5% of AGI, SALT taxes, which are capped to $10,000, mortgage interest, if our clients do retain a mortgage and of course, the charitable gift, which can be a real needle mover in the concept of accelerating or increasing our itemized deductions.

So, with this as background, how do we think about the best time, the most advantageous opportunities as to when we complete our charitable giving?

Text on screen: TITLE – When to give; SUBTITLE – Intentional giving remains an itemized deduction

Image on screen: The diagram shows a bulleted list of items on the topic of intentional giving to maximize deductions. This includes claiming itemized deductions. It also notes how intentional giving is not subject to the alternative minimum tax. Intentional giving can also be used if there’s a spike in self-employment income. And it can be used also for periods of higher marginal rates, such as prior to retirement, if there are larger realized capital gains, during Roth conversion years, if there’s a vesting of restricted stock shares, and if there’s an exercise of non-qualified employee stock options.

Well, clearly given the fact that charitable gifts are an itemized deduction, we want to encourage our clients to give when they are itemizing, as opposed to claiming the standard deduction. Clearly, clients derive a greater benefit given the higher marginal rates under the regular code, as opposed to giving when they're subject to the alternative minimum tax.

How about clients who are self-employed, who might be able to take advantage of the 199 A deduction? An increase in their charitable activities may result in a lessening of their adjusted gross income and a greater deduction that would be available to them,

and then broadly speaking, clients derive an even greater tax benefit when they give in years in which their marginal rate is highest.

So, let's think about clients who are currently working prior to their retirement, which may see a decline in their income and their marginal brackets.

Clients who maybe realized a large capital gain during the year, looking to offset that associated tax bite. Clients who might be considering a Roth conversion, which of course implies the recognition of additional income on that converted amount. They can offset that with the significant or larger charitable contribution in that particular year, and then maybe our clients who are employed by publicly traded companies, maybe the C-suite individual who holds restricted stock or options, which often produce taxable income to the employee.

We've got a great illustration to confirm the benefit of an important giving concept. It's known as bunching, giving a larger amount in a single calendar year as opposed to making smaller or lesser gifts over multiple years.

Text on screen: TITLE – When to give; SUBTITLE – Bunch deductions for maximum benefit

Image on screen: The figure uses two tables to show how bunching deductions maximizes the tax benefit. At the top, the first table shows the case of a married couple filing jointly, making $100,000 in charitable donations, spread out equally in $25,000 allotments over the four years from 2023 to 2026. Income property tax each year is $10,000, for a total of $35,000 in itemized deductions, and $140,000 over the four years. The second table shows what happens if the couple bunches all of the charitable donations into 2023. This would bring total itemized deductions to $110,000 for that year. But in the years from 2024 to 2026, charitable donations are zero. In this case the couple only can claim the standard deduction of $27,700 in each of those years. But overall, the actual deductions over the four years total $193,000: $110,000 in 2023, plus $27,700 for the next three years. All told, bunching the charitable deduction into one year leads to $53,100 in additional deductions over the four-year period. 

A client who makes a pledge to give $25,000 a year to their intended charity. This client has, in our hypothetical example, $10,000 of state and local taxes, which are available to them, of course, as an itemized deduction. Given the $25,000 annual gift over each of the four years in our illustration, this client would have itemized deductions of $35,000, slightly exceeding the standard amount. In aggregate over this four year illustration, the client would receive itemized deductions of 140,000.

But what about the client who receives the advice of bunching their gift in a single calendar year? The same hundred thousand dollars given to their intended charity, but given in a single year for an incremental tax benefit. Let's examine the numbers. This client has the same $10,000 state and local tax deduction and gives the full $100,000, either directly to their charity or maybe through a donor-advised fund, and then makes distribution over the next four years.

The aggregate itemized deductions, in the first year would be $110,000, providing a significant deduction to our client, and in the resulting three years, given the fact that there's no charitable giving taking place, our client relies on the higher standard deduction in those following three years. The aggregate deduction in our illustration is over $190,000, providing an incremental benefit of an additional $53,000 of deduction for the same amount of property or assets being given to their intended charities.

The question is, how do I give John? There are so many different ways in which I can fulfill my charitable giving.

Text on screen: TITLE – How to give; SUBTITLE – Charitable structures

Image on screen: A diagram displays four charitable structures, from least to most complex, from left to right. The first column, direct gifts, has an icon of an upward facing palm and dollar sign, with a bulleted list underneath. It’s the least complex charitable structure, and includes cash, personal property, life insurance, real estate, and qualified charitable distributions (QCDs). To the right, the next column represents philanthropic structures, represented by the icon of a building. This category includes donor advised funds, community foundations, and supporting organizations. Next, split interest vehicles, represented by an icon of arrows pointing up and down, include charitable remainder trusts, charitable lead trusts, and pooled income funds. The most complex structure, furthest to the right, has an icon of a house, representing private foundations, which include family and operating foundations.

Of course, the most convenient way is by giving cash or swiping a credit card. We may look at certain philanthropic structures like donor-advised funds or community foundations, split-interest vehicles provide a charitable benefit and maybe an income stream to the donor who's making this gift.

And, of course, private foundations are a little bit more tedious in terms of their establishment, but may provide a family with additional control and flexibility for their intended giving. These are the kinds of structures that should be considered as we advise our clients on the most effective way to complete their charitable giving activities.

So, in conclusion, we'd like to leave you with a couple of conversation starters that may allow you to broach this subject with your clients.

Text on screen: TITLE – Next steps: Engage in charitable conversations; SUBTITLE – Facilitating discussion around family philanthropy

Image on screen: The slide includes a bulleted list to help facilitate discussion around family philanthropy. The questions include: How do you decide how much to give each year? What do you currently donate? Do you typically itemize or claim the standard deduction? How do you decide on which charities to support? How important is a charitable legacy to you and the family? Are there any social causes that are particularly important to you and your family? How have your children been involved in giving efforts or decisions? What inspires you to give and how do you see this evolving in the coming years?

How much do you decide to give in a particular calendar year? What are your primary motivations for the charitable giving that you're currently involved with? Or why do you choose the certain types of entities or organizations who receive the benefit of your philanthropy? How has your charitable giving impacted your relationship with these organizations? And how have you chosen to get your family involved in the philanthropic activities that you're currently engaged in?

I believe that advisors can provide great value to their clients, once again, to derive an even greater benefit from the charitable giving that they're involved with. To learn more about this particular subject, please feel free to visit us at pimco.com or to contact your local PIMCO account manager. Thank you for joining us today.

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