Charitable giving is something that many people only think about at the holidays, when mailboxes are jammed with greeting cards, homes are festooned with lights, and the airwaves are filled with tunes about peace on earth. What with all the goodwill and bell-ringing elves lurking outside the grocery store, it takes a tough nut to withstand the urge to share at least some of one's good fortune--and the prospect of gaining tax advantages by year-end adds yet more sheen to the idea. And yet the urge rarely seems to last: Come January, advisors are turning back to their "real" work, the bread-and-butter tasks of advising clients about investments and insurance.
It's not surprising, really. After all, encouraging clients to give their money away seems counterintuitive; when client assets exit stage right, an advisor's opportunity to earn fees on those assets generally goes with them. But what if there were some way to turn charitable giving advice into one's bread and butter, and have not only "Christmas in July," but all year-round?
David Harris, 52, founder of the one-man consulting firm Legacy Solutions, Inc., in Santa Rosa, California, has found a unique way to make it happen. He doesn't manage investments or collect commissions, nor is he an attorney paid to draft wills or trusts. Rather, for a simple hourly or project fee, Harris spends his time guiding clients through a process of identifying their charitable and estate planning goals, and exploring the strategies and vehicles that can help them achieve those ends.
It's not all pie-in-the-sky idealism, of course: While some clients may show up with specific philanthropic intent, others may simply want to make general estate planning arrangements. Either way, however, charitable gifts usually appear somewhere on the final plan. "I don't approach this as, 'Charity is the solution and that's where we want to go,'" Harris says. "But the fact is, if you've been successful in this society, some of what you have is your own capital, and some of it is going to be shared with society whether you like it or not. The only choice you have is, do you want to do that involuntarily, through the tax system, or do you want to do it voluntarily, using charitable planning mechanisms that allow you to choose what aspects of society you want to support and strengthen? Faced with those alternatives, people generally want to choose."
And estate tax or no, there will always be tax incentives to nudge clients toward charitable giving, says Harris. A 10-year veteran of the planned giving department at the California/Nevada United Methodist Foundation, Harris emphasizes that charitable intent, not taxes, should always motivate the initial decision to give. Among his clients, Harris sees incentives for those facing business succession or the sale of a concentrated stock holding, a closely held business, or highly appreciated real estate. (Harris won't speculate on the future of the estate tax, but he does point out that any tax that affects 1% to 2% of the population is likely to retain its popularity, since most people want to tax the other guy, not themselves.)
The greatest satisfaction from this kind of work, says Harris, is when he can help clients achieve several disparate goals at once, especially when those goals were initially thought to be mutually exclusive. "I'll run into an advisor who will say, 'Well, I can't advise this client on what to do here, because they have conflicting goals: they want to preserve these family businesses for the family, but they also want to make major gifts to charity. They need to make up their minds, because we can't do both.' Well, those are exactly the challenges I like to see," he says. "There's nothing more satisfying than allowing people to really dream about what they want to see happen, and then finding the mechanisms that allow those goals to be met." With the right tools in place, what appeared to be an "either/or" situation may actually be an "and/and" situation: Sometimes you can have your cake and give it away, too.
Seventy-six-year-old Marvin Soiland, a client of Legacy Solutions, has more energy than most people half his age. A real estate developer, quarry-industry entrepreneur, and father of seven adult children, he's the kind of guy who's in the office raring to go at 7 a.m., and thinks that starting the day late (i.e., anytime after 8 a.m.) is as bad as sleeping until noon.
He pursues philanthropy with the same vigor and attention that he devotes to his business ventures: He's given away land, an office building, a medical center, and other buildings in the Santa Rosa area. And when he takes a stroll across the campus of California Lutheran University, he can stop by and check out the latest art exhibit in the airy atrium of the Soiland Humanities Center, a classroom and faculty-office building that he and his wife made possible.
It's all part of a comprehensive plan overseen by Soiland's seven (count 'em, seven) advisors: he's got two attorneys, a CPA, a psychologist, an estate planning/charitable giving advisor (Harris), plus two other professionals. Fortunately, Harris likes working as part of a group. "This kind of work always requires a team," he says. "This is not a competition about who knows more and who can show up the other professions, it's about bringing to the table multiple possibilities that would not otherwise be there." The complexity of Soiland's charitable and estate plans should be more than enough to keep Harris busy. As just one example, when Soiland recently donated a building to charity, part of the proceeds from the sale of the building went to his church, part went to start up a new Lutheran church in another town, part went to California Lutheran University, and part of it will go into a charitable remainder trust scheduled to be set up five years from now to benefit Soiland and his wife. (And that's just for one donation!)
Where Are We Going?
While it's easy to get caught up in the flowcharts and arrows depicting the flow of money into and out of different charitable giving and estate planning vehicles, Harris says it's crucial to tackle what he calls the "above-the-horizon" issues before even mentioning specific tools. "The process of uncovering what people's values and missions are, and what really makes them feel satisfied, and gives them a sense of accomplishment--all of that has to happen before you start talking about the vehicles and the dollar amounts and the mechanics," he says. You need to be very clear about where you want to go, he says, before you can even think about how to assemble the right kind of vehicle to get you there.
The process shouldn't happen behind closed doors, either, because estate planning, charitable or not, profoundly affects a client's entire family. "The gut reaction from many children is, 'Hey, if they're [bequeathing] things to charity, that's coming out of my pocket,'" he says. "Ultimately, [at the heart of such reactions] is the root human question of 'Who loves me?' 'Do my parents really love me?' It's far better to have that conversation when your parents are still alive, because you can't have it afterward."
Harris works to help both generations identify their values and goals, and then share them with each other. Every family needs this communication, and it's all the more important when significant assets are in play, he says. While the family members' goals may not match precisely (or at all), the important thing is for everyone to begin understanding each other's motivations. "It's not a question of right and wrong; it's being able to communicate with each other about their values and goals, and, more importantly, why those are their goals," he says.
Sometimes the realizations reached during these sessions can be surprising. When Harris, with the help of a personal coach, was leading Marvin Soiland's family through the process, one of the sons realized that he didn't really want to work in the family business anymore; he instead wanted to become successful in his own right, independent of the family company. "Sometimes people have a mismatch between wanting to prove themselves on their own, but also feeling that they should stay in the family business, at least until the parent is gone, because that's 'the right thing to do,'" says Harris. "But who knows when that's going to be? And if they wait, will they ever accomplish the goal of accomplishing their own success?" Harris believes honest communication on these important topics is the first step toward transforming parent-child relationships, and sibling relationships, into meaningful, adult relationships.
That's a Very Good Question
So how does Harris broach these imposing, intimidating issues? One of the first steps every client takes is to fill out a questionnaire. If the client is a couple, each spouse fills it out separately, and then meets with Harris separately to discuss the answers before meeting together. "Once they've filled it out separately and we've met, we put their responses side by side and begin the process of drafting the couple's financial philosophy. It's an iterative process, and they're encouraged to be frank," he says.
Part one of the questionnaire includes questions about the client's values, missions, and goals. What do they want to achieve? What is most important to them? What kinds of values do they want to pass on to their children? What legacy do they want to leave behind?
Part two is about financial independence. "For the average person, and even for the wealthy, the answer to 'How much do you need to be financially independent?' is 'Everything I've got, plus some more,'" says Harris. "But people really need to define financial independence for themselves." The questionnaire asks them how much they think they'll need, and asks them to identify whatever additional safety margin they believe is necessary. Interestingly, it's this item that prompts the most disagreements. "Usually the spouse that has been the most involved in the work and the development of their financial success is most confident that they have an adequate financial base," he says, while the other spouse is often less certain.
Part three of the questionnaire deals with the client's current and future legacy for family and friends. What do they want to share with their family and friends, now and in the future? Do they want to help their grandkids go to college? Do they want to leave a business to a family member?
And part four is about benefiting society. "All transactions involving appreciated assets raise this issue, and many people have charitable intentions beyond those motivated by taxes," says Harris. "So how would you be most satisfied to have this money--that is going to benefit society--be used?" To help the clients think more broadly, some of the questions are hypothetical, such as "If you had a million dollars to give away today, what charities or social benefit organizations would you give it to?"
The Lucky Winners
Answering that million-dollar question usually comes fairly easily to most clients, though for some its much more difficult than you'd think. A doctor client who wants to improve pre-natal care for Native American mothers may not know which specific organization is performing that kind of work; a business-owner client who wants to bring computer skills to local inner-city children may not know how to make that happen. As a rule, Harris advocates contributing to existing organizations rather than forming new ones (and thus creating more overhead); for instance, the client in the latter example might pay to establish a computer lab in the local Boys and Girls Club, rather than creating a new charitable organization to do the same job.
Harris also talks with clients about the amount of client work associated with certain gifts. For example, funding a scholarship for microbiology students at Stanford University may sound rewarding, but it also requires effort: The client has to advertise for applicants, review the resumes, interview the students, and select a recipient--and find the time to do so every year. An outright gift to the Stanford biology department, on the other hand, would require far less legwork.
Most clients choose organizations with which they have a current or historical connection: the college they attended, a health institute that has served them well, the local Habitat for Humanity chapter where they currently volunteer. Many clients select their alma mater, church, or synagogue as a major beneficiary of their charitable dollars, and Harris certainly doesn't discourage them from doing so. But he also "likes to look for those opportunities where people are receptive" to something a bit more creative. "It's kind of ironic," he admits, "that a lot of people's end-of-life gifts go off to an institution, like their alma mater, that they haven't been involved with for 50 years. What they have the connection with is the memories of that institution, more than its current status. Whereas with the organizations they're currently involved with, they're more aware of [the actual status], warts and all." In any case, the important thing is that the clients reflect on why they're giving to a certain institution, and make sure that they're making the gifts that will give them the most satisfaction.
Risk, too, is part of the discussion, since gifts, like investments, carry varying levels of risk. A low-risk gift is one that's guaranteed to have the desired result, such as donating funds to construct a building at an established university. A higher-risk gift comes with the potential for significant results, but the possibility that such results may not fully come to pass. Donating funds for innovative cancer research would fit into this category: It has the potential to change the face of modern health, but it might also simply lead to a little bit more knowledge, but no major breakthroughs. "For some people, their philosophy is, 'Well, it's a charitable gift--I'm giving it away--so that can be high-risk,'" says Harris. "For other people, it's 'I worked my whole life to accumulate this, and I want to do something pretty concrete with it. I don't want high risk.'" For many clients, it's helpful to diversify the risk in a client's charitable portfolio, just as one would diversify risk in an investment portfolio.
While Harris doesn't steer clients toward giving to one institution over another, he does admit that there are some gifts he won't help clients with. "In my case, the example [of an objectionable gift recipient] would be the National Rifle Association," he says. Fortunately, he's never had a situation where a client wanted to make a gift that made him squirm, but "the client can decide whether they want to work with me, and I can decide whether I want to work with them," he says. "If there was a major conflict like that, I would communicate with the client that I think they'd be better served working with someone else."
Once the clients have identified the lucky recipients of their generosity (both charities, family members, and their own retirement income needs), Harris analyzes the appropriate strategies that will help them achieve their desires. As a hybrid- and electric-car aficionado, it's fitting that he spends significant time making sure each charitable giving and estate planning vehicle works as efficiently as possible. Clients who seek advice from inexperienced advisors often get "the cookie-cutter plan for that advisor, or the plan that is safe harbor for that profession," he says, so he makes a point to explore more obscure strategies that might fit a particular client's situation. While many vehicles are most easily explained with "classic case" scenarios (Strategy X works best in Situation Y with Z kind of assets), there are always exceptions to the rules, and a good charitable/estate planner has to know those exceptions, he says.
The "classic case" scenario for a charitable remainder trust, for instance, is that it's used when a client has highly appreciated assets. However, for a real estate developer (such as the aforementioned Marvin Soiland), undeveloped land is an inventory asset subject to ordinary income taxes, not long-term capital gains taxes. "The developer's appreciated real estate doesn't have the tax advantages in a charitable remainder trust," says Harris, "so you can have scenarios where funding a CRT with cash is in fact a good strategy." Getting this strategy implemented meant some polite but determined discussions with the charity's planned giving staff person, but eventually Harris prevailed. "My job is to step back from the classic assumptions and look at the real situation of that client, and compare it with the alternatives, and do an analysis that allows everyone to get comfortable" with the chosen strategies, says Harris. "Your intuition tells you that it's cheaper to call down the street than coast to coast, but it isn't always true," he adds. "There are things like that in charitable giving; your intuition isn't always right."
In place of intuition, Harris uses a collection of analytical tools, including Crescendo (www.crescendointeractive.com), a software package of planned giving calculations and presentations; and Zcalc (www.zcalc.com), a set of financial functions and templates that can be used in conjunction with Excel. But even with these tools, he still relies significantly on his own custom-built spreadsheets, since the programs often can only illustrate the results of one vehicle at a time, not the interplay of several.
Rather than plunking down a finalized plan in front of the client or her advisors and telling them, "This is how it's going to be," Harris provides them with an electronic file of the client's custom spreadsheet so that they can punch in different numbers and see the results. If, for instance, the client has appreciated but concentrated assets that she wants to diversify, and Harris is recommending that she sell some, give some to a charitable foundation, and give others to a charitable remainder trust, the client and advisor can "look at different alternatives, mix and match, push those percentages up and down," says Harris. Accompanying the file are several one-page flow-charts depicting each planning vehicle, plus a page or two of bullet points explaining what is accomplished in each step.
Moe Jacobson, an advisor with Raymond James Financial Services in Petaluma, California, worked with Harris on a complicated client case involving a charitable remainder trust and environmentally "challenged" land, and he has nothing but praise for the final outcome. "He solved it very neatly, without compromising anyone, and benefiting everybody," says Jacobson. "He created a very artistic solution to what could have been a very challenging dilemma."
While both Jacobson and Soiland praise Harris's intellect--he has a Ph.D. in agricultural economics (prompting Jacobson to dub him "Dr. Dirt") and clearly enjoys the analytical challenge of piecing together complex vehicles--they also agree that his own philanthropic interests do much to burnish his credibility. With a previous career in planned giving, charitable plans of his own, and a record for encouraging giving even when it hurt his own checkbook (he encouraged his ailing father to make a major testamentary gift), Harris comes across as someone who believes he's doing work that really matters. "He has a very practical approach to solving estate-oriented issues," says Jacobson, "but he also has a very philanthropic heart." Andrew Carnegie once said that "he who dies rich, dies disgraced." With Harris's help, perhaps at least a few more people will leave legacies that make them worthy of respect.