From the November 2005 issue of Investment Advisor • Subscribe!

Good to Give

While giving may come from the heart, it's the advisor's job to see that his clients also do it with their heads

To practice charity has been considered virtuous and admirable in virtually every culture and religion since the dawn of civilization. Everyone knows, too, that it's better to give than to receive and that charity begins at home. It seems that all people, whatever their circumstances, have a natural impulse to want to help those less fortunate than themselves. A recent series of major natural disasters including the Gulf Coast hurricanes, floods and mudslides in Guatemala, and an earthquake in Pakistan and India have pulled on the heartstrings of millions of Americans, including your clients, and turned charitable impulses into beneficial actions.

While as their advisor you may applaud the philanthropic actions of your clients, whether the beneficiary is a local animal shelter, the Red Cross, or some other non-profit entity, it's also your job to help them do so prudently and in the way that does them the most good.

"I always look at charity as a great income tax strategy. You can always ratchet it up in those big income years," explained Gail Cohen, general trust counsel for Fiduciary Trust International in New York. "There is a range of vehicles through which a person can make a charitable gift. The most basic would be an outright gift to a public charity; you get your best income tax deduction when you give cash to a public charity. It's dollar for dollar up to 50% of your gross income, and there's a five-year carry forward."

While most taxpayers don't need an investment or tax advisor to help them write a check to the American Cancer Society or the local art museum and remind them to itemize the deduction on their tax returns, more and more advisors are making planned philanthropy an important part of their clients' overall financial plan.

"In some of the survey work we've done, we've seen that 52% of individuals who have $5 million or more are more likely to discuss charitable planning with advisors, and charitable planning is being viewed more and more as part of a wealth management/overall planning discussion," said David Giunta, president of the Fidelity Gift Fund. "It's very important that advisors begin to take the lead in talking to their clients about charitable giving. There's so much going on in those individuals' lives about estate planning, tax planning, and retirement planning that I believe the advisors who are more proactive in talking to their clients about it will have an advantage--their clients are certainly thinking about it."

Kim Wright-Violich, president of the Schwab Fund for Charitable Giving, voiced similar sentiments when she addressed a room full of advisors during Schwab Institutional's Impact 2005 conference in Seattle in September. She shared some Schwab research that found 63% of advisor clients want more tax planning advice and 35% want more charitable giving advice. Wright-Violich also noted that clients believe that raising questions about philanthropy is part of the advisor's responsibility. When advisors do have that charitable giving discussion, it can give them valuable insights into many aspects of the client's personality., she points out.

The Planners' Perspective

Randy Fox is a CFP in Naperville, Illinois, whose firm, InKnowVision, provides estate planning services to other advisors for high-net-worth clients. He's also president of the International Association of Advisors in Philanthropy (www.advisorsinphilanthropy.org) and has been involved in the philanthropic side of planning since 1989. "I think that charity needs to be presented to clients in a different way," he said. "When charity is presented as, 'We can do this instead of tax,' it's not that thrilling. If advisors can talk to clients and help them figure out what they're passionate about in the world, then philanthropy becomes more than a means to an end."

Another planner who views philanthropy as an important part of his clients' overall financial picture is Keith Newcomb of Full Life Financial, LLC in Nashville, Tennessee. He had two experiences early in life that stressed the importance of a charitable outlook. The first was at the age of nine when he won a 10-speed bike for raising the most money for the local cancer society chapter. The second was when he received a full college scholarship paid for by a wealthy couple. He said that when the husband, who had a reputation as a hard-boiled, tough businessman, tearfully told him and some other young people whose tuition the couple was also paying how much it meant to him to be able to do this for others, it made a lasting impression. Not surprisingly, when Newcomb entered the financial services business after 10 years as a music publisher, his benefactors were among his first clients.

"Philanthropy isn't just about the money," Newcomb said. "It's about the values of the people. So that's where we always start, trying to find out what's really important to them."

The first step that Newcomb takes with all his clients is to help them prepare a mission statement, usually just a paragraph or two, which summarizes what they hope to accomplish in their lifetimes. "It doesn't matter is if it's someone just out of college or someone about to sell the family business for several million dollars, we have the same discussion. At that point it becomes clear if the person is philanthropically inclined. If so, we've defined what they want to do philanthropically, just like with any other financial goal."

For those clients who are interested in philanthropy but also want to reap benefits beyond an immediate tax deduction of a direct cash gift, there are a number of vehicles from which to choose.

Donor Advised Funds

One charitable giving strategy that has grown more popular over the past few years is the donor advised fund. The donor advised fund (DAF) must be a public charity, but it can be offered by a local community organization or a commercial entity. Many mutual fund companies, such as Fidelity and Vanguard, offer them, as do Schwab and Raymond James. Among the benefits of DAFs that many advisors and their clients like is that they allow the donor to put the money into the fund and take the full deduction (up to 50% of adjusted gross income) allowable in that tax year, as well as carry forward as a credit any unused deduction for an additional four years. Another big benefit is that there are so many of them available. The money put into the fund is considered an irrevocable gift to a public charity, but the donor can take her time in deciding to which charities the fund should make grants.

"One of the things that the donor advised fund allows you to do is to plan the charitable giving," noted Giunta. "You can figure out how much you want to give in any year even if you're not sure where you want the grants to eventually go. It allows to you to give, for example, $20,000 this year and get the tax deduction. As you decide where you want the money to go, you can advise the fund to direct those dollars to the non-profit organizations at the end of the day. It's also a way to simplify recordkeeping. A lot of individuals may be contributing to 20, 30, or 40 charities in the course of one year, so to be able to bundle that into one gift and then grant out from there is something that's very attractive."

It's important to note that the donor does not have complete control over to which charities the grant money is given. Legally, donors can only suggest how much and to whom, but the fund's fiduciaries can refuse, although this rarely happens in real life.

Unlike private foundations, which must distribute at least 5% of its assets every year, a donor advised fund is not bound to a strict dispersal formula, although most do provide annual grants. For example, according to Giunta, the Fidelity Gift Fund currently has over $3 billion in total assets and usually distributes between 20% and 30% of its holdings in any given year.

"They're very handy vehicles and there aren't that many downsides to them really," said Cohen of donor advised funds, "although one is that these are mutual fund-based structures and so the client has little direct control over the investments."

Philanthropic advisor Fox said he has recommended donor advised funds in years when clients have had extra income, but want to keep the dispersal of their charitable donations at the same level. "A donor advised fund is an outstanding tool for shifting the timing of when the client takes the deduction," he observed. "Nothing really changes for the charitable beneficiary; what's changing is when the client takes the deduction."

Private Foundations

A more traditional way, especially for the ultra-wealthy, to carry out charitable works has been through the creation of a private foundation. While foundations offer a great deal more control to the benefactor, they also have more stringent paperwork requirements, a lower deduction limit, and the mandatory 5% minimum annual payout.

Newcomb noted that he has had clients who are passionate about giving and want to inspire that attitude both within their families and within the community at large, and felt that the benefits of a foundation structure outweighed any perceived drawbacks. One of the benefits is that the foundation can provide a mechanism for getting additional family members involved in the philanthropic effort, which was one of Newcomb's client's initial goals. As he did his research, Newcomb says he discovered that it didn't really require as much money to launch a foundation as he thought, and that the expenses in the end don't always work out to be much more than those for a donor advised fund.

Newcomb also pointed out that it is possible these days to outsource the administration to a number of service providers including Foundation Source (www.foundationsource.com) and Sterling Foundation Management (www.sterlingfoundations.com).

While the traditional rule of thumb is that is takes at least $1 million in assets to make a private foundation viable, Foundation Source's Web site lists 325 foundations with assets ranging from $100,000 to over $100 million in assets.

Gifts That Give Back

There are also other options, such as charitable remainder trusts and gift annuities, that advisors can recommend that allow clients who need income from their assets to still make philanthropy part of their financial plan while reaping some tax savings.

"These two represent a way for an individual to give money to charity but still receive a stream of payments back from the gift during their lifetime," explains Cohen. A gift annuity is created by the charitable institution, often a college or university that will push them to alumni. "If you make a gift to them today by purchasing one of these, they will pay you back an annuity,"he says, until your death. "When you die, whatever you haven't received passes irrevocably to the institution. "These are regulated in every state like insurance," notes Cohen. "The deduction that you get is not for the full dollar that you give, but for some portion."

A charitable remainder trust (CRT) is, on the other hand, a private trust created by the donor. The trust then pays out either a specific amount or percentage of total assets each year to the creator of the trust (or his designated beneficiary). When the trust recipient dies, the remainder of the trust's assets pass on to the specified charity.

"An advantage of the charitable remainder trust is that donors don't have to commit to a specific charity when they create it," noted Cohen. "They don't have to make an irrevocable decision today about who is going to benefit when they die. Some people make a donor advised fund the recipient of the remainder when they die, and then their children can become the advisors to the fund."

A vehicle used by Fox in a number of cases is a testamentary charitable lead trust.

"Basically it's a way to zero out estate tax for some of the higher-net-worth individuals," he says. A charitable lead trust is a charitable gift under which income from the gift goes to charity, but the remainder goes to the heirs or a trust for the heirs. "You can effectively take all the assets that are left in someone's estate and put them in a properly structured lead trust and gift them down to their kids," says Fox. "It might take ten years, but at the end of the ten-year period it's zero on the estate tax."

"Advisors who are interested in this area really need to dare to challenge their clients to think about their money from a broader perspective; about more than what it means to their family, but also what it can mean to society and the community," said Fox. "I think the only way to effect change in society and in the world is to channel those dollars into causes you believe in instead of shrugging your shoulders and saying, we'll just pay our taxes."

Managing editor Robert F. Keane can be reached at bkeane@investmentadvisor.com.

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