As Dave Ness, chief trust officer of Raymond James Trust, notes: “When I talk to a lot of financial advisors, they’re not completely comfortable with the subject. Some think it’s none of their business. There’s also this perception that beyond writing a check, it’s really hard: ‘If I don’t know what the right answers are, I’m not going there.’ But the fact is, there are an awful lot of things you can do with people. Clients aren’t necessarily looking for advice from advisors as to who to give to, but answers as to how.”
It helps, too, when the advisor is philanthropically inclined.
“I really think that to talk philanthropy you have to be philanthropic. This isn’t a product, this is a personal part of your soul. It’s part of who you are, it’s part of what you do,” adds Ness. “I’ve seen plenty of advisors who could sell ice cubes to Inuits who couldn’t sell a charitable remainder trust to Andrew Carnegie because they were trying to sell the tax benefits or the income — not the gift.”
Southern California advisor Mitchell Kauffman, managing director of Kauffman Wealth Services, preaches what he practices. He is hugely involved in philanthropy and he encourages his clients, most of them high-net-worth, to do the same. Yet he says it’s an “inaccurate but universal perception” that the wealthy instantly “get” philanthropy.
“They have many gaps, there are things missing. They’re the same as anybody else,” says Kauffman, who has offices associated with Raymond James Financial Services in Santa Barbara and Pasadena. “Most of the time it’s a struggle for people to do significant philanthropy. The idea of letting go of even the most highly appreciated assets can be a real struggle for even the most philanthropically motivated people. Our job as advisors is to help people clarify their goals and priorities and help them find the most advantageous ways personally to make those visions a reality. There’s opportunity here; there is value to be added.”
Here are 10 methods to consider as you help your clients think about charitable giving in fresh, new ways:
1. Rethinking the Private Foundation
Small private foundations, hammered by overhead costs and investment management fees, could operate as healthier entities when crafted as donor advised funds, according to Baruch Littman, vice president of development for The Jewish Community Foundation of Los Angeles. DAFs, he says, are leaner (no board, for example) and the donor gets the tax deduction the minute he throws cash or marketable securities into it. A DAF is also more flexible when it comes to donations of real estate and closely held stock.
In a trend that is gaining traction nationwide, Littman’s organization — which supports over 800 DAFs — became more advisor-friendly recently when it began offering separately managed accounts so that assets may remain under the management of the family’s financial advisor rather than migrating elsewhere.
2. Recognizing DAF Differences
A lot of clients open DAFs with Fidelity or Vanguard because they are huge companies and they advertise. As Randy Fox, founding principal of InKnow Vision in Naperville, Ill., and a past president of the International Association of Advisors in Philanthropy, puts it: “What a lot of people don’t know is there are donor advised funds that advisors can use where they can still help the client manage their money as opposed to going to Fidelity or Vanguard and ceding control of their assets.”
The upshot: The advisor continues to select the investments he or she thinks will best further the client’s goals. Fox adds that advisor-friendly funds like Renaissance Charitable Gift Fund and funds sponsored by the independent American Endowment Foundation also tend to be more flexible when it comes to gifts of more difficult assets such as a partnership interest. Also in play today: DAFs that represent socially responsible investing.
(Editor's Note: To clarify, Fidelity does permit donors to nominate an independent advisor to manage their assets as long as their donor advised fund has $250,000 or more in it. Typically, an independent DAF permits a family's personal advisor to manage the assets no matter the amount. Also, Fidelity does have a 20-year tradition of handling complex assets but they must be disposed of within three years. In fact, Fidelity Charitable saw donations of complex assets more than triple in the first half of this year to $43 million. In contrast, the typical independent DAF has no restrictions regarding time-frame.)
3. The Insurance Card
There’s a bit of a learning curve but the gifting of a life insurance policy to a favorite charity goes a long way, both for the donor and the recipient. “It’s a great tool that’s not used enough,” notes Kalita Blessing, principal of Quest Capital Management in Dallas, an RIA with Raymond James Financial Services. “It takes some education. There’s a little bit more energy involved than writing a check.”
Here’s how it works: In an ideal situation, the donor pays the policy off before gifting it. If there are continuing premiums, they are tax deductible to the donor. When the donor dies, the charity receives the proceeds. “This is finally getting some positive press after some negativity” when a few high-profile insurance gift cases went bad, Blessing adds. “The fact is it makes a nice gift. It’s an idea worth thinking about.”
4. Impact Giving
Many of today’s entrepreneurs — who are all about goals and achieving results over a certain time frame — are taking that same set of skills and thought processes and applying them to their philanthropic giving, according to Blessing. Their goal: to have an impact on issues that matter to them. “You have to set aside some time to talk about what’s been impactful in their lives. It often comes from hurt points — places of pain in their lives or loved ones’ lives. It all comes from personal experience,” she says. “It’s something they want to plug into because it’s really plugging into their hearts. It’s where they want to have maximum impact.” Impact givers also want to see results sooner rather than later.
5. Funder Collaboration
One easy thing an advisor can do to help clients is to connect them to other funders. “It can be beneficial because funders don’t have to go it alone. They can see how others are practicing philanthropy or running their foundations,” observes Meg Lassar, an analyst with Strategic Philanthropy in Chicago. “It’s also a good resource for advisors who themselves don’t have the expertise.” In Chicago, for example, there is a donors’ forum made up of family, private and corporate foundations as well as non-profits that convenes workshops and study groups. Lassar also suggests connecting clients to like-minded funders through peer funding networks such as Grantmakers Without Borders, for example, or the Environmental Grantmakers Association. “This is where you hear from people who are working on the ground,” she said. “It’s often how collaborations are formed.”
6. Giving Circles
Philanthropic investment clubs known as giving circles appeal to like-minded donors who wish to pool their resources in support of a particular charity. Contributors can open a donor advised fund or simply write a check to an organization, according to Ness. Giving circles have proven especially attractive to women, who often use a financial advisor or community foundation to guide them. “It’s all about joining together to make a difference with their money. The giving circle is a philanthropic outlet but it’s also a social gathering,” Ness says. “Like a sewing circle or a bridge club, it usually lasts as long as the friendships do.” He adds that giving circles are not well understood by many financial advisors, who might otherwise use them as forums for promoting philanthropy.
7. Perpetuity Reconsidered
The longtime default for foundations has been the perpetual model but it’s not always necessarily the correct choice. “It has been the working model, very often unquestioned by trustees and advisors alike,” notes Lassar. “Time horizon doesn’t come up often. Part of what we do is to encourage a conversation about time horizon to make sure that it is aligned with the donor’s mission.” The philosophy of so-called “spend down” foundations like the Bill and Melinda Gates Foundation is that some issues — like climate change, education, disease — can’t wait decades for a solution. In spend down situations, Lassar adds, investments typically become more conservative with the aim of preserving assets rather than growing them.
8. Spending Policies
Most foundations don’t have a spending policy, relying instead on the federally mandated 5 percent payout rate as the rule rather than a floor. “There are a lot of private foundations who believe they are required to spend 5 percent, no less and no more,” according to Brian Wodar, director of wealth management research for Bernstein Global Wealth Management in Chicago. The bottom line: Too many foundations simply spend 5 percent of their previous year’s assets, subjecting grant-making to swings in the financial markets.
“The majority of private foundations are either spending 5 percent a year or being checkbook philanthropists,” he adds. “What that doesn’t do is provide the board with rules of the road in times of crisis.” One key finding from Bernstein’s research: To gain more control and achieve the greatest charitable impact, a foundation’s board should align its spending policy with its investment policy.
There is no one right answer but some foundations — no matter the size — have found that using a spending policy like a smoothing formula can allow them to maintain stronger spending levels during times of crisis without substantially impacting their ability to continue in perpetuity, according to Wodar. Bernstein research shows that smoothing formulas, when adjusted for the required 5 percent minimum distribution, can facilitate more investment in stocks than would otherwise be thought comfortable.
The result: creating a potential for greater philanthropic impact over the long term. How? While higher stock allocations will likely increase an investment portfolio’s volatility, smoothing — which determines annual giving as a percentage of the average of several years’ asset values rather than one year’s — reduces the volatility of the foundation’s distributions.
10. Charitable Lead Trusts
The use of charitable lead trusts as a testamentary vehicle has become very popular but Wodar says that with today’s low interest rate environment, there is opportunity to set them up inter vivos, or during the donor’s lifetime. “It’s been said that charitable lead trusts inter vivos are the unicorn of the estate planning business,” observes Wodar. “You hear people talk about them but you don’t see them.”
Charitable lead trusts, used by the very wealthy, are required to make a yearly distribution to charity. The distribution is lower when interest rates are lower and higher when interest rates are higher. “With rates low, as they are now, there is a better chance the trust will succeed in distributing everything it’s supposed-to to charity with something left over at the end of its term for children or grandchildren,” he said. Notably, once the trust is drafted and funded, the interest rate is permanent.