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Financial Planning > Charitable Giving

Sweet Charity

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President Jimmy Carter once called Americans some of the stingiest people on earth. But since Carter left office, charitable giving has risen dramatically. Today philanthropy is an important component of the high-net-worth individual’s financial and social life, and not necessarily in that order. In 2000, according to Foundation Source, a philanthropic services company in Norwalk, Connecticut, the nation’s 700,000 families with $5 million or more in net worth gave over $32 billion to charity, representing over 25% of all individual giving. They, along with citizens of thinner wallet, gave away last year a hefty $203 billion.

The time is ripe for advisors to position themselves as the brains behind the giving process if for no other reason than the likelihood that their wealthier clients will dole out money with or without their blessing. Advisors need to know which charitable giving vehicle, or combination of vehicles, to employ to best meet a given client’s needs. It’s important as well for advisors to understand these needs in the context of each client’s life, a process that also can be extremely beneficial to the advisor.

There’s a lot for advisors to consider in terms of charitable giving techniques that are becoming increasingly sophisticated and effective. Included are variations on several time-tested trusts, community funds, and family foundations. Foundation Source, for example, has a new out-of-the-box product that lets advisors maintain control of assets. Then there are the relatively new and popular donor advised funds. Before examining these vehicles, however, we’ll look further into the philosophy of giving and the motivating factors that in the aftermath of September 11, and in the face of an ailing economy, cause an advisor’s clients to think and act the way they do. This, in turn, can make your advice more worth giving.

Show Me The Money

While it’s true that in the aftermath of September 11 some donors experienced “donor fatigue” and cut back on their largesse, Fidelity noted in November that despite everything, 70% of Americans had given charitably in recent months. At the same time, as terrorist-related events unfold in the media, highly sensitized Americans are exposed daily to the hardships that serve as normal life to those living in the Middle East and elsewhere. Americans today tend to empathize more strongly than ever, as they watch on television a world grow seemingly smaller and more tightly interconnected. Added to these feelings are troublesome questions regarding the fate of citizens’ 9/11 donations to charitable organizations such as the Red Cross: Is their money being used for its intended purpose, or for another? Is it being squandered in bureaucratic busywork, or worse?

“The biggest impact since the attack is how much more thoughtful people are being about their giving,” says Elizabeth Holt, vice president of Benchmark Advisory Group in Denver and Las Vegas. Advisor John Henry McDonald of Austin Asset Management, Austin, Texas, takes a somewhat less “charitable” view towards the giving impulse before 9/11 and after. “It’s the difference between style and fad,” he says. “It’s in the news now; it’s on everybody’s tongue. In Austin, at least, doing well by doing good is a much hipper thing right now.”

But not everyone can afford to do good. An ailing economy has put a dent in the reserves of those with modest incomes. At five-star hotels in New York, for example, according to The New York Times, bellhop tips, which account for half a bellhop’s income, have dropped 50%. The “merely rich” are feeling the pinch, too, but not the mega-rich–good news for advisors with HNW clients. A survey of persons with $1 million-plus in net worth conducted in 2001 by Phoenix Wealth Management showed that 77% expected to “stay the course”

with their investments, with 93% saying they felt financially comfortable. The survey noted also that 24% of respondents said they would rely on professional advisors, up from 16% in June.

That’s a far cry from as little as five years ago, when most advisors were marginally, if at all, involved in the charitable affairs of their clients. Back then there were the usual discussions between advisor and client about asset allocation, investment strategies, and tax shelters, but there wasn’t much talk about social capital, family financial philosophies, and planned giving. “If people wanted to give, they just sort of did it on their own,” says Holt.

There wasn’t much space devoted to charitable giving and specific techniques in the general media, either. But there was plenty of noise about the trappings of wealth. As advisor McDonald notes, rich people once bragged to the press about their cars and yachts and vacation homes; now they brag about the size of their foundations. Advisors must appreciate that wealthy folks today are motivated more by their values and less by avoiding taxes, and know that the realization of these sentiments in concrete giving techniques is facilitated by fast-paced marketplace innovation and technology.

Let’s Talk

McDonald asks new clients “straight off” about their charitable intent. “If they’re really motivated by charity, we pick pretty hard on this question: How do you feel about giving your money away?” McDonald doesn’t present his clients with a laundry list of giving options from which to choose. He chooses for them. Holt also is proactive in broaching the subject of giving. Before discussing giving techniques with clients–or anything, for that matter–clients must fill out a questionnaire that helps her develop what she terms a family financial philosophy. “Where did you come from? Who is important to you? What are your most important values? If you had to give away a million dollars, where would you give it? Things like that,” she says.

Cynthia Egan, president of the Fidelity Charitable Gift Fund, counsels advisors to “make the first move.” She says that educating clients on smart giving options will “help them more effectively pursue their charitable goals, and help you strengthen your client relationships.” Foundation Source Chairman and CEO Doug Mellinger finds that philanthropy as a mechanism for client discussion enables advisors to “really get to know their clients,” and in the process, deepen and enhance their relationship. “Each of these financial advisors is sitting there learning stuff they never knew before,” he says. “You don’t get a more personal discussion than one centering on philanthropic objectives.”

Perhaps the most unique take on charitable giving is that of advisor Carter Le Craw of Johnson City, Tennessee. “We may be kind of dumb,” he says, “but we have a requirement, a strong recommendation, that people be giving away at least 10% of their income before they invest with us, because we feel that charitable giving is a better investment than stocks and bonds.”

Decisions, Decisions

In general, picking the most advantageous giving technique depends on client goals, age, and the amount of money the client has to give. It’s easy to forget that the number-one giving technique remains a direct gift to charity, for a dollar-to-dollar deduction. For those with stock to give away, David Marotta of Marotta Asset Management in Charlottesville, Virginia, reminds donors that their generosity can be worth up to 20% more by turning their stock directly over to the charity, thereby dodging the capital gains tax they would have to pay on the stock if they sold it first. (The capital gains tax on $1,000 of stock is 20%; if most of the stock’s value is appreciation, the amount of tax approaches $200, leaving only $800 for charitable giving, Marotta explains.) But many are moving away from these so-called “bucket charities” toward ones over which donors have more involvement and control, to the degree that specific problems can be solved as per the donor’s directives.

Why a CLT?

A charitable lead trust (CLT) is appropriate when a person wants to support a charity for a number of years, but ultimately does not want to give away assets. Advisor Mark Johnson notes that CLTs are enjoying wider use now that the Applicable Federal Rate has declined. “As the rate decreases there is a reduction in the taxable portion of the remainder that passes to the children,” he notes.

Here are some other CLT advantages and features noted by advisor Elizabeth Holt:

oA CLT is ideal when there is a spike in income one year and future years are expected to be lower.

oThe trust is irrevocable and makes a predetermined payout for a specific period of time to a chosen charity. Upon termination of the trust, the residual assets return to the donor or go to a designated beneficiary.

oA grantor CLT generates a current-year income tax deduction. A non-grantor trust does not, but tax deductions are created when payments to charity are made dur-ing the term of the trust.

oThe higher the payment to the charity and the longer the duration, the higher the income tax deduction. For example, with an AFR of 6.84% and an 8% payment for 10 years, a 64.1% tax deduction would be given. A 5% payment to charity for 20 years would generate a 63.1% deduction.

oTax deductions can either be a percentage of the lump sum used to establish the trust or the annual payment made to charity. The decision is made during the trust design stage and cannot be changed.

o Earnings of the trust are taxed to the donor in a grantor trust. Therefore, proper investment planning is key.

oTo the extent assets in the trust appreciate beyond what is given to charity, there is no tax on the gain when returned to the donor or other designated beneficiary.

oCharitable beneficiaries may not be changed during the term of the trust.

oNo additional contributions to the trust are allowed.

o The donor can control investments in the trust if so desired.

o A CLT can be set up testamentarily to create an estate tax deduction as well.

One of today’s “hot” giving techniques is the donor advised fund (DAF). Often described as a “retail product for the masses,” DAFs are marvelously

appropriate for the donor of relatively modest means who wants to start a fund, often with a family name, build that fund, and teach family members about the joys of giving and the lessons of stewardship. DAFs have grown over the past few years into a $50 billion proposition, with tens of thousands of foundations set up through some 70 DAFs offered through mutual fund companies and brokerage firms, as well as banks and insurance companies.

The concept is simple: an individual opens an account making an irrevocable contribution to a given fund, receiving an immediate tax deduction for the current year: 50% of AGI for cash contributions; 30% of AGI for appreciated securities. Donors may also carry forward deductions for several years if their annual contributions exceed federal tax code AGI limitations. In addition, capital gains taxes can be avoided if appreciated stocks are involved. The money in these funds, which are structured as 501(c)3 charities, are invested by the mutual fund company or brokerage firm, and dispersed to the charity of the donor’s choice. Costs consist of a fee based on the contribution sum; fees on advisor-driven, asset-managed funds average ab

out 2.5% with some as high as 3%. The donor can “advise” the host charity about how much is to be directed each year to the charity or charities of his or her choice.

A major advantage of DAFs is that the donor can in some instances control the investments, and even retain the services of his or her financial advisor (though fee-only advisors usually lose control of the assets). And DAFs can be established with a relatively small amount of money. For example, the entry points for the Fidelity Charitable Gift Fund ( and the Schwab Fund for Charitable Giving ( are both $10,000. Vanguard offers a DAF through its Vanguard Charitable Endowment Program ( The minimum donation here is $25,000, with minimum subsequent donations of at least $5,000, though there also is an incremental plan that makes reaching the initial minimum easier. Calvert’s new socially responsible investing fund, the Calvert Giving Fund (, requires a $5,000 initial donation; there are 13 mutual funds into which the donor can place the cash.

At Austin Asset Management, McDonald makes use of all types of giving vehicles for his clients, but has a soft spot for the community fund, or foundation. So does Dan Moisand, president of Optimum Financial Group, Melbourne, Florida. Taxwise, there’s no difference between the community fund and the DAF, and they’re run by most of the same companies. “Ultimately it gets down to what the fundamental business is,” says Moisand. “A community foundation’s sole purpose is to benefit the local community. I’d put the local knowledge and impact of a community foundation up against a fund company any day.”

Kathleen Rehl of Rehl Financial Advisors in Lutz, Florida, finds that her elderly clients continue to favor charitable gift annuities. The rates are especially attractive right now. For example, a 70-year-old receives guaranteed income of 7.5%; about half of this is ordinary income, with the remainder tax-free or taxed as capital gain income, depending upon whether the gift annuity is funded with cash or appreciated securities. Plus, the donor receives an immediate income tax deduction. The top income tax payment rate is 12% for someone age 90 and above. “Compared with CD rates that are paying 3%-5%, gift annuities are certainly a good alternative for those who eventually want to benefit a charitable cause after their death,” says Rehl. “A gift annuity requires only a simple contract agreement prepared by the charitable organization rather than a complex trust document, and there is usually no cost to the donor for this service.”

All in the Family

Private family foundations set up for the purpose of charitable giving are another option, though appropriate primarily for mega-millionaires. In short, the donor gifts money to a charitable organization, or foundation, that is set up to be owned and run by the donor. By law, the donor must give away to charities each year 5% of the foundation’s average net assets. Apart from the prestige that goes along with having one’s own foundation, and the attendant educational opportunities for family members, the tax deductions are the same and the foundation works in a manner similar to any charitable organization. “If I have $100,000 here and want to give it away to somebody and get a tax deduction, I can give it away to my family foundation, and get the same benefit I would with a community fund or DAF,” explains McDonald.

The downside of private family foundations is that they can take months to establish, involve a slew of financial professionals, and carry costs that range from $10,000 to $20,000. Enter Foundation Source ( Launched about 18 months ago, the philanthropic-services company says it has developed the required infrastructure, systems, and technology to standardize and automate the private foundation, creating “ready-to-fund” private foundations in as little as 72 hours. It also provides necessary ongoing administrative services.

The idea of this self-described integrated end-to-end hassle-free solution is to enable the advisor to focus not on foundation logistics but on asset management, planning advice, and the client relationship, maintains co-founder and company executive Mellinger. It’s a great way, he says, to “consolidate client assets from other financial institutions,” and be in a position to land new clients, especially persons close to the client who may serve as directors for the client’s foundation. All account information is available online, to both the advisor and the client. This not only greatly simplifies the management of the foundation, and therefore family office duties if applicable, but provides an ongoing format for advisor and client discussions, which often include other family members–potential clients all.

Of vital significance also to advisors, Mellinger notes, is that when a client’s money is pulled from his estate and placed in the foundation vehicle, the advisor continues to maintain control of asset management. “We don’t touch the assets, and have no desire to be in the asset gathering business,” he says. Instead, Foundation Source develops partnerships with financial institutions–BankOne was the first–that offer the product publicly while Foundation Source remains in the background.

The Foundation Source product is designed primarily for persons with assets in excess of $5 million. The wholesale startup cost is $1,100. Financial firms and advisors can then mark this up to “whatever they want,” says Mellinger, usually anywhere from $2,000 to $4,000. There’s also a decreasing annual administration fee based on foundation assets: 1% ($250,000 or less), down to 0.25% ($2 million and more).

Tried and True

The use of charitable remainder trusts and charitable lead trusts, often employed in conjunction with a family foundation, especially in the case of CLTs, remain powerful charitable giving tools with solid tax advantages. CLTs, historically not all that popular, are making somewhat of a comeback. As for the differences between the two, a general rule of thumb is this: think CRT if current income is needed now, and the donor/client is willing to give up assets; think CLT if the donor/client is willing to give up income, or a piece of it, to temporarily produce money for charity, but ultimately wants the assets back (see sidebars above and on page 41).

President’s Carter’s admonitions concerning stingy citizens notwithstanding, Mellinger notes that giving nationwide has remained within a relatively narrow bandwidth, generally between 1.7% and 1.9% of individual annual income, during the past 30 years. But that’s about to change. Add to the present enhanced giving mood a factor likely impervious to market decline and guaranteed to fuel the exponential growth of philanthropy over the next decade or so: the transfer of an estimated $40 trillion from the Baby Boomers. Boomers have long been in tune with social values and the concept of giving back, and much of the riches they pass to their offspring will be shared with charity. The Boomers are ready for you, the advisor, if you are ready for them, along with legions of Americans today with enough wealth who feel a moral obligation to give freely to any group or cause deemed worthy–except their Uncle Sam.


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