Altruistic charitable giving notwithstanding, philanthropy is pretty much a fourth-quarter phenomenon. Given the outpouring of donations following 9/11 (individuals contributed some $1.25 billion while foundations added another $410 million, according to Frederick, Maryland-based Family Foundation Advisor), it’s reasonable to assume that this tax season advisors won’t see much client action on the charitable giving front. A year of investor portfolios continuing to head south might also be expected to dim charitable impulses. But advisors expecting a decline in activity might find themselves surprised.
A fair proxy for the level of charitable activity today is the degree of involvement with lawyers. And “trust and estate attorneys have never been busier than over the last year,” says Doug Mellinger, president of Foundation Source, a philanthropic services company that helps establish private foundations. He cites as further evidence data showing the continued growth of giving over the past 31 years, both as a percentage of income and in absolute dollars. According to the data, annual giving during this period has doubled each decade and grown through every U.S. recession.
The acceleration of giving can be attributed in large measure, Mellinger says, to aging Baby Boomers devoting more thought to giving as they approach retirement. According to Fidelity Investments, more than $12 trillion is expected to shift from one generation to the next in the next two decades, and possibly $100 trillion in the next quarter-century. If anything, 9/11 has only spurred giving.
Yankelovich Partners estimates that 90% of individuals with net worths exceeding $1 million make annual contributions to charity. Are financial advisors ready for them? Being so makes good sense, since, according to the Spectrem Group in McLean, Virginia, the use of professional advisors jumped from 61% to 74% between 1998 and 2000 for such high-net-worth investors. Fidelity notes that the benefits to advisors of being savvy about charitable giving include deepening the level of intimacy with clients when addressing an issue that involves family values and background; being able to defend your practice against competition by cross-selling your expertise in tax and estate planning issues; and achieving higher retention of clients by offering a range of services to help minimize taxes and attain charitable giving goals.
People give for a number of reasons, from the personal to the practical. While there is a host of charitable giving vehicles for the advisor to employ–direct gifting, donor-advised funds, community and family foundations, and various charitable remainder trusts and gift annuities–the selection of any vehicle must be carefully guided by each client’s philanthropic intent. This may seem obvious, but it hasn’t prevented some advisors from taking a “one size fits all” approach.
What’s the Right Vehicle?
For example, a client who wants some benefit from his charity today is not going to use a donor-advised fund because he won’t receive any cash flow; he’s better off with a charitable remainder trust or charitable gift annuity. Conversely, a client not seeking cash flow will likely gift outright, opt for a donor-advised fund, or set up a family foundation. “The money is important, but the [client's] soul and spirit are far more important,” says Ray Ferrara, an advisor with ProVise Management Group in Clearwater, Florida. “We need to understand their motivations about their wealth, their intent for their money, before we consider how to manage it.”
Ferrara says charitable giving will generally first arise while reviewing tax returns. “It may be a discussion we have today and nothing is done for eight to 10 years,” he says. “We have the discussion [but that] doesn’t mean clients are ready to take the money off their balance sheet and put it on a charity’s balance sheet.”
While people give for current income tax management and to create a legacy, Ferrara believes that most clients are philanthropic first and tax-sensitive second. Even clients who intended to give stock to fulfill giving pledges and are now trying to restructure those pledges in light of current market conditions are still making every effort to give, he maintains.
It’s no coincidence that charities launch fundraising campaigns in September, getting a jump on tax planning and preparation season when investors sit down with advisors and accountants to take gains or losses and discuss charitable giving. Mellinger estimates that 75% of all charitable giving occurs during November and December. The Internal Revenue Service characterizes gifts as complete and irrevocable transfers of money, property, or other assets to IRS-recognized charities (there are more than 700,000 IRS-approved 501(c)3 charities nationwide). The tax benefits to charitable givers are significant, though generally not much use to extremely wealthy givers. In general, the amount that can be deducted is limited to 50% of the giver’s adjusted gross income (AGI) in cash or 30% of his AGI in capital assets. The full current market value of appreciated assets can be deducted. It is possible, too, to avoid or reduce taxes on capital gains deriving from the sale of these investments, a very popular incentive.
Anatomy of a Giver
Mellinger defines three distinct giving populations. First is the low- to medium-income group, an enormous chunk of the population. Because they have little savings and don’t necessarily own much stock outside their retirement plans, market gyrations have minimal effect upon their giving. They still manage to give modestly, often through direct cash donations. Advisor Tim Hayes, president of Landmark Financial Advisory Services in Rochester, New York, says an argument for giving outright or through a charitable remainder trust can be made to middle-income consumers with relative good overall wealth, even if they have exposure to highly appreciated, low-basis stock and don’t want to sell because of the tax consequences. “Of course, the numbers don’t work nearly as well if you’re talking about $100,000 versus $1 million,” he says.
Mellinger characterizes the second group as those with net worths of $500,000 to $5 million. They are “definitely concerned” about the market, and tend to favor charitable instruments such as donor-advised funds. He sees this group as giving somewhat less this year–being “a little bit off”–affected, unlike the first group, by market gyrations. The third group, 700,000 strong, represents the number of U.S. households with net worths greater than $5 million. This group, he says, has been “unbelievably resilient” to market gyrations. This group, the “millionaire next door” type, continues to be very civic-minded and generous.
A Good Foundation