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Financial Planning > Charitable Giving

Using The Back Door To Connect With The Aspiring Philanthropist

By Warren S. Hersch

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Most financial advisors devote their practices to helping clients accumulate and conserve wealth. Others are doing the opposite: They aid high-net-worth individuals in giving much of their hard-earned assets away to good causes.

These charitable planners, a small but growing part of the advisory community, increasingly are tapping into prospective donors’ philanthropic impulses through the charitable and not-for-profit organizations to which the wealthy already are connected. The planners convert that attachment–be it in the form of volunteer time, yearly financial contributions or interest in the organization’s ongoing mission–into planned gifts that will have a lasting influence.

As the leading edge of baby boomers move into their retirement years, the opportunity to help the affluent direct their social capital has never been greater, say experts interviewed by National Underwriter.

“Retiring boomers need to transition assets into retirement, secure an income stream they can’t outlive and prepare to dispose of excess assets,” says Scott Keffer, founder and president of Wealth Transfer Solutions Inc., Pittsburgh, Pa. “The most effective tools to do all three are within the charitable planning space.”

That message is not lost on those who already contribute billions to philanthropic causes. A report from Giving USA Foundation, Glenview, Ill., pegs the total of charitable gifts in 2004 at $248.5 billion, a record sum. Individual giving, the single largest source, rose by an estimated 4.1% in 2004 to $187.9 billion.

Who benefited from this largesse? Religious organizations received the lion’s share of contributions–$88 billion–followed by education at $34 billion, according to the report. Smaller amounts funded research in medicine and social sciences, environmental and animal welfare organizations, international affairs and development, and human services, among other areas.

Much of the money underpinning these initiatives comes from planned gifts. A 2000 study conducted by NFO Research on behalf of the National Committee on Planned Giving observes that of 1,579 households surveyed, 782 gifted through a bequest to a charity. That compares with 370 and 427 respondents who used a charitable gift annuity and charitable remainder trust, respectively.

A plurality of respondents (34%) learned about opportunities to make charitable bequests from the charities’ published materials. Smaller percentages were informed through a legal or financial advisor (21%), a representative of the charity (11%) or a speaker at a financial planning seminar (8%).

These numbers, sources say, make plain the fact that financial advisors could be doing a lot more to educate donors about planned giving opportunities. The same applies regarding the development officers who work at charities, these sources say.

“There are so many organizations that have only one person on staff to do all the work of development,” says Sally Alspaugh, a financial planner and a principal at The Clarus Group, Cincinnati, Ohio. “These people typically spend all of their time organizing annual gift campaigns, banquets, golf outings and the like. They never get around to soliciting planned gifts.”

Those who do have the time, she adds, find the task daunting. Planned gifts, particularly those involving the use of a charitable trust for high-net-worth individuals, can be difficult to execute. The development officers, or the donors themselves, therefore need to leverage outside council to facilitate the transactions.

Yet observers note that many charities are wary about working with financial and legal advisors when soliciting gifts from their donors. One fear, they say, is that the advisor is more interested in pushing product than a solution in the best interest of the contributor.

Another is that the endeavor could be a waste of time and financial resources. Financial planning seminars devoted to planned gifts have all too frequently fallen on deaf ears. Or the charities are competing for attention with other organizations to which prospective donors are considering making bequests.

Kevin Johnson, a financial planner and principal at Retriever Development Council, Portland, Ore., says advisors can establish credibility with charities and their donors by volunteering to serve on a planned giving committee but not as a financial advisor. The benefits: They gain a better understanding of the organization’s mission; they cultivate greater trust with fellow volunteers who see them contributing in a non-professional capacity; and they broaden their life experience–experience that can be turned into stories to tell clients and prospects.

“When you tell stories about volunteer work, you demonstrate a passion that makes you credible from a philanthropic point of view,” says Johnson. “You now have a way to talk about the emotional impact of a charitable involvement.

“That gives the client permission to do the same thing,” he adds. “Then you can get to the all-important question: ‘Well, Mr. or Mrs. Client, what would you say if you could give a thousand people this same experience by donating a part of your estate?’”

To be sure, even involvement with a charity in a professional capacity can be a plus. Randy Fox, president of the International Association of Advisors in Philanthropy and a principal at InKnowVision, Naperville, Ill., says he generates business through his participation as both a financial advisor and board member of the Chicago and suburban Chicago councils of planned giving.

But whereas other charitable planning advisors secure clients by working directly with high-net-worth individuals, or indirectly via the charities to which donors periodically contribute, Fox collaborates exclusively with other financial advisors and attorneys who need his charitable expertise, many of whom he connects with through the councils.

That business model has served him well. Fox estimates that his firm does between 50 and 60 plans per year and that he has produced more than $400 million in charitable gifts.

“We generally don’t get called unless [the prospect], who typically is over 70, has $10 million-plus in assets,” says Fox. “Most planners can do the work for estates valued at less than this amount. But when the sums to be transferred go above $10 million, the planning tends gets to be complex.”

Keffer, for his part, sees value in charity-sponsored seminars on planned giving. But to be effective, he says, these seminars have to both educate and motivate people to take action. The events also have to be held repeatedly. And they need to offer prospects the opportunity for follow-up consultation with an advisor.

Enter the Donor Motivation Program, a Keffer-developed initiative that incorporates these elements and that Keffer delivers to interested charities in exchange for a fee. The program has yielded results. Since its inception 10 years ago, approximately 40 charities have hired Keffer to “have conversations” about planned gifts with more than 10,000 prospective donors. Keffer additionally has trained more than 60 advisors in the U.S. and Canada on the program’s methods.

“The Donor Motivation Program lets me apply my strengths–communication skills, an ability to motivate and knowledge of charitable planning–to an area where charities are lacking in resources and expertise,” says Keffer. “That’s something they’re willing to pay for.”

Alspaugh, who also leverages the program, adds that the quarterly events draw approximately 1% of invited prospects and that about one-third of attendees ultimately make planned gifts.

Along the way, she faces myriad questions from prospective donors. Among them: How much to give to charity without unduly impacting the donor’s retirement objectives; how to ensure that sufficient funds will be set aside for heirs; whether the transaction will be so complex and cumbersome as to make a gift worthwhile; and what the tax advantages are.

On the last question, advisors say, the benefits are clear: Structured correctly, a charitable plan can zero out the donor’s estate tax. But sources add that donors’ desire to direct social capital to causes that are dear to them is the chief motivator for giving.

Says Keffer: “Most people want to leave their fingerprints on three things–people, causes and institutions.”

That observation dovetails with the findings of the National Committee on Planned Giving survey in which 97% of the respondents cited “a desire to support the charity” as a reason for making a charitable bequest. Just over a third (35%) flagged a “desire to reduce taxes” as a key factor.

Among those prospects for whom tax benefits are the chief driver, charitable bequests tend to happen less often, says Johnson. He gives such “deal shoppers” basic information about charitable planning, reserving in-depth consulting for individuals who show genuine philanthropic interests.

Those interests, when realized, take numerous forms, starting with the simple. Alspaugh says she frequently recommends that clients name a favorite charity as a secondary beneficiary on their individual retirement account or life insurance policy (or, when survivors don’t need the money, as a primary beneficiary).

Where appropriate, she also encourages clients to gift their personal residence. The donors enjoy an income tax deduction for the present value of the remainder interest–a potentially large figure, given today’s high real estate values. And they can continue to live in and maintain the home; at death, the property transfers to the charity.

Johnson says interest among donors is rising in charitable gift annuities. Like charitable remainder trusts, CGAs are life income gifts. Clients transfer assets now, receiving a charitable deduction for a portion of the transfer. They or their beneficiaries then receive income for the rest of their lives or for a fixed period of time.

Most of Fox’s clients opt for the charitable lead trust and its derivatives: the charitable lead annuity trust, charitable lead unitrust, testamentary trust and inter vivos trust. All of these CLTs are irrevocable trusts in which a charity receives distributions from the trust for a period of time, after which the balance of the trust principal is paid to non-charitable beneficiaries. In most cases, Fox also creates an irrevocable life insurance trust to replace the assets donated to charity.

For the ultra-affluent, a complicated plan involving a CLAT, CLUT or ILIT may be the best way to maximize the gift and zero out the estate tax. But as the plan grows in complexity, the harder it becomes to win over the prospective donor, says Fox, who adds that many donors are also initially averse to giving up control of assets to a trust executor.

But the opportunity to build a profitable and rewarding practice in the charitable planning space more than compensates for the challenges, observers say. Yet, they add, comparatively few advisors become well versed in the advanced techniques of the discipline. The International Association of Advisors in Philanthropy, Fox notes, has just over 150 members.

“We’d like to see the organization grow, he says. “But charitable planning is a complicated area that requires someone to be really dedicated to learning new things.”

Adds Alspaugh: “Planned giving is the sweet spot of the future. The opportunity is huge–though not one where advisors can expect to get rich quick. It can take years to develop your practice in this area.”

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