A Matter of Principle

Ask any group of advisors what first attracted them to the profession or where they find the greatest job satisfaction and the most common answer is likely to be–helping people. That’s really what being an advisor is about–helping people plan for retirement, helping them plan their estates, helping them fund higher education for their children and grandchildren, and helping them plan their philanthropy.

It’s not surprising that advisors would say they get turned on by helping others. All religions encourage charity toward others and it’s been regarded as a virtue in nearly every secular civilization as well. But in fact it’s even more basic than that. No matter how jaded or cynical we might be, it just feels good to do something good for others, whether it’s throwing some loose change into the Salvation Army kettle outside Macy’s, donating a winter coat to a homeless shelter, or funding a scholarship for a kid that wouldn’t get an education otherwise.

While virtually everyone agrees that charity is a good thing, there’s often a huge gap between a good intention and a positive action. For the majority of people, philanthropy is what they’d indulge in if they had a lot of money, but they don’t, so they limit their charity to support of their church or the occasional donation to the local food bank or the Girl Scouts or a homeless shelter. Many advisors do, however, have generous-minded clients with more than enough assets to fund their lifestyles for the foreseeable future, plus enough to leave sizeable inheritances, and this is where a well-thought out financial plan that includes estate considerations and the best way to make charitable bequests can do an incalculable amount of good.

When Matthew Chope, a planner with the Center for Financial Planning in Southfield, Michigan, sits down with clients he first tries to figure out what makes them tick. “We meet with clients to help determine their goals and objectives for life, not just their money,” he explains. “We take a very holistic approach and try and figure out how money plays a role in their lives.”

Dean Harman, principal of Harman Wealth Management in The Woodlands, a high-end suburb of Houston, has found that many wealthy clients have a strong desire to give something back to society. “What I try to do is ask questions and take that desire and focus it,” he says. “My job is to understand what they want to do and then figure out the most tax advantageous way to do it. It doesn’t really pay tax-wise to go in and say ‘I’m just going to donate money’ to this or that. Obviously, if you’re going to do it, you’re going to want the tax write off, but that’s not really why people [make donations].”

Not every client has a well-defined charitable inclination, agrees Chope. He’s found that while many of his clients have institutions or organizations that they support with their money on a regular basis, drawing up a long-term philanthropic plan and attempting to create a charitable entity that will outlive them is not common. “It’s rare, but if a person makes it known that’s an important part of their life, we’ll go down that path, discussing possible strategies to employ for leveraging that part of their objective. But it’s definitely not something you start out with. Most people don’t think about leaving a legacy or think about how they can change the world with their money.”

Wanting to Do Too Much

Sometimes Harman finds himself in the unusual position of having to explain to clients that as admirable as their intentions might be, those intentions also might be out of reach. Being a former college athlete who also played in the NFL for the Tampa Bay Buccaneers has helped him develop a client niche made up of athletes and professional and college coaches.

“With athletes, I see a lot of desire to do charitable things,” he says, noting that these are usually young men who one day didn’t have a lot of money and then the next day signed a big contract and were suddenly wealthy. “One thing I deal with, with them, is the first thing they say is, ‘I want to set up a charitable foundation.’ I try to get them to understand that it’s one thing for Michael Jordan to set one up because he can go and raise millions of dollars for stuff. But most athletes are not Michael Jordan; they’re going to be able to raise maybe $20,000 at a golf tournament.”

But for all of his clients who express a desire to do something philanthropic, whether their money comes from athletics or some other endeavor, Harman starts with a simple conversation where he attempts to get down to “what’s near and dear to their hearts.”

Eric Smith, who operates Lifetime Planning along with his father in Camarillo, California, agrees that the first step in helping clients bring their charitable impulses to fruition is an understanding of how deep those impulses run and in what directions.

“We’ve done that by periodically asking questions at our regular review meetings to elicit their interest in that area and to educate them about what’s out there in terms of charitable planning,” he explains. “One of the hypothetical questions is, ‘If you had $100,000 that you couldn’t leave to your kids or family and you couldn’t spend on yourself, what would you do with it?’ It’s quite interesting the range of answers that you’ll get. If they give the kinds of answers that show they have a charitable motivation, then you can develop that.”

Like most advisors, Smith approaches his clients’ charitable inclinations from the aspect of a fiduciary. He says the first step is an analysis to determine if the client really does have more assets than they will ever need in their own lifetime. Included in the analysis is an assessment of the client’s income and expenses and a determination of how much income is from guaranteed payments such as pensions and annuities and how much is from investments. “We want to make sure they’re not hurting their own lifestyle or retirement by making a charitable gift,” he says, noting that the firm has several clients who are heavily committed to charitable causes and have put substantial portions of their net worth into charitable trusts. “It’s not that they’re threatening their lifestyle, but it’s more than you would typically advise a client to do.”

Many advisors find charitable remainder trusts to be ideal vehicles for allowing clients to help a cause they care about through a legacy without having a negative effect on the donor’s last years. Such vehicles can also help assure that the client’s money goes to a charity rather than to the government in the form of taxes. Smith tells of one client who put a rental property into a CRT which then sold the property, allowing the client to avoid the capital gains that had built up in the real estate while still deriving income to live on and leaving a larger gift to his charity of choice upon his death.

Tim Truebenbach, who runs the Henderson, Nevada office of the Keller Group, an advisory firm headquartered in Irvine, California, recently helped set up a CRT for a client who wanted to use his money to benefit children. “One of my contacts is a community foundation who knows numbers of charities and they usually do a lot of research on each one of them,” the advisor explains. “This particular charitable remainder trust is pretty big, so we’ve identified five different charities for it. Then we start structuring how we are going to give that money. We talk to the charities about the best way to do that for them and then try and match those needs up as best we can.”

For one of Eric Smith’s clients who had no children of his own and wanted to help both a niece and his university, a CRT was the perfect solution. After a series of in-depth discussions with the client, Smith helped him set up a trust that would provide income to his niece for her lifetime with the remaining assets transferring upon her death to his alma mater to fund a liberal arts scholarship.

The Virtues of Planning