Charitable planning has long been a staple of advanced income, gift, and estate tax planning techniques for the high-net-worth client. I’ve always found that working with clients who have some degree of charitable intent are the most rewarding cases. The ability to immediately reduce income taxes, lower the cost of lifetime transfers, and negate the bite of the estate tax, all while leaving a charitable legacy, provides wealth managers with planning opportunities like no other. That being said, the perception is that charitable planning opportunities for the high-net-worth client have stagnated over the past year or so, due to economic events.
It is understandable that clients want to reduce their charitable giving in difficult times. The magic of charitable planning with highly appreciated assets has lost its luster, as equities and other assets are well off their highs of two years ago. The impressive appreciation of the equities markets over the summer and into autumn may present charitable planning opportunities again, but we are not quite there yet.
So does this mean you should put your charitable planning strategies on hold? No. I believe that this may be an ideal time for wealth managers to perform checkups on previously implemented charitable planning for current clients and to explore planning strategies for potential clients.
I have found that this is an especially valuable service for those clients with private foundations.
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The Family Foundation
There was a time when the private family foundation was a planning tool for only the most wealthy and prestigious families: the Walton family, the Getty family, and, more recently, the Gates and Buffett charitable foundations come to mind. The private foundation, however, has become a popular charitable planning tool for a host of clients at descending levels of wealth. There is a good chance that a few of your current or prospective clients have established private family foundations. Some of them may see the foundation as a way to give back to a community that provided the setting for their successes; others may have established foundations for the prestige they confer; and, finally, it is quite possible that tax savings is the primary goal of the family foundation (I know this may come as a surprise).
Whatever the motivation for the client’s charitable endeavor, you may find that some clients’ circumstances–and, consequently, their attitudes–have changed over the past year. While the satisfaction of establishing a foundation may have been one of a client’s most rewarding experiences, the continued administration, costs, and formalities associated with the foundation have taken some shine off the apple. The idea of the foundation may have been inspiring, but the reality has become a bit more challenging than some clients anticipated.
Should the Foundation Terminate?
Recently, an advisor contacted me regarding a client who had established a private family foundation in the spring of 2006. The client was an executive for a publicly traded bank and had accumulated a significant amount of wealth through stock grants and option exercises. The client always had a strong charitable intent and wanted to include his family members in his philanthropic activities. The foundation was funded primarily by equity positions, with a majority of those holdings in bank stock. As time passed, though, he realized that his dream of making the foundation operation a family affair was not coming to fruition. His children did not share their father’s philanthropic drive and wanted nothing to do with the responsibilities or complexities of operating the foundation. On top of that, the foundation assets, which were intended to fund charitable distributions throughout successive generations, had been devastated by the financial crisis.