Whatever your take may be on the current economic crisis, many financial advisors foresee a positive trend in private philanthropy over the coming year. This optimism is despite the fact that estimated total charitable contributions from American individuals, corporations and foundations fell 3.6% from $315.08 billion in 2008 to $303.75 billion in 2009 (Giving USA 2010).
Indeed, according to the 2010 Fidelity Charitable Gift Fund Advice and Giving survey conducted among 503 producing financial advisors, more than one-fourth predict their
clients will increase charitable giving in order to offset tax hikes. And many advisors
believe these tax hikes are coming: 87% of those surveyed expect income taxes to
increase for most of their clients in the next 12 to 18 months.
Offsetting may be the strategy of choice in philanthropic planning over the coming months, suggests Sarah Libbey, president of the Fidelity Charitable Gift Fund in Boston, the nation's largest donor-advised fund (DAF) program and the third-largest public charity. One area where offsetting may be of particular use is with Roth IRA conversions, for which more clients are now eligible. According to a recent study from Fidelity Investments, 40% of investors working with tax advisors are eligible to take advantage of the recent removal of income limits for Roth IRA conversions, up from just 13% a year ago.
While there are advantages to making the Roth conversion, the tax costs to clients can be overwhelming. One solution for charitably inclined clients with sufficient non-retirement assets to pay for both the donation and the tax is to reduce the tax bite with an offsetting donation. (See "Roth IRA Conversion With Charitable Offset.") If the donation is made to a DAF, then grants from the offsetting donation can be made over future years. Total multiyear charitable giving need not be increased for this strategy to be effective.
For his part, James Barnes, chief relationship officer of the Vanguard Charitable Endowment Program in Malvern, Pa., believes this technique must be weighed against clients' overall estate plans. He notes that IRA assets make the best bequests to charity and the worst bequests to children, due to double estate and income taxation. Therefore, if a donor is planning on gifting an IRA to charity at his or her death, then the conversion with charitable-offset strategy makes little sense.
One giving technique that Libbey and Barnes both favor is the use of a DAF in place of/or
in addition to private foundations. In the Advice and Giving survey, when asked which giving
vehicle they expect to see increase in use over the next five years, nearly twice the number of advisors said DAFs (39%), compared with private foundations (20%).
Libbey believes that DAFs are increasing in popularity over private foundations for four reasons. First, DAFs are much simpler to set up. Barnes concurs, "There is a myth in the planned-giving world that it takes substantial time to set up and structure charitable vehicles. However, DAFs can be set up and funded online in one day, say December 31!"
Second, says Libbey, DAFs are much easier to administer than private foundations. DAF providers such as Fidelity and Vanguard handle all the administrative detail. Unlike private foundations, donors do not have to oversee a 501(c)3 entity with all the corresponding legal, accounting and tax-return headaches.
Third, DAFs allow clients to donate anonymously. Private foundations must file an annual
tax return, the 990-PF, which lists all the grantees that received funds from the foundation. DAFs do not face this issue.
Finally, adds Libbey, "DAFs receive favorable tax treatment over private foundations. In a given year, a donor can deduct up to 50% of his or her adjusted gross income (AGI) with a gift of cash to a DAF, but only 30% of his or her AGI with a gift of cash to a private foundation." Furthermore, gifts of non-marketable securities (e.g., real estate) to a DAF can be deducted at their full fair market value (FMV), while gifts of non-marketable securities to a private foundation can only be deducted at their cost basis-a major difference. (See "Tax Treatment of Charitable Vehicles.")
What's Libbey's advice to planners? Look for appreciated securities in your client portfolios before year-end. As of mid-October 2010, more than 50% of all donations to the Fidelity Charitable Gift Fund have been in the form of securities.
Barnes has noticed a flow of other charitable gift vehicles into DAFs. "Here at Vanguard we see people collapsing their charitable remainder trusts (CRT) and charitable lead trusts (CLT) into our donor-advised fund. For example the remainder of a CRT can be left to our DAF or the annual income from a CLT can be put into our DAF. We even see a number of private foundations converting to DAFs!"
"Advisors should note," says Libbey, "that just because a client has a private foundation does not mean you should not recommend a DAF." What she calls a "compliment DAF" can increase a donor's tax deductions, even if the donor has a private foundation.
Clients and advisors looking for personal guidance in establishing and administering DAFs, private foundations and charitable trusts can check out the philanthropic concierge services of Tactical Philanthropy Advisors in Burlingame, Calif. Founded by Sean Stannard-Stockton, CFA, CAP, the firm handles everything from developing philanthropic policy statements and overseeing grant-making functions (including site visits to charities) to helping clients build and launch websites for their foundations.
While acknowledging the slight decline in giving between 2008 and 2009, Stannard-Stockton maintains that recessions tend to focus-rather than diminish-private philanthropy. He takes his clients through a philanthropic asset allocation process much like the wealth management process, by encouraging clients to give larger gifts to fewer charities, the organizations they are most passionate about.
Stannard-Stockton encourages clients to be more proactive and less reactive, seeking out charities rather than just reacting to solicitations. That said, after helping discover a family's values and issues, he might propose an annual charitable gift allocation of 40% to each of the donor's two major interest areas (e.g., education and the environment), with 20% left flexible-"family and friends stuff," Stannard-Stockton quips.
Stannard-Stockton runs his philanthropic business in a fashion similar to a wealth management firm. He charges clients a percentage of their philanthropic assets under advisement. Clients must
invest a minimum of $1 million in a private foundation or DAF. They pay a fee of 1% on assets between $1 and $3 million, with fees declining on assets more than $3 million. Currently Stannard-Stockton has $48 million in assets under administration.
He loves the field of charitable giving for two primary reasons. For one, thoughtful planned giving usually increases the amount of money people give to charity from the traditional 2% of income to 3% or 4% (or in the case of the new Buffett/Gates pledge 50% of assets). In addition, options like DAFs optimize a client's tax situation in a given year by front-loading future years' giving. If you are going to give $100,000 a year to charity for five years it makes sense to take your $500,000 tax deduction in year one. From the time value of money alone, you have increased the value of your tax deduction.
A Different Kind of Charity
One charitable concept advisors might consider is that of "blended value." In the past,
corporations have sought to maximize economic
value, while public interest groups have sought to maximize social or environmental value. However, according to a variety of research available at
www.blendedvalue.org, "a growing group of practitioners, investors and philanthropists are advancing strategies that intentionally blend social, environmental and economic value."
These activities have resulted in an exciting wave of new practices across the for-profit and nonprofit sectors. Many social entrepreneurs find for-profit capital formation a more efficient means of solving social problems than traditional fundraising. Stannard Stockton's Tactical Philanthropy Advisors helped
organize the Social Capital Markets conference that took place in October in San Francisco this year and drew a record crowd of 1,000 people in its third year (up 70% from the year before).
This blended approach is practiced by organizations such as the Calvert Foundation in Bethesda, Md. The Foundation, a separate entity from Calvert Mutual Funds, does not give money away. Instead, it borrows money from philanthropically inclined individuals and loans it to more than 170 nonprofits, as well as a few for-profit organizations.
According to Art Stevens, vice president of sales and marketing at the Foundation, "We loan money to organizations that are involved in everything from charter schools and low-income housing to micro finance in the Third World. The loans are typically three to five years in maturity. The nonprofits borrow from the Calvert Foundation at 4% and we pay investors up to 2%, while trying to live off the spread."
The big advantage for charitably minded investors is that they get their money back and earn a little income to boot. Investors in effect buy bonds that the Calvert Foundation refers to as "community investment notes." Stevens believes that adding a few of these community investment notes to your clients' portfolios can generate further philanthropic conversations.
Libbey concurs with this sentiment. As she says, "Today, more than ever, high-net-worth investors are looking to their advisors for comprehensive financial planning advice and tax strategies. By integrating charitable planning within a wealth management offering, advisors have the potential to deepen existing client relationships and open up multi-generational planning opportunities."
Five Questions a Donor Should Ask When Considering a Significant Gift
(1) On what research or evidence did the nonprofit organization design its program?
(2) What information does the nonprofit collect about the results of its programs? All high-performing nonprofits should be striving to track the social results of their programs.
(3) How does the organization systematically analyze the information they collect? Emphasis should be on the results of the nonprofit's activities, not just the activities themselves.
(4) Has the nonprofit adjusted its activities in response to new information?
(5) Does the organization have an absolute focus on producing results? The intended result in the business world is profit. But in the nonprofit world, generating revenue and fundraising is not a sign of success-it is only a means to an end. What are the social results of the nonprofit?
Source: Sean Stannard-Stockton, CEO, Tactical Philanthropy Advisors
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