Attract affluent clients with private foundations

By Roccy Defrancesco

The Wealth Preservation Institute

Many advisers are struggling to find new clients and earn the income they made two-three years ago. I’ve always said that, if you are not happy with what you are making, you need to get into the affluent client market.

Private foundations (PFs) are the ultimate affluent-client concept. PFs play into the ego of such clients and can also help them accomplish many of their financial and estate planning goals in a tax-advantageous manner. To work with clients on PFs, you do not need to be an expert in this subject matter. What you need to do is understand the basics about PFs and how affluent clients can benefit by using them (and then have a team of other advisers you can lean on when it comes to implementation).

What is a private charitable foundation?
It’s nothing more than your own “private” 501(c) charity. From a technical standpoint, it’s really no different than the non-profits you are currently familiar with like a church or local animal shelter. The main difference is how the charity is funded. Private charities are typically funded only by a small group of private donors and not by the public at large.

Who are candidates for foundations?
Candiates for foundations include clients who have 1) capital-gains issues (like wanting to sell appreciated assets), 2) stock options to exercise (ISOs or non-qualified), 3) estate-tax problems (even those who are uninsurable and don’t want life insurance), high-income earners who would like the income-tax deduction from donating to their own foundation.

Why form a private foundation?
The main reason affluent clients form their own foundations (vs. giving to a public charity) is control, which you don't have if you give money to a public charity. Money donated to a PF is controlled by its manager(s) which could be the person making the donation (your clients). There are over 100,000 PFs in existence in the U.S. today.

With control, the founder can involve his/her children or other heirs in the PF. How? Many times, a son or daughter or even grandson or granddaughter (or several of them) will help run the PF. As such, they, along with the founder, can receive the following benefits: 1) salary, 2) deferred compensation, 3) health and other welfare benefits, 4) they will learn how giving to others can change not only the beneficiaries’ lives, but also their own.

It is this high degree of control that has historically brought private foundations under close scrutiny. Because of abuses — real or unreal — perceived by lawmakers, there is a large body of rules that must be adhered to.

Foundations allow the founder to pursue philanthropic goals. What is most fascinating about this is that, while there is only a range of activities that the government considers acceptable, this range corresponds to activities that also fall under the category of hobbies. For example, this list of acceptable charitable activities includes amateur sports, educational activities, cultural activities, animal husbandry and environmental issues.

Incorporating a client’s personal interests into a PF
Instead of pursuing the above-listed activities on their own, clients can “institutionalize” them by incorporating them into their foundation and subsequently receive many benefits that they would receive from any other business. This would include salaries and other tax-leveraged benefits, such as welfare benefits and expense reimbursements.

Why should financial planners or insurance advisers care about PFs?
The simple answer is that advisers should learn about PFs for the same reason they want to do business with any profitable business — because there are a lot of services you can offer. Here is a partial list of services foundations may need:
  • Life insurance (to perpetuate the long-term viability of the PF)
  • Various types of casualty and health insurance, including workers' comp
  • Retirement-plan services
  • Annuities to grow wealth in a protected manner or to create a guaranteed income stream
  • Cash and asset management and investment services
Keep in mind that PFs are tools used by the affluent, and are typically set up to last for several generations. That means a PF can be a tremendous tool advisers can use to not only get to know one affluent client, but an entire affluent family.

There are many advisers who go after profitable businesses as clients, but most of them do not understand the uses of a PF, meaning these advisers are missing out on an opportunity to form a long lasting and profitable relationship with their clients through the PF.

If you are looking for a unique angle to build your business plan in order to niche yourself in a path seldom chosen, then you should look at PFs as a source of business. You can attract new clients by educating them about the lifestyle and tax benefits of foundations and helping them set them up. Besides opening doors to getting business from the foundation, you will also have a direct line of communication to the founder and a relationship with that individual on a personal level. The PF market has several hundred billion dollars in assets, and, as such, it should not continue to go ignored by most advisers.

Thomas Quinlin, CIMA, AIFA contributed to the creation of this article.