Charitable giving for high-net-worth families, Pt. 2Article added by Edward Arias on January 10, 2013

Edward Arias

West Saint Paul, MN

Joined: June 19, 2012

Editor's note: Part one examined the importance of charitable giving for high-net-worth families, and provided a detailed outline of the tax advantages of doing so. Part two covers the strategies of giving, including a list of items that the donor should check before setting a donor-advised fund, advice on whom to give to, how much to give and a summary of the information outlined in both parts.

Strategies for giving

There are many strategies available to ultra-high-net-worth families for giving. As a life insurance specialist, I have always recommended that my high-net-worth clients purchase life insurance, not only for personal wealth protection, but to donate to a charity, organization or church of their choice. By implementing this strategy, the insured (donor) makes the organization to which the proceeds of the life insurance policy will be given the owner of the policy, and the premiums which the insured pays for are tax deductible as a gift.

In some scenarios, the donor has existing policies with substantial cash value accumulated in the policy, or policies which can be gifted to the charity or organization without additional premiums needing to be paid in order for the policy to stay in force for the rest of the insured’s life. I would almost always recommend that the donor withdraw cash from the policy up to the basis, while leaving enough cash in the policy to keep it premium-free to the insured’s age 100, thereby guaranteeing the death benefit available for gifting to the charity or organization at death.

Another strategy that is being recommended more frequently, especially to individuals or families with high net worth, is the donor-advised fund. These types of funds allow the high-net-worth families to give to the charities and organizations of their choice without having to set up a private foundation in order to distribute funds. The private foundation is heavily regulated by the IRS and there are strict deadlines that must be met in order to avoid any penalties or tax consequences.

The donor-advised fund is the most flexible alternative to transfer funds to a public charity, and is also a public charity. Deborah L. Jacobs of Charitable Gift Fund states, “Donors can make these recommendations on their own timetable and it's not necessary to choose the specific recipients when dissolving the foundation. The administrative burden is greatly reduced as well. (For example, the sponsoring charity, rather than the donor, among other grant recipient diligence, verifies that the organizations receiving the grants are IRS-qualified public charities.)”

Victoria B. Bjorklund, a lawyer with Simpson Thacher & Bartlett in New York says, "Clients who previously might have carved up one foundation now express an interest in distributing the entire endowment to a charity with a donor-advised fund program, with each family member serving as an advisor of a separate fund." This avoids the duplicate administrative expenses of running multiple foundations, such as preparing and filing an IRS Form 990-PF for each. Instead, the public charity sponsoring the donor-advised fund files one IRS Form 990 for all of its assets.
Here is a list of items that the donor should check before continuing the process of setting a donor-advised fund:
  • Check the document that created the foundation to be sure you are complying with all the provisions that affect dissolution.

  • Select the 501(c)(3) IRS qualified public charity that will receive the assets and verify that it has been in existence for at least five years.

  • Satisfy any contractual commitments, such as pledges, that the foundation has made.

  • Calculate the legal and accounting costs of dissolution and pay these fees before you distribute the endowment to charity.

  • Make sure your last transfer is to charity. This includes the required 5 percent payout for the year of dissolution.

  • Indicate, on the next tax return, that this is the foundation's final return.

  • Take all the necessary steps required by state law to dissolve the foundation. The division of public charities at the attorney general's office can be a valuable resource.
These are basic rules to follow when selecting a strategy to follow and making sure that the high-net-worth client and his advisors aren't making any missteps which may cost them.

Who to give to

Most charitable contributors will give to charities and organizations which closely match the donor’s altruistic interests and there will be several avenues through which the donor can fulfill his or her goals. There are many resources available to help narrow down the numerous charities and organizations which are all vying for the donor’s money. A great way to get started is to attend a non-profit conference. There are many of these conferences held annually, both here in the United States and abroad. Writer Maureen West, of The Chronicle of Philanthropy, writes “In times of tight budgets, nonprofit conference-goers are working to get more out of each 'must-attend' meeting. And conference organizers are working harder to attract participants by offering more creative and timely sessions and making them more interactive, with shorter static presentations, longer audience forums and live blogging.”

These types of events will help donors flush out charities or organizations that they may have thought aligned with their philanthropic goals but, after a more in-depth presentation and review of the organization at the event, turn out not to do so.

The donor must also understand what role he or she will be willing to play in the charity they choose to support. Some donors want to be completely hands off and simply want to get quarterly or semi-annual reports showing how the organization or charity is using its donated resources. These donors simply want to write the check, stand back and watch their contributions at work.

There are, however, other donors who want to actively participate in the charity or organization to which they are giving money. Some of these donors want to be active in the actual event, project, presentation, etc. Others like to be active on the boards of these organizations, where they can help decide where the contributions are being spent as well and add one more prestigious title to their resume. The pride of giving can sometimes supersede the true altruistic reason that one gives to a charity or organizations and that is not a bad thing if it continues to motivate the donor to give.
Once the charity or organization has been chosen by the donor, he or she should then sit down with the board of the charity, as well as their estate planning advisor, CPA and attorney, to determine the organization's needs and how much money he or she will commit to contributing using a five-year, 10-year, 20-year or lifetime plan for donation. The importance of short- and long-term planning is that the charity or organization is usually forecasting needs out for several years and knowing how much they will be getting from their donors for fixed periods of times helps them budget and plan.

Once the donor and his team of advisors have determined the amount of annual contributions and the effects of the donations on the donors estate, they should then sign a commitment agreement with the charity or organization and, of course, write the first check of many.

Economic effects

Now that the donor has picked the charity or organization and has signed a commitment letter, what happens if there is a change in circumstance for the donor? What if he or she loses a substantial amount of their net worth due to unforeseen economic downturn in the economy or drastic changes in the IRS laws? (Which can and has happened in the past.) What will happen to the donor’s obligations to the charity or organization?

With most high-net-worth-donors, there were contingencies written into the commitment letter given to the charity. The donor’s attorney most assuredly reviewed the commitment letter and included ways for the donor to either cease contributions in an extreme economic emergency or, at the very least, have the ability to lower their commitment contributions to levels that match the circumstances requiring an adjustment to the donation. Although changes in economic conditions affect the contribution levels that charities and organizations receive, it must really be a catastrophic event in order to affect the commitments they have received from their donors.

However, most downturns in charitable giving do not happen when there is a crisis. According to Maria Di Mento, writer for The Chronicle of Philanthropy, "The 10 single biggest gifts donated by Americans in 2009 totaled just $2.7 billion, compared with $8 billion in 2008 and more than $4 billion in 2007." She also states, “It’s not just America’s mega-philanthropists who pulled back on their giving. All donors of $1 million or more are retrenching."

The following statistics show contributions of the top 11 American donors to charity in 2010:

AnonymousN/ABaylor U. (Waco, Tex.)TexasColleges and universities $200 million
Len Blavatnik
Chemicals, media and entertainment, real estate, telecommunications
New YorkOxford U. (England)N/AColleges and universities $117 million
Marc R. and Lynne Benioff
CaliforniaU. of California at San Francisco Children's HospitalCaliforniaColleges and universities $100 million
Henry R. Kravis
New YorkColumbia Business School (New York)New YorkColleges and universities$100 million
Meyer and Renee Luskin
CaliforniaU. of California at Los Angeles CaliforniaColleges and universities$100 million
T. Boone Pickens
Investments, Oil
TexasOklahoma State U. (Stillwater)OklahomaColleges and universities$100 million
Mark Zuckerberg
CaliforniaStart Up: Education (Palo Alto, Calif.) CaliforniaEducation$100 million
Frances Lasker Brody
Family wealth, real estate
California Huntington Library, Art Collections, and Botanical Gardens (San Marino, Calif.)CaliforniaArts$95 million bequest
Terrence M. and Kim Pegula
FloridaPennsylvania State U. (University Park) PennsylvaniaColleges and universities $88 million
Virginia Bernthal Toulmin
Law, Pharmaceuticals
OhioGeorgetown U. (Washington) District of ColumbiaColleges and universities$87 million bequest
David and Patricia D. Atkinson
New JerseyCornell U. (Ithaca, N.Y.) New YorkColleges and universities$80 million
The list of America’s top donors is impressive, but only a fraction of the high-net-worth contributors there are globally. These donors are the most important to charities and organizations because the funds donated by them are the ones that off of which their annual budgets for operating costs, staff, and emergencies are based. Without these large donors, charities and non-profit organizations would rely more heavily on much smaller donations from an income class that may not be as readily available to donate, especially when there is an economic downturn.

How much to give

The amount a donor decides to give is first determined by how big their heart is and how closely they hold a cause to it. The second factor is the amount of net income the donor has and lastly, what tax consequences the donor is trying to mitigate or minimize.

Advisors use many tools to determine how much a donor should give based on their net worth and net income. Most estate planners and tax advisors have access to specialized charitable planning calculators to help donors determine and maximize the contributions they can make, avoid capital gains taxes when donating long-term appreciated securities, use charitable contributions during high-income years to maximize tax benefits of charitable giving and provide additional benefits through the potential for tax-free growth of charitable assets — all key factors in helping determine the contribution amounts.

According to Fidelity Investments, “While cash donations are certainly desired by charities and provide a tax deduction for the donor, a more tax-efficient way of giving is sometimes possible: donating securities with long-term appreciation. In fact, Fidelity estimates that the additional annual federal tax savings for Americans who could donate appreciated securities instead of cash is between $2.2 billion and $4.5 billion. Simply put, millions of Americans who itemize their charitable deductions could potentially save billions of dollars or give millions more a year to charity if they understood the tax advantages of using appreciated securities they already own — whether they be stocks, bonds or mutual funds — instead of cash to make gifts they already intend to make.”

This brief description of how to contribute can have an exponential effect both on the money saved in taxes and in the amount contributed; it emphasizes the importance of having a planner who specializes in gifting and a team that supports that planner. As stated earlier, the number one contributing factor that motivates a high-net-worth person to give is how dearly he or she holds a cause to their heart and how much they are willing to give to that cause. It ultimately becomes altruistic for these donors and that should not be downplayed by the donors' advisors or the charities and organizations who are trying to get funding from these large donors.

This article was written in order that we may see the value in admiring and aspiring to be philanthropistss. The high-net-worth families in this world are sometimes portrayed as greedy and only out for their own self preservation. This is sometimes the farthest thing from the truth once we have an opportunity to peek behind the curtains and see what they are truly doing with their wealth. Most of the wealthiest and greatest philanthropists will never be known because they give anonymously.The joy they get from giving is what they seek in life once they have attained material wealth. They now realize that they can’t take the wealth with them when they die. They can only leave so much wealth to their families and the rest, they realize, can do a lot of good in the world and ultimately that is their goal — to leave this world a better place for future generations. Along the way to becoming great philanthropists, they have been taught by advisors how to minimize taxes and other consequences of being wealthy while maximizing the financial contributions they can make in the world while still leaving a legacy behind.
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