Planning For Philanthropy

For financial advisors, charitable giving vehicles can provide an opportunity to deepen relationships with high- to moderate-net-worth clients by offering more options to meet various wealth management and personal goals. Strategies that entail long-term horizons and family involvement can provide ways to extend a client relationship into the next generation.

"I'm seeing an increase in people who've been successful at business and making money, and now tell me they want to benefit society in some way," says Kenneth Guard, a CFP licensee in Ft. Myers, Fla. "And how can you give the most back to society? Is it just writing a check or is it more personal involvement with where your money goes? You can make much more happen with the latter."

Indeed, philanthropy is a much more involved process than simply throwing money at a particular organization or cause and then patting one's self on the back. Doing it right and getting the most out of it take a lot of thought and effort by the client. It also calls for a sensitive ear by an advisor. "The job of the advisor is to help families identify their own goals and values, which points them toward the type of gifting they want to do," says Leslie Kelly, director of philanthropy at Charles D. Haines LLC, a Birmingham, Ala., financial planning firm.

Philanthropy has a learning curve, she explains. Most people start with check writing, and some move into more thoughtful and meaningful giving that requires more structure. They might want to take a more hands-on approach, involve family members, or both. The important thing is to avoid a cookie-cutter approach and to help an individual or family make a gifting decision that fits their personality and goals.

A charitable giving plan that doesn't connect with an individual's or family's core values tends to sit and collect dust. When Kelly meets with families, she tries to create an environment where they share family stories that help bring out their most meaningful values. "When you begin to do gifting and can tie it back to things that resonate with them, the idea catches fire," she says. "I try to make it personal so it takes on a life of its own and the family wants to get involved. This creates an environment for younger generation interest, and that creates a legacy."

A sampling of advisors indicate that all of them discuss the topic of charitable giving when meeting with clients, who sometimes still find it a nebulous area. "I always bring it up as an option, but never as a strong encouragement," says Kacy Gott, a principal at Kochis Fitz, a wealth management firm in San Francisco. "My role isn't to make value judgements for clients, it's to help them get to where they want to be. I'm still not comfortable with this, and it's something we discuss at the chapter level of the Financial Planning Association here in San Francisco."

Donor Advised Funds

There are many available options for giving. Foundations traditionally have been the domain of the uber wealthy, offering tax breaks and organizational structure to facilitate charitable giving. They're also high maintenance and costly beasts, which is why they weren't appropriate unless donors had at least several million dollars or more in assets. Then along came donor-advised funds, which for as little as $10,000 enable investors to donate assets to special accounts that fund charitable causes and provide the same kind of tax deductions enjoyed by foundations. The number of donor-advised funds, which are easy to create and administer, recently eclipsed foundations, no small feat considering that the number of foundations grew by roughly 75% between 1991 and 2001. According to the National Philanthropic Trust, there were 62,245 donor-advised funds versus 61,810 foundations as of 2001. (But total foundation assets of $450 billion swamp the roughly $14 billion held in donor-advised funds.)

When it comes to costs and ease of use, it's hard to beat donor-advised funds. Along with the low minimum investment, they provide more substantial deductions versus private foundations for both cash gifts (50% of adjusted gross income versus 30%) and appreciated assets (30% versus 20%). Donations of stocks, cash or other assets are made to a public charity, such as a community foundation, or to commercial sponsors such as Fidelity Investments, The Vanguard Group and T. Rowe Price Associates, which then invest the collective asset pool into mutual funds or other financial vehicles. Individuals make grant recommendations to specific causes, but ultimate approval rests with the parent organization. Donors claim a deduction when they create the fund, and can make a grant recommendation to a charity whenever they want. Unlike foundations, there are no paperwork or tax forms, no excise taxes and no board meetings. Also unlike foundations, there's no requirement to pay out at least 5% of assets annually.

Donor-advised funds were created in 1969 in response to new tax laws as a way for community foundations to garner contributions from fairly wealthy donors. But they didn't take off until Fidelity entered the fray in 1992. Today, the Fidelity Charitable Gift Fund is the industry gorilla, with assets of roughly $2.5 billion. Following its example, other leading financial services companies rolled out their own donor-advised funds.

For these companies and their advisors, it's a way to keep clients' assets in-house. Given the longer-term nature of donor-advised funds (the typical life span of 11 years is significantly longer than that of mutual funds), it prolongs the income stream from fees, provides another tool for tax management and helps fulfull the philanthropic desires of clients. But after a steady run-up in asset growth, donor-advised funds have taken a breather. The Chronicle of Philanthropy reported that contributions to many of these funds dropped last year due to the lousy stock market and a lame economy. Fidelity's gift fund, for example, sank in value by almost 10% last year, marking the first time it paid out more money to charities than it took in from investors. Still, the total number of new donor-advised accounts grew by 9% in 2002, even as the average account size shrank more than 7% to $193,000, according to the National Philanthropic Trust, a 501(c)(3) public charity that administers donor-advised funds for such financial services companies as Morgan Stanley, American Express Co. and Bank of America. This indicates that people still want to give, but can't afford to give as much as before.