Advisors find creative ways to boost charitable giving.
Few things say "philanthropy" quite like an
automobile lease. An obvious exaggeration, of course, but an auto lease
arrangement on a Mercedes enabled financial advisor Sidney Blum to
broker a three-way deal that helped a client make a contribution to his
favorite charity. Blum's willingness to dig deep into a complicated
situation is one of several examples of advisors who add a new twist to
Americans are a generous lot. Charitable giving hit a new record last year at an estimated $295 billion, according to the Center on Philanthropy at Indiana University. That's a 4.2% increase over the amount given in 2005, and 6.6% more if excluding extraordinary disaster relief giving for Hurricanes Katrina and Rita.
Such vehicles as donor-advised funds, private foundations and charitable remainder trusts are commonly used by many financial advisors to help clients achieve their charitable goals. But sometimes unconventional steps can also play a philanthropic role.
In Blum's case, his vehicle of choice was actually a vehicle. One of his clients owned his own consulting business and was leasing a car provided to him by one of his business clients as part of the compensation package for his consulting work. At the end of the lease, the consultant's client wanted to give him the car, but that would have counted as compensation and boosted the amount of taxes owed by the consultant.
Blum's client wanted the car but didn't want to take the tax hit. The man is charitably minded and had created a foundation to raise education money for minorities, but he couldn't take the car and donate it to charity because his corporation had already exceeded its annual maximum gifting contribution limit. "My idea was to have the client who was leasing the car to my client just gift the car to my client's charitable foundation," says Blum, founder of GreenLight Fee Only Advisors in Evanston, Ill. "Then my client could continue to use the car by leasing it from the foundation."
Blum worked with a tax attorney to make sure the arrangement passed muster. For starters, they didn't want the client's lease payments to his education foundation to qualify as unrelated business taxable income (UBTI). Charitable organizations are limited in the types of activities they can do, and contributions classified as UBTI can result in a not-so-charitable tax hit. Blum's research indicated that the proposed leasing arrangement was considered an isolated case that wouldn't trigger taxable income for his client's foundation.
They calculated the fair-market value of a three-year lease for the Mercedes at $875 a month, or $10,500 a year. "The charity gets money from the lease it wouldn't get otherwise," says Blum. "The company that donated the car to the charity gets a charitable deduction, and my client has use of the car for business purposes. Everybody wins."
Share The Wealth
The partners at the advisory firm Greenbaum and Orecchio in Old Tappan, N.J., began a program called Shared Rewards that acknowledges clients who make referrals that result in business by donating $500 to the referring clients' charity of choice. After a referral becomes a client, they'll call the person who referred them. "For confidentiality reasons, we can't say specific names," says Tom Orecchio, "but we tell them that someone they referred to us has become a client and we'd like to make a donation to their charity of choice as a way to say thanks."
The existing clients don't always have a specific charity in mind, so they might suggest something like the Red Cross. But others have definite choices, which Greenbaum and Orecchio vet to make sure they have 501(c)(3) status.
In one case, Orecchio says, the Shared Rewards donation started a stronger relationship between a client and a charity, where the client got more involved and participated in some of the charity's fundraising events. To date, the firm has donated $10,000 through its Shared Rewards programs.
Children-related causes were the focus of a one-day event in July sponsored by Evensky & Katz to engage teens and young adults in the philanthropic process by bringing them together to review and evaluate various charities, and then letting them decide how much money to donate to each cause. "We wanted to put together something to help our clients work with their kids or grandkids in different areas of financial planning," says Matt McGrath, senior vice president of the firm, in Coral Gables, Fla.
The firm and the Coral Gables Community Foundation put $2,500 apiece into a fund to be doled out to eight charities that submitted requests for various needs to the community foundation. Most of the charities were local and dealt with child-related programs such as foster home care, aiding physically challenged children and supplying food and shelter to children in other countries.
Evensky & Katz sent out invitations through various channels looking for young people willing to participate in the event, which followed a similar program they sponsored last year. Many, but not all, of the respondents were children or grandchildren of clients.
A dozen young people ages 16 through 22 gathered at a local Hyatt Regency hotel and broke out into groups of three to review the requests from the organizations. The groups presented two requests each, and the participants decided among themselves how to allocate the money among the various charities, all of which were guaranteed to get at least a minimum amount. "We wanted to give them a mental framework for giving and what factors to consider in that process," says McGrath. "It wasn't meant to be overly deep. It was more of a hands-on, two-and-a-half hour experience to get them exposed to how the process works."
McGrath says the first two events have gone well and the firm wants to continue doing something along those lines, and maybe take it to a deeper level. "It was a Friday afternoon in summer," he says, "and we were impressed we got 12 people."
Check writing is the easiest way to make charitable donations, but this after-tax gifting method is often the least cost-effective from a tax standpoint. Savvy advisors are plugging into a little-known provision of the Pension Protection Act of 2006 that allows individual retirement account holders who are at least 701?2 years old to donate up to $100,000 to a nonprofit directly from their IRA without paying any taxes on the distribution. The donations count toward minimum required distributions.
"It's kind of tucked away in the bill," says Rusty Cagle, president of ASE Wealth Advisors in Greenville, S.C. "You have to educate the custodian so they know to make it directly to the nonprofit because the individual can't take possession."
Cagle gives an example of a 73-year-old woman who donates $10,000 a year to her church. Her tax bracket is 40%, and the IRA that she taps into to pay for her donation is valued at $100,000. Accounting for the 40% tax bite, she needs to withdraw $16,675 to have enough money to make her $10,000 donation.
By using the special tax provision known as 170(b)(1)(A), the woman can boost her donation by taking out $16,675 tax-free from her IRA and giving the entire amount to her church. But this provision is set to expire at the end of the year unless it's extended, so advisors planning to use this strategy better move fast.