Charitably-inclined customers come in three sizes-those who have their own private foundations and use them exclusively; those who give to public charities, like churches, the Salvation Army, universities and colleges, the arts and so forth, exclusively; and those who give to both their own private foundations and to public charities.

As advisors, you will be giving investment advice and possibly trading for the charities and foundations themselves, and the customers, in all three of the foregoing categories. There are a few pointers, for working in what I call the investment advisor's charitable world, that will enable you to be more effective in your advice and enhance your business.

Charitable giving is on the rise. A recently released study found that 69% of the wealthy-people with at least $1 million in financial assets-are giving more to charity than in the past. This means they need advice on how to best make these increased gifts. Charities, in turn, are going to have more assets, and a significant portion of them will be cash, stocks and bonds that will need to be traded and invested.

The challenges for charities are formidable. To be prosperous long-term, they cannot spend almost immediately all they receive without sacrificing the achievement of long-term goals or even their financial stability. "Endowments" for public and private charities are vital.

One great public university requires $3 million to fund a professorial chair, and very wisely gives the holder of the chair or the school of the university where the professor resides, an annual 4% return on that $3 million to use. That's notwithstanding a historical investment return for this particular university of about 8% annually. The endowment grows, investment advice can be obtained without undue risks taken, and the professor or his or her school at the university has a fair amount to spend.

Financial advisors on charitable boards or counselors to charitable boards need to give this type of advice, and carefully shepherd precious resources dedicated to the public good.

It is in a financial advisor's own interests that the charitable pot grows because there is more trading or more advice required, or both. The charity's interests and the advisor's interests are identical; the more funds and the more stable they are in a reasonable growth pattern, the larger the term of security and prosperity for each, and the greater the benefits to each.

There is a most appropriate old proverb, "Too soon old; too old smart." To charities and investment advisors who do not abide by this principle (to mention only one), there will be severe ups and downs and frequent crashes. Charitable bankruptcies are not featured in the press as often as private bankruptcies, but they are almost as prevalent. Your wisdom and counseling can make a difference, not to mention self-control and patience on both sides.

Individuals giving to charities face numerous concerns and cautions. The public charity is worried about use of the funds, often long term, with changes of charitable officers, directors and direction. The private grant-making foundation is faced with the need to give 5% of principal annually-a calculation that is not as simple to make as it may seem-and to comply with a host of complex rules on the nature of investments. These rules include who may give to the foundation, who may be employed by the foundation, annual reporting requirements, and a host of other so-called "no-no" rules, all tolerated because that individual wants to maintain investment and distribution control.

Vehicles for giving to public and private charities range from the simple outright transfers of property to complex split-interest trusts, partnerships and other arrangements in which the charitable donor and his family benefit along with the charity in unusual but most acceptable ways. An outright gift yields a charitable deduction, and a split-interest gift yields a deduction, in both cases for income-tax and transfer-tax deductions. But the amounts of those deductions and procedures for making the gifts vary dramatically.

Outright gifts, particularly of cash and securities, normally lead to higher income-tax and transfer-tax deductions for the donor, but split gifts-leading usually to lower deductions for income-tax purposes in particular-can achieve astounding personal objectives while benefiting the private foundation or public charity.

In either case from the investment advisor's perspective, money once inside a split-interest device, and certainly in the hands of a public charity or private foundation, grows free of ordinary income tax and capital-gains tax. The pot is bigger, the commissions and fees are bigger, and the stakes are higher for the investment advisor and the charities.

I must conclude with an inadequate, but sufficiently tantalizing mention of the split-interest side of charitable giving, so advisors can see opportunities for their customers not so obvious, but powerful for "those in the know."

The key to split-interest arrangements is much more economic than legal. The documentation is sophisticated. But if you are the investment advisor and your performance does not meet certain minimums over the device's life, it will be a perfect flop, even if the legal document were perfectly drawn.

Split-interest trusts are in two broad categories, both having investment performance as their key. The first are trusts that pay a fixed sum to an individual or individuals. At the termination of these payments, what is left ("the remainder") passes to charity, either a public charity or a private foundation. They are called, not surprisingly, "charitable remainder trusts."

The second are trusts that pay a fixed sum (note I am not in either case saying income) to a charity, either a public charity or a private foundation, for a fixed term or the donor's lifetime, and what is left passes to the children of the donor, usually in trust or outright as your customer had predetermined. These trusts are called "charitable lead trusts."

The key here is "what is left," and that depends upon you. A charitable remainder trust often is created to replace a gift to charity at the donor's death. The donor received significant benefits during life, and the charity receives the same property when the donor dies. The benefits during life are an immediate income-tax deduction for the property placed in the trust, reduced mathematically by the donor's retained interest. But the trust now can trade, invest and pay the donor his or her fixed sum, or the sum to others, without any taxes to the trust. So, if the donor was at age "X" and put $1 million of property (securities, real estate, hedge funds) into this trust, and the trustee (possibly the advisor's trust company) sold the property, there is no capital gain; but there might be an income-tax deduction of 50% of the trust's value (or whatever) to be used to save income taxes on the fixed sum paid to the grantor or otherwise.

In this trust, the fixed sum must be at least 5% of the trust's initial fair market value (in this example, $50,000) or of trust principal valued annually. You see where you come in the door. If your advice to the trustee does not produce the fixed sum, the charity and the donor will both suffer. If you exceed the fixed sum, the donor will get more in the variation where the assets are valued annually, and the charity will get more in both cases.

Charitable lead trusts flip the coin. The fixed sum passes to charity, and what is left passes free of estate and gift taxes to the children or whomever the beneficiaries may be in the same generation as children or tax complications arise. Once again, if you make the fixed sum, the charity will receive what it expects. The private beneficiaries will receive what remains after the charity's interest ceases, and they don't pay any taxes upon receiving the property.

The mathematics is best illustrated by this simple example: If $1 million is transferred to a charitable lead trust, and the fixed sum is 10% of the initial value of the principal (this also can be 10% of the principal valued annually to charity), the charity will receive $100,000 per year on a fixed-sum trust for the life of the donor or a fixed term.

The magic of this technique occurs because the applicable provisions of the Internal Revenue Service Code require the donor (and you) to assume the trust will earn over its term Treasury bill rates-there's a published table with Treasury bill rates you must follow. Assume that the Treasury bill rate is 5% and the trust term is 20 years, and see what theoretically happens and what actually happens. If you actually earn 5%, or $50,000, but pay out $100,000 for 20 years, there will be nothing left in the trust supposedly because invasions of principal were needed to pay the fixed sum. Put simply, $50,000 paid for 20 years out of principal equals $1 million and, therefore, theoretically there is no principal left.

But a confident and competent investment advisor would accept the challenge of, on the average, really making 10% or $100,000, and the principal of $1 million would never be invaded to pay the fixed sum. This leaves $1 million intact for the trust beneficiaries, and a very happy charity that has received $100,000 annually for 20 years. Yes, the government's assumptions are wrong, but with good investment results that "beat" the government's assumptions, these results are not only possible, but engaged in on a regular basis by estate planners in cooperation with legal counsel and investment advisors.

If the trust had not been used and the donor, through your efforts, made 10% on the $1 million and gave the $100,000 annually to charity, the $1 million would be in his estate and probably taxed, depending upon the kinds of exclusions, deductions and exemptions available at the donor's death.

If the trust is used, the charity, the donor and certainly those who receive the $1 million all benefit. Incidentally, in the most common form of charitable lead trust, there is no income-tax deduction upon creating the trust for the donor. But the stream of income from the $1 million from the trust is out of the donor's income stream, so the result is similar, if not an improvement.

These examples show an investment advisor's charitable world is filled with fulfilling opportunities to give insightful advice, benefit customers and charities, and to gain personally at no one's expense-but you cannot drive down this road without knowing the rules.

Roy M. Adams is a partner with Sonnenschein, Nath & Rosenthal in New York City.