New options and new money are changing philanthropy and the approach to charitable giving.

Philanthropy isn't just for the old and ultra-rich anymore. A new generation of younger philanthropists has emerged in recent years, spurred both by the '90s stock market boom and the creation of vehicles that allow even moderately well-off individuals and families to engage in serious charitable giving.

In recent years the growing use of donor-advised funds, along with the development of new and easier ways to create private foundations, has allowed increasing numbers of people to experience the financial and emotional benefits of philanthropy during their lifetime.

"That's inspiring more people in their twenties through fifties to think about giving now," says Virginia Esposito, president of the National Center for Family Philanthropy. "The notion of advisors waiting until someone is close to retirement before bringing up philanthropy is old thinking."

One driving force in the change is that the financial bar has been lowered considerably. Donor-advised plans can be started with only $10,000, while some companies now offer one-stop programs that handle all of the hassles of running a private foundation-in some cases with as little as $100,000.

One of the trends is that products and services are migrating down to individuals with more moderate net worth than what philanthropy used to be about, says Eileen Heisman, president of the National Philanthropic Trust, an organization that administers donor-advised funds at several brokerage firms.

"Because the wealth bar has been lowered to $10,000, the age bar was lowered to where people can afford to be philanthropic sooner in their lives than before," she says.

The trend also is being fueled by the newly minted millionaires who came out of the 1990s with a commitment to become serious donors and the capital to do it. "Unlike the traditional philan-thropists, these aspiring philanthropists are young, more focused on local causes, and tend to be more involved and hands-on," says Sang Lee, an analyst with Celent Communications, a Boston-based finan-cial consulting firm.

That can take many shapes and forms. An example is found at Community Foundation Silicon Valley, one of a myriad of nonprofit community foundations that have established donor-advised funds as a way to fund philanthropic causes. Within CFSV is a fund spearheaded by entrepreneurs in their twenties through sixties who give both time and money to various charitable activities.

Among charitable vehicles, donor-advised funds and private foundations experienced phenomenal growth during the '90s, thanks to the burgeoning class of new millionaires. With the former, even non-millionaires can participate in sustained planned giving programs. Not surprisingly, though, the recent bear market has taken a toll on donors. According to the American Association of Fundraising Counsel, total charitable giving in the United States was essentially flat in both 2001 and 2002. This followed growth rates of 9%, 7% and 11%, respectively, during the prior three years. But it's anticipated that giving levels should pick up again once market conditions improve and portfolio sizes increase.

One reason for this is that the United States is in the early stages of a massive intergenerational wealth transfer from older to younger Americans, with significant implications for the financial services industry. A study by Boston College Social Welfare Research Institute predicts a wealth transfer of at least $41 trillion during the next half-century. Of that, it's predicted that at least $6 trillion will go to charity.

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.

The shrinking asset base among some funds has led to talk of consolidation in an industry accustomed to growth in recent years. "People are responding with concern and pause, and that's what they should be doing," says Heisman of the National Philanthropic Trust. "The larger companies are in it for the long haul. I think some of the smaller programs will likely be rolled into others. It takes a lot of time and education to market this product to the financial advisor community, and some of these newer programs didn't market their products enough."

A New Look For Foundations

For donors who want more hands-on control over their philanthropic activities and don't want their ultimate decisions approved by an outside board such as with donor-advised funds, then foundations are an attractive option.

Foundations come in two flavors: private and public. Public foundations have similar tax breaks and organizational structures as private foundations, but must get their funding from public sources. Community foundations, which generally funnel money to charities in a local area and are prime recipients of donor-advised funds, are a good example.

Private foundations are divided into three classifications; the vast majority fall into the private non-operating foundation category. These typically consist of individuals or families who focus on making grants to charities or individuals, and are often referred to as family foundations. They have their own trustees and board of directors, which often include family members.

Family involvement and the opportunity to create a family legacy, along with tax breaks and the chance to have a direct influence on a charitable cause, are among the chief selling points of private foundations. The drawbacks include the need for full-time staff to oversee grant distribution, handle accounting that includes excise taxes and the complicated 990-PF federal tax form, and to make sure the foundation fulfills requirements to distribute at least 5% of its assets annually. Accountants and attorneys are needed to get things up and running; it may cost more than $10,000 to set up a private foundation. Maintenance fees can reach 5% of assets. Generally, it isn't cost-effective to establish a private foundation unless a donor has at least a few million dollars in assets.

These kinds of headaches and expenses soured some high-net-worth people on private foundations, moving them to donor-advised funds or other philanthropic options. Into this void two years ago stepped Foundation Source, a Norwalk, Conn.-based outfit that aims to streamline the process of setting up and running private foundations. With a comprehensive Web site and on-call staff, the company provides a range of services that includes back-office administration, grant management, advice on foundation rules and access to research on more than 750,000 charities.

Foundation Source works with accountants and attorneys to help them establish private foundations, and it has forged relationships with financial institutions such as National Advisors Trust and Bank One to make this product available to their advisors. An initial investment of $100,000 is all that's required in many cases (some partners, such as Bank One, require a $250,000 minimum, with start up costs not exceeding $5,000 and total annual maintenance fees of 2% or less.) The company recently had 63 foundations under its wing, with another 100 or so in the pipeline. It expects to have assets under administration of $350 million by year-end.

Foundation Source's early success wasn't lost on Fidelity, which last year launched its own private foundation program with many of the same streamlined services of Foundation Source. However, it recommends an initial investment of $750,000 to justify the costs of creating and maintaining a foundation. "We saw a tremendous opportunity here because the awareness of giving vehicles, including private foundations, is very low," says Andrew Tappe, senior vice president for Fidelity Charitable Services. "We figure only about 15% of high-net-worth households in the U.S. use or are aware of charitable giving programs. I think that awareness level is similar to the awareness level of retirement vehicles in the early 1980s."

Will Fidelity's private foundation product spur other mutual fund companies to enter the fray much like its donor-advised product did in the early '90s? "We're talking to some of those companies now about forming partnerships," says Foundation Source CEO Doug Mellinger. "For the most part I don't think fund companies are set up for the private foundation world as they were for the donor-advised world. They don't have as much of a direct relationship with high-net-worth individuals. Private banking organizations, wealth management brokers, high-end financial advisors, attorneys and others have been the traditional conduits for private foundations."

None of that will matter much if New York state Attorney General Elliot Spitzer has his way. In addition to his well-publicized campaign to clean up abuses on Wall Street, Spitzer is proposing changes that would affect some charitable giving and put the clamps on the formation of small private foundations of $20 million or less.

Spitzer's office wrote to Congress suggesting legislative changes that include preventing donors from deducting the portions of their charitable gift that go to professional fundraisers. And citing governance abuses by the boards at more than two dozen private foundations in New York-including misuse of funds and lack of professional oversight-the attorney general's office said it would like the IRS to limit private foundations to at least $20 million in assets. Given the influence of both Spitzer's name and the size of New York state, his office's rumblings could have a tremendous impact.

"That's not going anywhere," Mellinger says confidently. "I've met with the Charities Bureau in the attorney general's office, and they realize they took a radical position to make a point. They're finding less than 1% of the private foundations they've audited have issues, and the easiest thing to do is to say, 'We'll just not let them exist.' It's like saying corporations can't exist unless they have $20 million in sales."

And then there's the potential impact of the new tax policy on charitable giving, where lower taxes on capital gains and ordinary income could take away some of the incentive to be philanthropic. "The economic reasons for charitable giving have declined, so now the onus is on doing the right thing," says Gott from Kochis Fitz. "People will now have to have more philanthropic intent."

Will potential donors step up to the plate? "There will always be people who give to charity purely for tax purposes," says Guard, the Florida planner. "But I think the vast majority who give want to give something back to society."

And advisors can play a big role in that.

"Financial advisors can do a lot of the groundwork to gauge priorities, whether it be program costs or control over giving, to get the process started," says Kelly of Charles Haines LLC. "Advisors can start out with the client and help get them pointed down the road. At some point, they might want to hand them off to an expert."