With the end of the year approaching, along with clients’ seasonal focus on charitable giving and taxes, we hosted a round table discussion with Kim Laughton, the president of Schwab Charitable, and three wealth advisory professionals—Jose Reynoso of Clarfeld, Nancy Bergstrom of Meristem and Rob Francais of Aspiriant—who’ve built holistic practices using philanthropy as central to their model. Together, we had a spirited discussion about the relationship between taxes and giving, the role philanthropy plays in developing deep, multigenerational relationships and ways that uninitiated advisors can begin to incorporate charitable themes into their client communication.

Hannah Shaw Grove: Thanks for agreeing to be part of this timely discussion. Perhaps we can start by having each of you talk briefly about your organizations.

Kim Laughton: Schwab Charitable is a national donor-advised fund provider sponsored by Charles Schwab to help increase and facilitate tax-smart charitable giving. Our resources are available to advisors and end clients, together or separately, to support philanthropy as an integral part of a broader financial planning process and help them understand, select and administer the appropriate gifting vehicles based on their needs and preferences. Our accounts range in size from $5,000 to $500 million.

Jose Reynoso: I’m a managing director at Clarfeld and head of the advanced tax and estate planning practice. Clarfeld is a wealth management boutique, multifamily office based in Westchester County, N.Y., with offices in New York City and London. Our average client has about a $60 million net worth.

Nancy Bergstrom: I’m a client advisor with Meristem, a family wealth practice in Minnetonka, Minn. Meristem is a full-service wealth management organization that was created through the merger of a single-family office and an advisory firm. As a result, our clients are a blend of wealth creators and inheritors.

Rob Francais: I’m one of the co-founders and CEO of Aspiriant, a firm created in 2008 focused on helping clients achieve their goals through an independent, unbiased and comprehensive employee-owned service platform. We’re the nation’s third-largest independently owned advisory firm. The 800 families we serve range in level of assets and complexity. At one end are clients with average assets of $3 million spanning up to those with an average of $75 million.

Grove: When and how do you approach the subject of philanthropy with your clients?

Bergstrom: It’s hard to just jump into philanthropy when a relationship is starting out. It’s something that develops over time as we become more familiar with each client’s circumstances. You can’t look at charitable giving in a vacuum; you have to consider the big picture. So we look at things like a client’s cash-flow needs, their estate planning goals, their tax picture and tie all that together. We’ll also work in conjunction with their other advisors to make sure we’re using the most efficient vehicles.

Reynoso: The idea is to break it down very simply. There are three potential beneficiaries of your estate: your loved ones, charity or the government. You can choose two out of the three. It seems odd to even frame it this way, but for some people, charity becomes almost a necessity.

Francais: While philanthropy isn’t typically the first thing we talk about, it is certainly part of the first conversation and I would say that it is one of the centerpieces of our service offering. First and foremost, we’re a goals-based planning firm and often we are dealing with clients who clearly have more assets than they’ll ever consume and there are only a couple of places those assets can go. The tax bucket is pretty easy to define and most people want to pay less, not more in taxes. So it’s just a matter of defining the other three buckets that Jose mentioned, which can quickly lead to philanthropy.

Grove: In some cases, it sounds like you might be working with people who haven’t spent a lot of time thinking about their giving goals. What are the implications of that and how do you help sensitize them to the process?

Reynoso: Many clients have experience with giving to their alma mater or their place of worship or playing in charity golf tournaments, that sort of thing. Beyond that, not every client has meaningfully explored his or her philanthropic objectives or intentions. The fact of the matter is, I find that to be the case more often than not.

Francais: We want our clients to be ready to act on the broader goals that they’ve already set. So sometimes we suggest they select a vehicle that can act as a parking lot for the assets; it buys them the time to figure out the right strategy. As an example, let’s say we have a client who plans to retire and has one final year of high ordinary income along with assets with a lot of built-in capital gains. The exact plan may not be well defined yet, but uncovering and defining their longer-term philanthropic goals up front allows us to take advantage of a really efficient year to get out of the position. Once the vehicle is in place it’s much easier to facilitate future planning.

Laughton: Right, oftentimes the first decision is whether and how to place assets into a strategic giving vehicle such as a donor-advised fund or private foundation. We work with advisors as the intermediary to provide a level of expertise as to which types of vehicles are available, their pros and cons and why people choose one or another.

Grove: Private foundations get a lot of interest at the higher end of the market. Are you seeing any particular trends in vehicles or products?

Bergstrom: Families who haven’t had any experience in philanthropy can be very intimidated. They might have an idea of what a foundation is, but they might not think it applies to them. So going the donor-advised fund route to begin with can help create an entry point that allows you to begin the discussions and devise the plan.

Laughton:  Virtually every client we have with $100 million or more in assets has both a private foundation and a donor-advised fund because they offer different benefits. For instance, certain types of assets have higher deductibility when contributed to a donor-advised fund. Another reason donor-advised funds have become so popular is that with the onset of the Internet, private foundations aren’t really private anymore because their annual tax filings are accessible online. While the portion of people who choose to give completely anonymously is quite low, less than 2%, most people still want some degree of privacy

Grove: How can you allay concerns about privacy?

Laughton: While Schwab Charitable’s annual tax filing does list all the grants made from our accounts each year, it does not specify which person recommended each grant. It’s a nice way for our donors to maintain a level of privacy and limit the conclusions that might be drawn about who they are based on how much and where they give.
Grove: Once you’ve got a client who has diverted assets into a vehicle, how do you help them figure out what they want to do and then act on it?

Reynoso: We stay with our clients and provide ongoing advice. The big mistakes in planning often happen when there is a lack of proper administration, monitoring and follow-through. Those things are just as important as devising a unique and sophisticated strategy. You have to make sure it actually works—that it’s sustainable and compliant.

Francais: We take responsibility for our clients’ goals and objectives. In a lot of cases, there are action items that come from simply setting up a private foundation. As a part of our service offering, we do whatever is necessary to make the foundation successful in the eyes of the clients. This is especially valuable for those clients who set up the foundation for all the right reasons but who are not quite ready to fully engage in their philanthropic activities. In the interim, we can be an effective bridge for them as it relates to the administration and minimum giving requirements.

Grove: Motivating clients can be a concern for a lot of advisors. How do you handle it?

Francais: We have to figure out the right way to get them inspired. We find that doing some planning exercises with real-time tools that allow us to change variables, like tax rates and investment returns, can provide context to individuals. Many times they don’t understand the purchasing power of their own wealth, so the scenarios can be illuminating. And clients want to see the impact their assets can have. This anonymous giving to large charities and just writing a check is really yesterday’s news. Tomorrow will be completely different. When those things are present—the context, the line of sight—that’s when they’ll become engaged in the process. And that’s how we measure success—when the client engages in their resources.

Grove: Have any of you worked with families that want to include younger family members or children in the process?

Francais: It happens quite frequently. If somebody’s picked a foundation, there’s usually some notion of perpetuity involved, and oftentimes they use foundations as a place to transition values to future generations—kind of like a family school. In those situations, the governance structure tends to define the experience. Some families will divide the annual grant amount into equal portions and give everyone a piece to oversee. Others might allow five people to bring their case to the organization knowing that they’ll ultimately pick two to fund. We’ve set it up different ways, but many families use it as a school and a place to continue the conversation with kids in their 20s and 30s.

Laughton: Almost all of our larger clients involve the next generation as nominators or successor donors for their donor-advised fund accounts. It’s a great way to facilitate a developing conversation between Gen One and Gen Two. By the time Gen One passes, Gen Two will have been involved in the process all along and be prepared to take over.

Reynoso: We’ve seen our client base mirror the demographic shift in society. Our clients are typically hard-charging, successful people who have a little more time to focus on personal matters now that they’re getting older. They’re looking for assistance with family meetings, governance protocols and ways to initiate these discussions with their adult children. You can talk about human capital and family values, but missions can start to elude people. Instead, it’s the act of giving, perhaps, that begins to unify them by imparting a sense of perspective and humility for the very wealthy, realizing that there’s a bigger world out there than just you. And maybe that’s where values come from—not just from the act of writing a mission statement, but from actually understanding it.

Grove: Linking philanthropy and family values makes sense. Can it also be used to teach younger family members about other aspects of financial planning?

Laughton: Yes. In fact, there’s a great statistic in a Morgan Stanley/Campden research study entitled Next-Generation Wealth: The New Face Of Affluence, that 40% of families use philanthropic vehicles as a way to teach the younger generations about investing. Once assets are contributed to a charitable vehicle, they are no longer a part of the family estate and are free from inheritance considerations. This can open up great conversations about investment goals, how to grow and manage something over time and how to think about asset allocation.

Bergstrom: A lot of times, parents will have a stated mission, so that’s a way for them to pass on values. But sometimes, the next generation doesn’t have assets of their own yet, so the whole process gives them an opportunity to test run an advisor relationship. It’s really important for advisors to get involved with the next generation so you can start building trust and show them how you can help their whole family plan. When you’re the one they come to for estate planning, tax advice, philanthropy—and you know the entire family, beyond the numbers—you become really familiar with their values. You understand how the grandparents started with their giving and you can help pass that on to future generations.
Grove: All of you have mentioned family meetings as being an important forum to facilitate philanthropy. How do you make sure they’re productive?

Francais: I’ve had some success scheduling meetings around Thanksgiving. It’s a time when there’s a natural gathering of the family and you can carve out time to do official foundation business. And it’s a great conversation. The money is already out of the estate, legally separate, so you don’t have that concern interfering with the conversation. It lets them focus on what they stand for, who they want to impact and why. And those tend to be incredibly robust conversations. Families get a lot out of them when they execute.

Laughton: Today’s youth and young adults have been raised to incorporate community service into their lives much more than their parents or grandparents. They are well traveled, had bigger opportunities to see problems firsthand and want giving back to be part of their everyday lives. Family meetings can be a great way to educate the older generation about the younger generation’s passions. If the older generation has been singularly focused on work and hasn’t really given philanthropy much thought, the younger generation has as much or more to bring to the table in these discussions. It creates a nice interaction and starts to create glue that binds.

Bergstrom: We encourage annual family meetings to ensure there’s a forum for everyone to bring different ideas to the table and discuss how and where they would like to give. We find that gathering ideas in advance and circulating a proposed agenda is a great way to set expectations for the meeting and set the stage for truly productive discussions.

Grove: Can you offer any advice to our readers about how to bring charitable giving into the conversation?
Laughton: Any regular planning or review discussions, whether they happen quarterly or semiannually, can be an appropriate time, and certainly toward the end of the year, when there may be taxable gains in the portfolio that charitable giving could help to offset. Simply asking people how they like to spend their time, what their interests are, where they might be giving now and any future giving or volunteering interests they may have is a good start.

Reynoso: I would say for advisors who don’t regularly engage with their clients in conversations about philanthropy or planning, stretch yourself. Even if you’re not 100% comfortable with the technical or tax side of things, you can differentiate yourself by speaking to subjects that aren’t the typical things everyone else talks about—the things that actually might matter more in the long run than, say, what your asset allocation was.

Laughton: Don’t be afraid to bring up the conversation. It’s not necessary to have all the answers. The key is to gather the information and be a good listener so you can find the right resources to help. This requires listening and facilitation skills that not every advisor naturally has, so it is best to have the right people leading these discussions.

Grove: Are there other kinds of philanthropic specialists our readers should be aware of?    

Laughton: There are a variety of philanthropic consultants with varying degrees of sophistication. Finding a good one is similar to finding a good counselor or therapist, and there needs to be a good fit with the individual or family dynamics. When advisors come to us and articulate the need, [Schwab Charitable] can often refer them to a good match.

Reynoso: I see a growing need for the detailed strategic side of philanthropic execution—not just planning. Things like grantee relationship management, board member management, board meeting facilitation, overall program management. There’s a nuance to doing it well, a specific expertise that’s needed but not necessarily resident at a lot of financial firms. It’s much more specialized, so I think there’s a growing niche in this area.

Bergstrom: For firms that are just starting to get into this area, it’s really helpful to develop an internal mechanism that allows for group discussions and bouncing ideas off one another. Bring to light what you’ve experienced with clients in their meetings: what worked and what didn’t work. Why one client chose a foundation and another didn’t when they have similar financial backgrounds.

Grove: Why is philanthropy good for the advisory business?

Laughton: When you cut through all the research, there are two things that are important to most people. The first is to establish a positive legacy for their children, giving them not too much and not too little, so that they become happy, healthy, self-sufficient adults. The second is to make a lasting difference. An advisor who develops a dialogue and supports their clients’ philanthropic endeavors builds a much deeper relationship that is likely going to last and grow.

Reynoso: Legacy is important. A lot of our clients, when discussing their goals and objectives, say legacy is important. For some, it may mean putting their name on a building or making sure they’re recognized for their major charitable contributions. Others may view legacy more privately, within the family. Either way, philanthropy can be a tool for creating the legacy.

Francais: If clients are engaged in philanthropy, then it’s personal. It’s second only to their children. These can be great conversations that deepen your relationships and make them sticky. The boundaries associated with [philanthropy] are really important because it’s something that can fall into the category of important, but not urgent, for a lot of clients, even those ones that are semi-passionate about it. So you could end up having conversations that don’t really lead anywhere.

Grove: Kim, any thoughts about what the near future might look like for giving?

Laughton: Short of unforeseen or unwelcome changes in the tax code, I think the future for philanthropy is very bright. 2012 felt like a once-in-a-generation event with the threat of the fiscal cliff, but this year we continue to see increasing new account, contribution and call volumes. We believe a few things may be driving this: First, we’ve got a robust stock market, into its fourth year of growth, so people have appreciated securities and a sense of well being that they didn’t have a couple of years ago. Second, income and capital gains tax rates have increased for higher income earners, so people who are impacted by those increases or who have made the decision to convert to a Roth retirement plan might be looking to defray taxes by giving to charity. Finally, the IRA charitable rollover has been renewed for 2013, which makes giving easier for retirees who do not need their required minimum distributions to give directly to charity tax-free. Alone, each of these factors could spur more giving, but collectively they could lead to a pretty big year. Advisors are poised to help their clients maximize their money for the causes they care about.