Your clients have a variety of options to consider as they explore giving through our community foundation. These include determining

• the type of fund that best meets their charitable giving goal
• the type of gifts to make as they initiate and grow the fund, and
• how the assets will be invested.

Detailed information about all donor options are available in our section titled Donors.

If your client is considering the creation of a private foundation, we strongly encourage you to have them explore the advantages a community foundation can offer. More details on this issue can be found in Private Foundation Options.

Helping a client realize a charitable goal while also diversifying a concentrated position provides many benefits for both the charity and the donor. The philanthropic experts at the Greater New Orleans Foundation have helped many advisors help their clients give more effectively within their financial plan.

When an executive at a publicly held company decided she wanted to make a charitable contribution to her local community foundation, Chris Nicholson saw a great estate planning opportunity. Nicholson, the vice president of development at the East Bay Community Foundation, in Oakland, California, recommended that the executive donate a portion of the employer stock she held.

"Most of the executive’s net worth was tied up in that company's stock," says Nicholson. "We helped her realize her philanthropic goals by donating a portion of that position." The gift allowed the donor to set up a planned giving strategy while reducing the investment risk to her portfolio. 

Across the country, many advisors regularly deal with similar clients: those whose wealth is concentrated largely in one stock or the stocks of a few companies. Holding concentrated stock, of course, is perilous during periods of heightened volatility or a market downturn.

"Declines can be steep and fast," says Gregory V. Aloia, an attorney and wealth advisor with Abacus Wealth Partners, LLC, in Philadelphia. "Even before the recent bursting of the tech-stock bubble, we saw highly regarded stocks go from $140 to under $20 in a year." Even wealthy clients may face financial distress if this happens to a key holding.

Philanthropy can provide a solution. Donating shares from a concentrated portfolio can allow donors to fulfill charitable commitments without having to tap cash reserves. Donors can also reduce market risk, defer capital gains tax, and diversify their holdings. As long as those assets have been held more than a year, donors enjoy a tax deduction on the full value of the donated asset and steer clear of capital gains taxes.

Planned Giving

While many clients' goals may be attained by outright donations of concentrated stock, some clients may prefer to use a charitable remainder trust (CRT) to immediately reduce the risks of a concentrated portfolio while providing income from a diversified portfolio.

The strategy is slightly more complex. After the shares held in a concentrated position are donated to a CRT, they may be sold with no tax obligation. Then the full proceeds can be invested in a diversified portfolio, designed to pay income to the donor and perhaps a surviving spouse.

CRTs come in a variety of flavors. "Older clients may prefer the simplicity and predictability of an annuity trust, which will pay out a fixed amount each year," says Laura Peebles, a director in the Washington, D.C., office of Deloitte & Touche LLC. "Younger donors might choose a unitrust, which pays a fixed percentage of trust assets and possibly can provide increasing income over the years.”

For people who are not yet ready to retire, a NIMCRUT, or net income with makeup charitable remainder unitrust, might be used. A NIMCRUT can be designed to pay out little now but more later, perhaps after the donor retires.

Peebles says a concentrated portfolio also may be used to fund a charitable gift annuity. Again, the donor can receive an immediate tax deduction, lock in a lifelong income and avoid the risks of holding a portfolio composed of a single stock or just a few stocks. "Especially for relatively small donations, clients might like a gift annuity's lack of complexity," says Peebles. "The main drawback to a gift annuity is that the annuitant is a general creditor of the charity. That risk can be alleviated by contributing to an established community foundation that is financially sound."

Timing and Appraisal

For planned giving strategies as well as outright contributions, an independent appraisal may be necessary. "Donations of shares in a thinly-traded public company or shares donated by an insider of a widely traded corporation may require an appraisal,” says Peebles. An appraisal also will be required if the concentrated position consists of shares of a closely held company.

When it comes to concentrated positions of closely held shares, Peebles says that charitable donations often occur when the company is sold. She recalls a situation in which the seller wanted to donate a substantial portion of his shares to a charitable remainder trust. As part of the transaction, the buyer would purchase the shares from the trust, which would then provide income to the seller.

Peebles told the client that this transaction likely would be permissible because no binding contract was in place. "If the agreement had been enforceable, there probably would be adverse tax consequences for the seller.”  This is an issue an advisor should evaluate when a large block of stock in a closely held corporation is donated to a charitable remainder trust.

Such financial considerations are important, according to Abacus Wealth Partners’ Aloia, but they are not the only concerns. "An advisor's primary focus should be on a process that also helps a client establish an emotional connection to giving," he says. "Such an approach can remove any personal obstacles that might arise while providing a result that is ultimately more rewarding and meaningful to the client."

Donald J. Korn is a freelance writer based in New York. Copyright 2004, Council on Foundations and Community Foundation of America, Used with permission

Advising Young Donors on their Philanthropy

Many young donors confront charitable giving-related issues for which they have little or no preparation. Richard Ditizio, a managing director at The Citigroup Private Bank, compares the experience to jumping on a ten-speed bike without ever having been taught to ride.

Still, research by the United Way of America underscores that young investors—those between the ages of 18 and 34—are often more receptive to charitable messages than the older Baby Boomer generation. The problem is that most have simply never been asked to give, and advisors are often reluctant to teach them about philanthropy.

Increasingly, though, advisors will need to be prepared for the conversation. In 2003, Paul Schervish, Professor of Sociology and Director of the Social Welfare Research Institute at Boston College, reconfirmed his 1999 prediction that a wealth transfer of at least $41 trillion will take place in the United States by the year 2052, with $25 trillion going directly to heirs. That’s assuming economic growth of just 2% a year—higher growth will mean an even greater wealth transfer. The upshot is that 120 million members of Generations X and Y will become the primary investor pool as the first Baby Boomers reach retirement age.  Advisors must learn how to help members of this important demographic meet their philanthropic objectives.

How to Help Young Donors Give
Advisors can encourage and shape their young clients’ philanthropic drive while looking out for their broader financial interests. Indeed, those that make a point of raising the subject with their clients report that it is often the most interesting and rewarding discussion they have.

“Their enthusiasm is unbridled,” reports Eileen M. Wilhem, head of charitable services for Wachovia Wealth Management. “They have big plans and they want to make a difference.”

Lynne Pantalena, a wealth advisor at the Fleet Private Client Group, says she helps define her clients’ interests and develop a strategic approach that enables them to make meaningful and lasting commitments, without jeopardizing their own financial futures. She encourages them to make direct gifts and, depending on their level of wealth, to consider establishing a donor-advised fund or a family foundation.

“They haven’t yet saved enough in an IRA account to gift from there, and they aren’t really good candidates for other planned giving vehicles, such as charitable remainder trusts, because their life expectancy is so long,” she says. “But they are eager to give and deserve to be encouraged.”

Different Approaches For Different Sources of Wealth
Advisors say the source of a clients’ wealth should determine the optimal approach to encouraging and channeling all this youthful ambition. Those just coming into an inheritance have different motivations and concerns than those starting to think about how to allocate money that they have earned. So, for that matter, do the increasing number of young people who have both earned and inherited wealth.

Young people with inherited wealth often have some exposure to philanthropy through their families but are eager to define their own interests. As Stephen Johnson, a senior advisor at The Philanthropic Initiative puts it, their youth and energy means that are less likely than their parents or grandparents to write a check for the local hospital’s oncology ward, and far more likely to become involved in a hands-on way in environmental and educational causes. It’s important to respect and encourage their individualism, advisors say, without fretting about the impact on the extended family. (Besides, a lasting conflict of charitable interests is very rare, advisors add).

Young people who have earned their own money are also a potentially powerful force in the philanthropic world. As a group, they need a lot of guidance, both in defining their philanthropic interests, developing strategies and incorporating them into a holistic wealth management strategy. Often, that means advisors have to teach young donors to exercise restraint.
 
“Young donors want to make a big impact; to give back to the community very quickly,” says Fleet’s Pantalena. “They are very different from the 60-year-old who has worked hard all his life and has just sold his business. A 30-year-old thinks he or she can give it all away and make it all over again.”

There are many rewards for effectively encouraging and guiding young clients who feel a sense of gratitude for what they have received and a strong desire to give back. Advisors who make it a point to raise the subject say it creates a lasting bond with the clients and helps get them off to a good start on their philanthropic journey.

Aline Sullivan is a freelance writer based in Westport, Connecticut.

Copyright HNW, 2003

Used with permission