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How to Help Clients Navigate the Charitable Giving Maze

Now is the time to start this year's charitable planning.

Helen Modly, 01/04/2007

Procrastination leads to anxiety.

Nowhere is this more evident than watching your clients agonize over last minute charitable gifts. Why they wait until the waning weeks of December is always a mystery. As their advisor, suggest that they begin this year's charitable planning in the early weeks of January as part of their overall tax planning, which should include an estimate of charitable intent for the year.

This is especially appropriate for 2007 as the recently passed Pension Protection Act contains many changes affecting charitable organizations and the tax deductions for contributions.

Size Does Matter
How much your clients intend to donate to charity is probably the most significant variable in determining the best structure for their gifts.

You can review the Schedule A from the past year's tax returns for an idea of the level of giving that is customary for them and then schedule a meeting to discuss the options that may be most appropriate. Clients who only give a few hundred dollars a year should probably continue to just write out the checks to the various organizations they support. They will need to obtain a contemporaneous receipt from the charity, or be able to produce a cancelled check or credit card statement to support the deduction. This will apply to all gifts, not just those over $250 as in the past.

Donor Advised Funds
Significantly larger gifts in the thousands of dollars should prompt a discussion about how much involvement and control the donor wants to have over time in respect to their gifting. Often, a single large gift is prompted by tax considerations as much as charitable intent. This is usually the case with last minute, end-of-year gifts made in haste to alleviate a higher-than-expected taxable income. Many clients don't realize that by making the donation to a donor advised fund, they can qualify for the end-of-year tax deduction without having to make up their mind about which organizations will ultimately receive the money.

There are many qualified donor advised funds to choose from, and cash contributions to them qualify for a charitable deduction up to 50% of the taxpayer's Adjusted Gross Income (AGI), provided they itemize deductions on a Schedule A. Donations of publicly traded securities are deductible at their fair market value up to 30% of the taxpayer's AGI. The donor advised fund accepts the donation and then makes grants to qualified charities as "recommended" by the donor. New regulations require that the donor advised fund issue a contemporaneous acknowledgement of any donation. This acknowledgement must state that the fund has exclusive legal control over the contributed assets.

While there is currently no required minimum annual payout from donor advised funds, the Treasury secretary has been charged with conducting a year-long investigation into donor advised funds. Commercial donor advised funds such as those offered by Schwab and Fidelity may require a minimum distribution of 5% of the funds assets on a rolling five-year basis.

Many donors are intentionally not recommending grants from their donor advised funds in order to accumulate sufficient funds to create an endowment for their charitable purpose. In the case of donor advised funds created under the umbrella of a community foundation, there is often a maximum distribution limit of 5% set by the community foundation to allow for the accumulation of assets within the funds.

The main advantages to using donor advised funds are the reasonable annual expenses (usually around 1% of assets), absence of any public disclosure or filing requirements and flexibility as to the amount and timing of the actual grants to the receiving charitable organizations. Grants to charities can be made in the donor's name or anonymously. Clients can usually establish their donor advised fund with as little as $10,000. Some donor advised funds allow donors to use their own investment advisors depending on the size of the fund established, while others will manage all assets themselves.

Community Foundations
Most communities have one or more community foundations, but they are not all created equally. A community foundation usually offers a choice of charitable vehicles that can be utilized by your clients. Most offer donor advised funds as described above. All of them encourage donors to contribute to their community investment funds which allow the foundation to direct the actual gifts to receiving charities. Sometimes these funds have no direction other than the whim of the current board of directors, and sometimes they have very well-defined "field of interests," such as education, health care, scholarships, or the environment.

Some community foundations will allow donors to use their own investment advisors depending on the size and type of option elected, while others will pool all assets and either manage the funds themselves or use one or more money managers. A good way to evaluate any community foundation is to see if they comply with the National Standards for U.S. Community Foundations. Contributions made to a community foundation are deductible just as those made to a donor advised fund.

The most significant difference among community foundations is the level of support they can provide to donors in terms of identifying suitable organizations to meet the donor's interests. Many also facilitate a dialogue between the donor and the charities, if desired and provide expertise in developing programmatic or capacity expanding grants according to the donor's wishes. Giving to a community foundation can give clients a measure of influence over the final destination for their gifts, provide them with often needed support and expertise in designing and evaluating effective grants, and often allow for networking and recognition events that many donors appreciate.

Private Foundations
The Cadillac of charitable giving has always been the private foundation. The tax deduction for donations to a private foundation is reduced (30% of AGI for cash and 20% of AGI for the fair market value of publicly traded securities), compared to a donor advised fund or a community foundation. In spite of this, private foundations are attractive for a variety of reasons. The most often cited is the amount of control retained by the donor who appoints the board that will control all investments and grant making. The other attraction usually involves recognition for the donor or their family, although this is also available with both the donor advised fund and the community foundation.

While it is traditionally assumed that establishing and operating a private foundation can be prohibitively expensive, this is not always the case. There are several foundation management firms that have very flexible, turnkey private foundation programs that involve minimal set up costs and can handle all grantmaking operations and compliance reporting for about 1% of assets, similar to the fees charged by both donor advised funds and community foundations. The donor is free to choose their own asset managers for the standard fee charged by the manager. One such firm is Sterling Foundation Management. A private foundation does have a minimum distribution requirement of 5% of the net asset value annually, so these vehicles are best suited for significant and/or ongoing gifts.

Encourage your clients to take the time to determine the best overall structure for their giving so that they will be able to more thoughtfully consider and investigate suitable organizations for their gifts.

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