The Stages of Giving: Advising Mid-Life Donors

Discussing philanthropy with middle-aged investors can be daunting. They are working hard, saving for retirement, educating children and, possibly, caring for aging parents. Not surprisingly, with so many other concerns, many advisors are reluctant to even broach the subject with their clients. Research by The Philanthropic Initiative, or TPI, in Boston suggests that more than half of all advisors neither discuss their clients’ personal or social values nor help them develop a philanthropic mission.

But recent studies indicate that advisors may be missing a big opportunity if they do not address the topic of philanthropy. According to the 2003 Wealth and Values Survey conducted by Community Foundations of America and HNW, a wealth marketing consulting and research firm, 63% of wealthy individuals surveyed said that, when thinking about their financial success, they felt an obligation to give back to their community.

TPI senior advisor Stephen Johnson notes that there is great untapped enthusiasm for giving among this age group. “Donors want to be guided in their philanthropy to achieve important objectives,” he says. “They want to be equipped to create cohesive giving programs, evaluate the impact of their gifts, and know whether they are making a difference.”

“Most people, when talking about their overall estate plan and the effects of income and gift tax are happy to view a certain portion of their money as social capital,” says Jere Doyle, senior director and first vice president of estate planning for Mellon Bank's Private Wealth Management group in Boston. “They want their advisors to talk about philanthropy.”

By early middle age, investors often are ready to do more than write the occasional check when asked to give by a friend, neighbor or colleague, says Brad Turner, senior managing director at McDonald Financial Group in Cleveland. They want a strategy for giving that fits in with their overall financial plan.

“Reality starts to set in at about 40 when investors become much more pragmatic about just how much money they will need to finance their retirement and support their family,” says Turner. “But as they age, they also feel a growing sense of obligation, a desire to give back to society.”

Establishing a Donor Advised Fund
This is a great time to set up a donor advised fund, says Doyle. Held by a public charity such as community foundation, a donor advised fund is easier to set up and administer than a charitable trust or a private foundation. The amount required to start a donor advised fund might be as little as $5000. Donors can recommend gifts to their favorite charities immediately or at some other time in the future. In the interim, the assets allocated to the fund will grow tax free, and they are also excluded from estate and gift taxes.

“Funds are the best way for donors to get their feet wet without taking on commitments that they may have trouble meeting down the road,” Doyle says. “They can set up a donor advised fund with appreciated securities and cash and use it later to make charitable contributions.”

Starting a Charitable Remainder Trust
Donors in their 40s and 50s are also very receptive to establishing charitable remainder trusts as part of their estate plans. A charitable remainder trust, or CRT, is an irrevocable trust arrangement to which a donor transfers highly appreciated and/or income producing property in return for a payment stream for a fixed term (up to 20 years) or for the donor's life and/or the lives of other individual beneficiaries. The assets remaining in the CRT are then transferred to the charity selected by the donor.

The donor receives an income and gift tax charitable deduction (or an estate tax deduction if the trust is funded by a transfer at death) equal to the present value of the charity's remainder interest. Any taxable gain on the sale of appreciated assets by a CRT may generally be deferred, thereby allowing reinvestment of pre-tax proceeds.

That means that a donor can convert low yielding assets into a vehicle that produces a consistent stream of income without immediately recognizing the gain. Assets contributed to a CRT are generally excluded from the donor's estate.

“The beauty of a charitable remainder trust is that you can make a major gift now, draw income from that gift for years and know that the beneficiary will receive the principle after your death,” says Johnson at TPI.

Involving the Whole Family
Charitable remainder trusts are an especially good idea for middle age parents of teenagers since you need a lead time of at least 10 years to make it tax effective. “It’s a great way to transfer assets to children without incurring a gift tax,” says Doyle.

Indeed, CRTs can also draw families together. Doyle suggests naming the family’s donor advised fund as the beneficiary of the charitable trust. “Some donor funds enable a family to have at least two generations make disbursements,” he says.

Whatever the vehicle, philanthropy plays an important part of most middle-aged investors’ lives.
It is, as Doyle puts it, a challenging time of life, with considerable work and family obligations.

There are many benefits to helping middle-aged donors give more effectively within their overall financial strategy. Advisors who help middle-aged donors by finding the best giving solutions for their situations find this group welcomes the opportunity to make a bigger difference.

Aline Sullivan is a freelance writer based in Westport, Connecticut.
Written by HNW for Community Foundations of America.
Copyright 2003. Used with permission.

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Posted at 3:19 PM, Oct 28, 2004 in Aging | Intergenerational | Performance Measurement | Philanthropic Strategy | Permalink | Comment