Archive for May, 2012

CCH’s Federal Tax Day newsletter recently dropped this bombshell of a news item on its subscribers:  “Tax-exempt organizations complained about the difficulty of completing Form 990, Return of Organization Exempt From Income Tax, at a May hearing before the House Ways and Means Oversight Subcommittee. Industry officials told Subcommittee Chairman Charles W. Boustany Jr., R-La., that completing Form 990 requires too much detailed, and sometimes redundant, information…” 

To which I reply:  Why should tax-exempts be any different from the rest of us?  A tax return is a tax return!  We need a Congressional hearing to tell us this?

But seriously, from the moment I entered this profession, I have had trouble with the notion of tax exempt organizations filing tax returns.  It all seems just a bit contradictory to me.  Of course, the main purpose of such forms is not so much tax calculation but an effort to ensure that tax-exempt organizations are in fact tax-exempt and not just claiming to be.  So the basic returns (form 990 for public charities and form 990-PF for private foundations) are really more regulatory compliance checklists than tax returns.  Oh, these returns do provide financial data such as balance sheets and income statements, but as plain vanilla tax calculators – not so much.  (Except, of course, for private foundations that are subject to a whopping 1% or 2% excise tax on investment income — and IRS better make sure that they collect these taxes or we may end up having to curtail vital governmental services in these great United States.) 

But, protect the public these forms do – IRS can make sure that tax exempt organizations are who they say they are and that they are in compliance with the myriad regulations designed to protect the philanthropic public.  As far as the rest of us are concerned – we too have the ability to check up on virtually any charity by viewing its 990 or 990PF online either at the charity’s website or at www.guidestar.org

So, all kidding aside, these reports provide a valuable service for those who wish to invest in particular charities.  Of course, like all financial reports, simplicity is not their overriding virtue — they are written not in English but instead in bureaucratic legalese, and it takes a fair amount of work for the casual reader to get through them in any sort of meaningful way. Think of them as a kind of prospectus for a tax exempt organization.

But because you can never tell a book by its cover (which is even harder in these days of Kindles and Nooks), this information is vital to the philanthropic investor.  Just because an organization has a word like “Cancer” or “Youth” or “Jewish/Catholic/Protestant/Muslim” in its title does not mean that it is an efficiently run charity worthy of your support.  Thankfully, the Internet has made the gathering of both qualitative and quantitative data about tax exempt entities far simpler and quicker that at any time in the past (thank you Al Gore!).  Regardless of whether you have $10 or $10 million to invest/contribute, this data can help you make intelligent choices about which organizations deserve your support.  In addition to an organization’s form 990, you can always read its annual report (often available at the organization’s website) or avail yourself of even easier-to-digest information from third party websites such as www.charitablenavigator.org, www.guidestar.org, or www.bbb.org

Remember the old retailer’s slogan “An educated consumer is our best customer” – that slogan applies just as much in the marketplace of philanthropic choice.     The information is out there.  Use it or lose it.

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In a recent blog post I wrote about the desirability of developing a family vision and mission statement.  Such a statement helps families to come to grips with who they are and where they want to be.  They help instill the most important beliefs and values in each generation of the family in a way that is at once collaborative and not coercive, supporting and not demanding.

Regardless of whether your family actually develops a written statement, we know that thinking about and instilling these beliefs and values in family members is absolutely crucial to character development, educational and career success and, yes, especially the development of a philanthropic mindset.

A student of mine recently shared the following story with me:  “My family has been fortunate enough to be able to fund a small family foundation, and my sister and I are allocated an amount of money to donate annually to ours (and our spouse’s) favored causes. It’s not a large amount of money, but my wife and I take it seriously. It’s a good way to help the next generation understand how important charitable giving is and how important it is to put thought behind it…” 

What a wonderful idea!  How fortunate my student is to have this gift to use in a way that is meaningful to his generation and perhaps even his children’s generation.  His family may not have consciously engaged in the following “top 10” practices, but they sure as heck reaped the kind of results that these practices envision.

So, in the spirit of philanthropic advisor Charles W. Collier and his book Wealth in Families (Second Edition), here are the “top 10” best practices of successful families, those like my student’s, who take pains to pass on more than just the family name and jewels:

  1. Successful families focus on the human, intellectual, and social capital of the family.  What does each family member have to offer both for him/herself and for the family (human/intellectual capital)?  What type of investment does the family make to cultivate this capital?  Where does the family see itself fitting into the greater society (social capital)?
  2. They stress the priority of each family member’s individual pursuit of happiness – NOT Mom & Dad’s definition of what that should be for the kids and grandkids but those of each individual family member.
  3. They work on enhancing intrafamily communication.
  4. Their time frame for determining success is long-term.
  5. They tell and retell the family’s most important stories.  Every family has a history and this history is what makes the family.  Telling and retelling the stories creates a sense of pride and a reason to continue to pull together as a family.
  6. They create mentor-like relationships with establishing family trusts.  While we tend to think of trusts as purely financial instruments, in fact, the trustee/beneficiary relationship formed as a result of the formation of a trust can be used as a tool to guide the beneficiary using someone other than the parent as that guide.
  7. They have collaboratively defined a family vision statement (the Shared Dream).  This is particularly important when engaging in family philanthropy.
  8. They teach children and grandchildren the competencies and responsibilities that come with financial wealth.
  9. They work at getting to really know each family member.
  10. They give their younger family members as much responsibility as they can manage as soon as possible.


It’s never too late…

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The stories behind our client families are sometimes tragic, often inspiring, and always interesting.  And of course, over time, we have noticed that certain patterns repeat themselves, particularly in family businesses.  The complaints are so similar – the patriarch/matriarch founder of the business operates autocratically, demanding perfection without ever ceding control; the heir-apparent works 100 hours per week while the dilettante sibling does nothing; the inevitable generational clash of philanthropic interests in the family foundation.  The common thread is that far too much assuming goes on between family members and, because of that, resentments tend to fester and sometimes explode.  Without proper management, this dynamic can be lethal, driving family members apart and destroying not only the family unit itself… but perhaps even the business or the family foundation.

You know the old saying: “From shirtsleeves to shirtsleeves in three generations.”  Sometimes it’s a wonder that family fortunes last even that long.

So what is a family to do? 

Successful business and not-for-profit leaders have long known that the establishment of a formal and communicated mission and vision statement within their organizations goes a long way toward organizational self definition and the creation of a positive image in the marketplace.  Formally stating these points enables management, staff, volunteers, donors, and the public to align their values with those of the organization.  A well-defined and mission-driven organization has a much better chance at achieving success, however defined, than a vaguely defined one.  Couldn’t the same be said for families?  What about a family mission and vision statement?

Before you write this off as some hippy-dippy claptrap, consider the source of some of this thinking.  Based on his experience in working with some of the nation’s wealthiest families, Charles W. Collier, the former Senior Philanthropic Advisor at Harvard University, writes about confronting these issues in his excellent monograph Wealth in Families (Second Edition):

“I define a successful family as one that knows who it is, what it stands for, and where it is going.  Successful families manage themselves deliberately.  There is much at stake for your individual family members, for your family as a whole, and for society at large.  If you and your family can define “what’s important” before deciding “what to do,” then your children will thrive, your family will flourish, and society will benefit”. (Collier, p. 5)

This might be easier for the family with a business or foundation at stake.  Other families without the formality of a business unit or private foundation to bind them may find it a bit harder to do, but either way, the results can be well worth it.  Contemplating the big questions of family philosophy, beliefs and values will force you to define:

  • What is truly important to our family?
  • What are our family’s true assets?
  • What can/should we do to guide and support the life journey of each family member over time?
  • How wealthy do we want our children to be?
  • Do we have a responsibility to society?

Touchy-feely?  Perhaps.  Might you as a successful entrepreneur or business person become impatient with such an “Age of Aquarius” approach?  Entirely possible.  But if you check your impatience at the door and involve all your family members where appropriate, you just might find that your family unit is strengthened and better able to function and thrive over the long term, to truly travel from “success to significance.” 

Next Up:  The 10 Best Practices of Successful Families

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It wasn’t too long ago when, if you mentioned the idea of family philanthropy, you conjured up images of the “Thurston Howell III” Family Foundation.  With all due respect to the actor Jim Backus (said Thurston Howell III of Gilligan’s Island fame), one generally associated family philanthropy with “old money”, white families.  Think Rockefeller, Carnegie, Phipps, etc.  But that stereotype is changing… thankfully.  


Check out this video from RockPhilanthropy for more information.

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What is the first thing that comes to mind when you think of the idea of “charity?”  Is it Bill Gates and the Gates Foundation?  (“Rich guy uses his billions for charity”) Or perhaps it’s the other Bill and the Clinton Foundation?  (“Charismatic guy uses his charm to raise millions”)  Maybe your family has its own private foundation or supports a donor advised fund.  If so, congratulations – and, I might add on behalf of society at large, a hearty thank you!  If you fall into this category, you are pretty far along the sophistication spectrum of philanthropic giving.  I certainly hope that your investment is built on a passion for effecting positive change.  If not, your foundation may just be built on a foundation of sand. 

Let’s consider that for a moment.  Whether you control a family foundation or just have a spare couple of bucks in your pocket to give to charity – how do you decide which challenge to pursue? There are so many problems in the world and so many good (and not so good) causes offering to work to solve those problems.  How do you really decide?

Back to my original point – what is your passion for effecting positive change in the world?  That question is so key because, man, if you don’t have one, then philanthropy is probably not for you!

Now, admittedly, this is a conversation that most financial advisors shy away from.  The typical accountant, lawyer, or wealth manager would rather talk about anything but passion because it sounds a little too….new age.  Or, they may refer to charity in the abstract: “A testamentary charitable remainder trust enables you to leave a stream of income to your beneficiary for a period of time with the remainder to be paid out to the “fill in the blank” charity at termination of the trust….”  But actually talk with you about which causes or causes should fill that blank?  Talk to you about that which truly floats your boat??  I think not.  It might be seen as bit presumptuous.  It wouldn’t fit in the model of the chargeable hour.  It might even be perceived as being a little judgmental.    

Balderdash!  The conversation has to start and end with your passion for giving, your passion for making a difference.  It does not matter how many cool financial and tax planning techniques exist for the budding proto-philanthropist —  they mean nothing if they are not framed in the context of philanthropic passion.  Honestly, would anyone arrange to give away a significant amount of their income or wealth just to save taxes? 

At the very least, every donor should want to make a difference; extrapolated to its logical conclusion, the thoughtful donor is just plain bold enough to hope/expect to change the world.  Is a little passion too much to ask?

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A reader recently gave a suggestion for a future post:  “Write about the importance of unrestricted giving to an organization you support, especially umbrella organizations such as __________ or a local United Way.” 

As one who is currently serving in leadership roles in two national organizations (including the _________ referred to above), the suggestion rings true.  Unrestricted gifts hold a special place in the hearts of executive directors everywhere for the obvious reason – they give the leadership the most flexibility to determine how the funds will be spent in the furtherance of their organization’s mission.  Donations with strings attached, restricting how or when funds can be expended, are also welcome and encouraged, and frankly are often the focus of major fundraising campaigns.  And certainly no development officer worth his or her salt would necessarily balk at a major gift just because the donor wants to limit the organization’s ability to “squander” the gift.  But human nature being what it is, the leaders of charitable institutions want to preserve their ability to guide the organization by using its assets free of encumbrances from the outside world, i.e. donors.  For organizations that operate efficiently and effectively, nothing could be better.


For major donors, we are not talking about a mere two-way street here; we are talking about a major four lane highway.  These donors are increasingly demanding a say in how their funds are deployed to further the mission of the organizations they support – as they rightly should.  Unlike the fee for service or commodity mentality that pervades the for-profit world (if you can’t do the job I will take my business elsewhere), charities aspire to be something bigger than themselves, and donors look to satisfy their need to give back by aligning with those institutions that best mirror their personal world view. 

This may be hard to fathom if you are on the lower end of the giving spectrum.  I laughed out loud when I read a recent article by Gail Collins in the New York Times when she spoke of how unpopular Congress is right now and compared them to “…people who get students to call you up during dinner and ask you to give money to your old university.”  That about sums up the average casual donor’s feelings about the transactional approach to charitable giving.  The charities solicit, I say “no” (or “yes” if my guard is down) and the transaction is complete.  Fast, sterile, faintly cynical and not particularly satisfying.  Could you imagine soliciting, much less obtaining major gifts in this manner?

No, major gifts require far more finesse.  The very word “major” implies that the donor is not just giving money; s/he is investing in a cause.  And if s/he invests in a cause, s/he has the right (responsibility?) to monitor the use of those funds.  Charitable groups that get this right do far more than just solicit funds.  They go out of their way to properly steward the assets and report back to their donors about their progress.  They respect the wishes of their donors and develop relationships with them that often transcend the business at hand.  For the uninitiated, the attention lavished on a potential major donor may be cynically viewed as a slick sales job.  The fact is, if this is the potential donor’s visceral reaction to a particular organization’s development process, then perhaps that organization is not for them.

Charities do a lot of good in the world.  They need resources to do it.  Donors want to help but they also want to feel genuinely respected and yes, loved for what they bring to the table.  So here is the “major four lane highway” prescription –

(1)  For not-for-profit managers and boards of directors:  Never stop defining, evaluating, and communicating your vision/mission.  Be fully aware that you are the steward of your organization’s assets and it is your duty to ensure that adequate controls are in place to properly safeguard and expend those assets.  Realize that donors may place restrictions on their charitable dollars because they are not entirely comfortable that the leadership will always do the right thing.  You have to constantly work to earn and retain that trust.

 (2)  For donors:  Be vigilant in your oversight of the causes you support.  After all, you voluntarily fund them and they need to live up to your expectations.  On the other hand, when your organization performs at or above expectations, don’t be afraid to show a little appreciation – and don’t forget about unrestricted gifts.  Unrestricted gifts speak volumes to the leadership about the confidence that you place in them.

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Don’t exit this blog post yet – I know, the very name “conservation easement” invites yawns!  But the concept is great – you create some permanent restrictions on your property to, say, preserve an area for outdoor recreation or to protect open space or to save a breathtaking view, or maybe even to preserve a historic structure and then get rewarded from Uncle Sam with a healthy charitable contribution on your income tax return* and possibly some estate tax goodies as well.  The contribution is based on the decline in market value that you “suffer” from imposing the easement on yourself and future owners.  The upside is you retain partial ownership of the property while doing good for society (and, let’s be honest, for yourself as well.  This is (sort of) the very definition of having your cake and eating it too….. Now, of course, not everyone can do this.  You have to have the right property from a conservation/preservation viewpoint, you will need to get a qualified charity involved to administer the plan, and you (and future owners) will have to give up a certain amount of control over the property.   But under the right circumstances for the right taxpayer, a conservation easement can be a wonderful income and estate planning tool.  As one might expect, easements have been pretty popular for a number of years.


Here’s an example.  Minnie Gotrocks grants a perpetual conservation easement on some undeveloped land she owns in the Berkshires to a qualified charity.  As part of the easement, she gives up her development rights on the property.  Without the easement, the property is easily worth $8,000,000, however, because the property can no longer be developed, its value drops to $5,000,000.  By properly dotting the I’s and crossing the T’s, Minnie is entitled to a $3,000,000 deduction* on her income tax return and may also be able to claim some healthy discounts on her estate tax return when the time comes.   Best of all, she still owns the property and can use it as she wants so long as she does not violate the terms of the easement.


Pretty good, huh?  So, what’s the catch?   Big brother and his insatiable love of paperwork, of course.  According to Karin Gross of the Internal Revenue Service, there are an enormous number of docketed cases currently pending in Tax Court (approximately 216) and “we’re winning the cases for the most part.”  The two biggest issues with respect to these transactions are substantiation, or lack thereof, and overvaluation.  So the message is clear – if this type of planning appeals to you, then make sure you work with the right people.  National organizations like the Nature Conservancy and the Land Trust Alliance or local land trusts can accept your gift and steward it properly while providing you with the proper documentation required by IRS.  Qualified appraisers are a must – the appraisal must properly calculate and support the diminution in fair value in order to qualify for the deduction.  And a competent attorney who is skilled in these areas will help pull it all together.  Don’t skimp.  The reward will be well worth it.


* Subject, of course to limitations based on income or other factors. 

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