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Archive for July, 2012

If you have been a faithful reader of this blog, you know that I have been all over the place discussing the “why” of philanthropy: “why” you might do it, “why” certain famous individuals have become philanthropists, and “why” your family might consider taking the plunge.  (If you don’t remember, check out the archives at www.charitable-nation.com.)  Now, I want to spend a little time discussing the tools and techniques of charitable planning.  We can assume that you have sifted or are sifting through the “why” and you now want to understand a little bit of the “how.”  However, if you have not yet done this soul searching, I urge you to seriously consider the “why” of philanthropy before the “how”.  The use of charitable tools without charitable intent is meaningless.

The first question you have to ask yourself is this: what kind of charitable donor am I?  There is a broad spectrum of donors ranging from those who donate a few bucks only when the mood strikes them or when their friends “guilt” them into a donation all the way up to the serious philanthropist who invests major dollars in charitable causes expecting to see real results.  Understanding the type of donor you truly are or hope to be as well as understanding your underlying motivating passions will go a long way toward making your plan a reality.  With this knowledge in hand, the tools and techniques of charitable planning fall into place much more simply. 

Many of us fall most appropriately in the mid-point, the “proto-philanthropist” category, where we may want to give more than we have in the past, but we want to make sure that we give it efficiently and make a difference without necessarily involving a family foundation or a trust or other complex legal mechanism.  Moving from casual or checkbook philanthropy to the “proto” philanthropist level generally involves making a commitment or commitments – you make a multi-year pledge to your alma mater’s capital campaign, you consider making a planned gift to the American Red Cross in the form of a charitable gift annuity, you name the local hospital as a beneficiary of your estate, or you fund a donor-advised fund at your local community foundation.  Financial and tax planning are very important at this level.  There may be significant estate and/or income tax implications to these gifts and your advisors should be involved. 

Philanthropy becomes truly significant when it consumes the bulk of your estate and/or has more than 5 or 6 or 7 zeros appended to the value of the gift(s).  Among other things, serious philanthropists may consider the use of lifetime or testamentary charitable remainder trusts (CRT’s), charitable lead trusts (CLT), and private foundations.  Each of these tools has its own pros and cons which we will explore in future posts. 

For those who choose to engage in serious philanthropy — especially during their lifetimes — philanthropy becomes its own business.  This business may calculate a social profit/loss statement rather that a financial one, but it is a business nonetheless.  Approaching philanthropy in this way truly can help the serious philanthropist make the leap – from success to significance. 

More to come……….

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Did you know that it is illegal in the United States to “possess, sell, purchase, barter, transport, import or export any bald eagle — alive or dead?”  And it is on this basis that New York art dealer Ileana Sonnabend’s heirs have valued her Robert Rauschenberg masterwork “Canyon” at zero for estate tax purposes.  The rationale is, if they cannot sell it or even give it away, there is obviously no market for it and therefore, it has no ascertainable value.  The article in Sunday’s New York Times “A Catch 22 of Art and Taxes, Starring a Stuffed Eagle”  was facinating reading.  Some highlights:

  • The estate valued the work at zero because of the IRS’ own guidelines for determining the fair market value (FMV) of property which state that taxpayers should “include any restrictions, understandings, or covenants limiting the use or disposition of the property.”  (Sidebar – this explains the common estate planning technique of the “family limited partnership” – a way to legally discount the value of lifetime transfers).  Because of this restriction, the family contends that “Canyon’s” FMV is zero.  Interestingly, the article does not discuss the fact that it is a crime to merely “possess” the dead eagle.  Ms. Sonnabend was able to legally get around that technicality but what about her heirs?
  • According to Stephanie Barron, one of the members of the IRS’ Art Advisory Panel, the group evaluated “Canyon” solely on its artistic merits, without reference to any accompanying restrictions or laws.  Hmm… If value is determined in part by any restrictions on use or disposition, then how could the panel NOT consider any legal restrictions?  Says Ms. Barron: “It’s a stunning work of art and we all just cringed at the idea of saying that this had zero value.  It just doesn’t make any sense.”  Perhaps so, but did the panel err in not considering this obscure legality?
  • A bizarre argument advocating a black market valuation was advanced by a former director of the IRS’ Art Appraisal Services Unit.  Said Joseph Bothwell as quoted in Forbes:  “There could be a market for the work, for example, a recluse billionaire in China might want to buy it and hide it.”  Yeah, or maybe the heirs could carry the work under a raincoat to a dark alley and sell it to some random passerby.  To me, this line of reasoning is very dangerous.
  • There was an initial valuation by the IRS of $15 million; when the estate refused to pay the additional tax and penalty, a Notice of Deficiency was issued stating that the value was in fact $65 million.  Although an intriguing turn of events, I do not want to argue the dollar amounts here, I want to stick to the principles of valuation. 
  • What about gifting the piece to charity and getting a charitable deduction for the value (what value? – and isn’t the fact that they can’t dispose of the thing the whole point of this discussion?)  Get over it – the value passed on to the heirs would be the FMV as determined in the negotiation.  The contribution would be made by the heirs, not the estate, and taxes and penalties would still be owed at the estate level.  According to the heir’s attorney, they would then face the limits on deductibility based on their current and future adjusted gross income.  Assuming a $65 million valuation, it would take them about 75 years to absorb the deduction in full.  Not the best piece of tax or charitable planning.

Most fascinating of all from my viewpoint is what started this whole thing, the restriction on the ownership and transferrance of any bald eagle, dead or alive.  So I went to the actual federal law to see what all the fuss was about.  Yes, it is a crime but: “….. whoever violates any …… regulation issued pursuant to this subchapter, shall be fined not more than $5,000 or imprisoned not more than one year or both.”  Now, imprisonment for one year appears to be a bit of a restriction (worth what?), but $5,000?  On a potentially $65 million valuation?  And couldn’t such a criminal penalty be negotiated separately to end the uncertainty?  Methinks there is much more here than meets the eye.  Stay tuned for the Tax Court case……..

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The early part of the 20th century is considered by many to be the golden age of philanthropy.  And because so many of the industrialists and financier of that era were, shall we say, complicated individuals, the rise of philanthropy itself was actually a controversial development.  A recent article in Philanthropy Magazine explored and tried to debunk what it referred to as the “Seven Myths About the Great Philanthropists.”  The article is pretty interesting (if a bit too long to read on an iPhone screen).  So, let me summarize.

Myth # 1 – The great philanthropists were robber barons. 

Fact:  They were merely very aggressive businessmen who pushed the envelope of technological process.  Because of that, they may have been a bit, ahem, ruthless in their dealings with both friend and foe but, according to the author, to classify them as robber barons is demeaning.  “Whatever else may be said of them – and there is much to be said – they created real and enduring wealth.  Moreover, the wealth they created benefited all Americans.”  By definition, robber barons get rich by extorting payments that yield no value, leaving everyone else a little poorer.

Myth # 2 – The great philanthropists were free market purists.  

Fact:  Although they perhaps liked to think of themselves that way, most of them were not above seeking and demanding government help and protection.  Example – James Wharton, who endowed the business school that bears his name at the University of Pennsylvania, stipulated in his deed of gift  that the “right and duty of national self-protection must be firmly asserted and demonstrated” and that “forfeiture shall occur upon the failure or unwillingness” of the school to teach a protectionist curriculum.  I don’t think Mr. Wharton would have been a fan of NAFTA. 

Myth # 3 – The great philanthropists were simplistic businessmen, not serious thinkers.

Fact:  Talk about painting with an overly broad brush!  The author gives a number of examples to prove otherwise.  My two cents – You can’t amass a fortune, particularly from nothing, if you aren’t endowed with serious gray matter. Enough said.

Myth # 4 – The great philanthropists used charity to control the working class.

Fact:  This is a bit of a communist argument gone awry.  “….to borrow the language of the Marxists, the great philanthropists did hope to find a bourgeois solution to the proletarian problem.  Some of them were quite explicit about their desire to use philanthropy to undercut communist influences in the labor movement.  But at a more profound level, the great philanthropists hoped to use their resources to turn the working class into the middle class….. the Marxists were wrong to see philanthropy as an instrument of exploitation.  It was an invitation to opportunity — placing, as Carnegie famously put it, within its reach the ladders upon which the aspiring could rise.”  And how is this bad? 

Myth # 5 – The great philanthropists turned to charity out of vanity.

Fact:   The author’s argument is a bit weak here.  His examples lead one to believe that vanity often was a motivator.  My argument is “so what?”  Focus on the good that charity accomplishes.  If a donor’s ego is stroked a bit in the process we shouldn’t complain.

Myth # 6 – The great philanthropists turned to charity out of guilt.

Fact:  Really?  Guilt about what?  No one in the Gilded Age ever felt the need to apologize for the accumulation of wealth.  And many of the great philanthropists did not turn to philanthropy in retirement; it was a lifelong habit started with a few of the first pennies ever earned.  So, where’s the guilt??

Myth # 7 – The greatest achievement of the great philanthropists was to establish perpetual foundations with professional staffs.

Fact:  “Surely it cannot be an accident that the Rockefeller Foundation achieved so much during its namesake’s lifetime [more than it did after his death].  Leadership, it seems, accounts for much of the difference…….Did Rockefeller and Carnegie change the course of American philanthropy by creating their foundations?  Undeniably yes.  Their efforts helped launch the field of professional philanthropy.  Is it the case….that their foundations have distributed their wealth with ‘greater intelligence and vision that the donors themselves could hope to possess?’  That is much less clear.  The great philanthropists, it turns out, were truly great at philanthropy.”

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There has been a lot of coverage lately in the press about the potential impact on public opinion by certain “501(c)(4)” entities and so-called “super-PAC’s” (political action committees).  If you don’t believe me, check out the recent front page New York Times article  “Tax Exempt Groups Shield Political Gifts of Businesses.”   Now, I know, your eyes have already started to glaze over; so have mine, but stay with me on this – it is an important topic, especially now.  Here are the takeaways:

  • During the election season which, like tax season and rush hour in the NY metro area, seems to have no real beginning or end, these two types of entities will be trying their darndest to get us to think the way that they do – and vote accordingly.  While both types of entity are tax exempt, contributions to neither are deductible for income tax purposes.   Make no mistake – these organizations are in no way, shape or form to be considered “charitable organizations.”
  • As I tell my students, beware those who quote Internal Revenue Code sections by number.  They either do not know what they are talking about (bad enough) or they know what they are talking about but they don’t want you to know (even worse!)  So, let me define – a “501(c)(4)” entity is a “civic league or organization not organized for profit but operated exclusively for the promotion of social welfare…..”  So let’s call them social welfare organizations.  Now, to me, the classic definition of a social welfare organization has always been my local civic association working to make life better in my community by advocating for road resurfacing, enforcement of zoning laws, and planting flowers in the common areas of the community.  Back when I was involved in the Civic, we always took pains to make sure that we did not side with or support any political party or politician in any way.  Today, however, the “social welfare” envelope is being pushed really hard both on the national and local levels.  While these organizations are actually prohibited by regulation from devoting themselves primarily to political activity, they can spend the bulk of their money on “issue” advertisements that purport to be educational and not political in nature.  And, of course, the IRS does not yet have a clear test for determining what constitutes excessive political activity by a social welfare group.  The result is a lovely shade of grey.  Consider an organization like the American Action Network which explicitly describes itself on its website as: “…. a 501(c)(4) ‘action tank’ that will create, encourage and promote center-right policies ……. primary goal is to put our center-right ideas into action by engaging the hearts and minds of the American people and spurring them into active participation in our democracy…..”  On the other side of the aisle, consider Priorities USA:  “….a 501(c)(4) organization dedicated to mobilizing Americans to preserve, protect and promote the middle class ……..We oppose right-wing attempts to harm the American middle class in order to bestow special treatment on the very wealthiest and special interests……” Bottom line, social welfare organizations can “educate” you as to the issues but not directly support any candidates.  Donors to such organizations remain anonymous.    Educational or political?  You decide. 
  • Super-PACs are a new kind of political action committee that have been around now for about two years.  According to http://www.opensecrets.org super-PACs are:  “….ttechnically known as independent expenditure-only committees, [that] may raise unlimited sums of money from corporations, unions, associations and individuals, then spend unlimited sums to overtly advocate for or against political candidates. Super PACs must, however, report their donors to the Federal Election Commission on a monthly or quarterly basis — the Super PAC’s choice — as a traditional PAC would. Unlike traditional PACs, Super PACs are prohibited from donating money directly to political candidates.”  Unlike social welfare organizations, super-PACs can support candidates but cannot directly finance their campaigns. Donors must be disclosed. 
  • Direct contributions to political candidates are severely limited, so these organizations provide effective work-arounds for those who want to spread the gospel truth according to the organization. 
  • Because social welfare groups do not have to report their donor lists to the public, more money has been flowing to the social welfare groups.   What a surprise!
  • Both sets of groups are aggressively promoting their agenda in advertisements that, while not specifically endorsed by the candidates, pretty clearly point the way to those candidates.

This is a great example of caveat emptor – let the buyer beware.  In the short term, there is absolutely no chance of curbing abuses in this arena.  Each one of us must take everything we hear and read with a couple pounds of salt. 

Happy voting!

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Affluenza – n  Also called:  sudden-wealth syndrome – the guilt or lack of motivation experienced by people who have made or inherited large amounts of money. 

And collectively, the other 99% sighs and says “get over it!”  Money may be the root of all evil but we all want more of it.  How else do you explain the explosion in state lotteries and legalized gambling or the obsessive drive to get into the “best schools?”  (not just college or grad school, but nursery, grade and high school as well!) 

“I’ve been rich and I’ve been poor.  Believe me, rich is better.” – Mae West

“Hey, all you need is a dollar and a dream!” – New York State Lottery

But we do know and can grudgingly accept the fact that the acquisition of sudden wealth, earned or inherited, can be devastating to the acquirer and his/her family.  Consider the self destruction of certain entertainers, athletes, and scions of billionaire families that we read about all too often.  While affluenza is an affliction many of us wouldn’t mind having, it actually has the potential to ruin lives and families. 

Apparently, the ultra-rich among us may be taking heed.  According to the 2012 U.S. Trust Insights on Wealth and Worth™, some 45% of baby-boomer-age high and ultra-high net worth Americans feel that it is not important to leave an inheritance for their children.  Hmmm, maybe affluenza is a disease that will take care of itself!  But then again, probably not.  Old habits tend to die hard, and estate planning – and the leaving of a financial legacy – have been societal habits for hundreds of years. 

So, what can we do about this problem?  Most high net worth individuals (HNWI’s) are very concerned about their estate planning.  In fact, I would venture to say that the majority of HNWI’s are more concerned and interested in estate and gift planning than income tax planning.  The disposition of their financial legacy is a big deal to them, whether it is getting money to the kids and grandkids so they don’t have to sweat and struggle, or endowing a chair or naming a building at the old alma mater.  And here is where traditional estate planning both excels and fails – it excels by concerning itself with the tax efficient transfer of assets to beneficiaries and charities but it fails by doing nothing to assist the families in psychologically and emotionally preparing for the eventual transfer of wealth.  Perhaps this is why family wealth typically does not last very long – “From shirtsleeves to shirtsleeves in three generations.”   

I am reading a very interesting book right now called Beating the Midas Cur$e by Perry Cochell and Rodney Zeeb.  While the book is several years old and the statistics may have shifted a bit due to the events that have occurred on Wall Street in the last four years, the premise is still rock solid – we need to rethink our approach to planning in a way that puts family before fortune and, by so doing, greatly increase the chance that both will survive and thrive for generations.  The authors have developed The Heritage Process™ which is their specific consultative approach to helping clients determine and control their true legacy while interweaving it with traditional estate planning.  It sounds tough, but it is actually not rocket science.  It is a process that focuses on values and vision and, ideally, starts early, when kids are still in the cradle.  It is a process that does not assume that children or grandchildren will automatically soak up the lessons learned through the school of hard knocks by the matriarchs and patriarchs of the family.  It is a process that explicitly acknowledges that money management, philanthropy, and social responsibility must be taught and reinforced throughout life.  It is a process that, quite frankly, scares the heck out of traditional planners who would rather shy away from the “soft” stuff that deals with feelings and emotions and focus instead like a laser on the numbers.  But as you can see, they do so at their peril.   

Warren Buffet, the Oracle of Omaha once famously said:  “…a very rich person should leave his kids enough to do anything but not enough to do nothing.”  Determining that proper mix – the right amount financial inheritance offset by philanthropy and coupled with the appropriate values and visions of the family – that is the challenge.

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