Posts Tagged ‘charitable donation’

So far, this blogger has covered a variety of “level 101” charitable tools & techniques.  Today, we begin to take it up a notch to the “201” level – though, we’re not quite graduate students, we are upperclassmen, at least as far as split interest trusts go!  This week we will discuss a key limitation of the charitable remainder trust (CRT)

First, a quick review:  You want to give a sizeable donation to your favorite charity but, truth be told, you do not feel comfortable parting with the assets today because you need the income for living expenses.  In the right interest rate environment, the CRT can be a perfect tool.  The CRT is a tax exempt trust in which the donor or other noncharitable beneficiary retains the income interest from the trust for a period of years or for the life or lives of one or more individuals.  The donor transfers cash or other property into the trust and in return, receives periodic payments over the term of the trust.  For income tax purposes, in the first year, the donor can deduct the actuarial present value of the remainder interest as a current charitable contribution.   Upon termination, any assets remaining in the trust pass to one or more charities.   Its best use is for a donor who wants to make a large charitable gift but hold onto that annual income; it can also be used to monetize and diversify an asset or asset pool at little or no tax cost to the donor.

Generally speaking, however, it does not make sense to fund a CRT in a low interest rate environment.  Because there are a number of fences built around CRT’s designed to ensure that they do what they are supposed to do – get money to charity in a tax-efficient (but not too efficient) manner,  a transfer made to a CRT in a low rate environment may not even work!  Here’s why:

By law, the annual payout percentage from a CRT cannot be less than 5% nor greater than 50% of its  market value[1].  In addition, based on the published §7520 interest rate[2] in effect at the time of the transfer, the projected charitable remainder interest going to charity must equal or exceed 10% of the initial fair value of the trust.  In completely plain English, this means that you can’t use a CRT to avoid tax completely nor can you use it to cut out the charity completely.  Combining the two limitations means that the lower the published government rate, the more difficult it will be to meet the 10% rule.[3]  In addition, there is yet another stress test to be met – there has to be a less than 5% probability that the assets will run out before the trust terminates, either at term or at the death of the grantor(s).  Again, the lower that published government rate, the harder it is to meet this requirement; the only way around this is to let the grantor(s) season a bit (i.e. get older) before funding the trust or reduce the term over which the annuity will be paid.  The result?  All math, all painful, all the time.

Let’s compare a charitable remainder annuity trust (CRAT) set up in today’s low rate environment versus the higher rate environment of, say, 2008.  Except for the actual published government rates, we will hold all other assumptions between the two years equal.

Our hypothetical grantors are both 65 years old and wish to monetize their $1,000,000 portfolio using a CRAT, with the remainder interest earmarked for their favorite charity.  Per the trust agreement, they will take back the minimum allowable annual payout of 5% of the initial fair market value of the trust, or $50,000[4].  They structure the trust to run until the death of the second grantor.  The results are summarized in the following table:


(Click to enlarge)

As you can see, from an income tax perspective, the CRAT is far less attractive today as the calculated charitable contribution is worth only 64% of what it would have been in the interest rate environment of 2008.  Of equal or even greater concern is the fact that contribution itself may be disallowed for tax purposes because there is a more than 5% chance that the trust will run out of money before its time.  Clearly this is a bad deal in today’s low interest rate environment.

As a planning tool the CRT may be on hiatus (or at least in hiding) for a bit because of today’s low interest rate environment, but, as we all know and expect, what is low now will eventually rise.  When that happens, all hail the triumphant return of the CRT!

[1] In the case of a charitable remainder annuity trust (CRAT), this would be the initial fair market value; in the case of a charitable remainder unitrust (CRUT) it would be the fair market value on the annual revaluation date for the trust.

[2] Let’s call it the “published government rate.”

[3] The §7520 rate for February 2015 is 2.0%.  When funding a CRAT, you are permitted to use the best (highest) rate in effect during the current month or the immediately preceding two months.  In our example, the January 2015 §7520 rate (2.2%) is best.

[4] Because this is an annuity trust rather than a unitrust, the annual payment is set in stone and does not change over time.

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Engaging in estate planning can be troublesome. It forces you to face your mortality. Those who are superstitious ascribe all kinds of evil consequences to the contemplation of death while the rest of us are just plain uncomfortable with the finality of it all.  But engage in such planning we must if we want to ensure that our estates – our legacies, really – efficiently pass to heirs and other beneficiaries in the manner and amounts we intend.

So, how to handle charitable giving?  Is it better to make such gifts now or at death?  Charitable bequests are often included in wills to fulfill existing pledges or to round out a lifetime of giving to favorite causes.  This approach is especially advantageous when there are no other “noncharitable” heirs involved, or when the estate owner wants to limit the amounts ultimately passing to these heirs.  Also, a testamentary transfer may be the only practical way to accomplish giving an entire estate over to charity, particularly if depleting the estate during lifetime effectively impoverishes the estate owner.

But what if there is a choice?  What if, during your lifetime, you can give away something, even a significant something, and not dangerously deplete the estate in so doing?  Are you better off giving at death or during life?

Obviously, there are pros and cons to each, and everyone’s situation is different.  But a general rule to follow is that lifetime charitable gifts are better than the exact same gifts made at death, both for tax and non-tax purposes.

  • Charitable gifts made during your lifetime are deductible for Federal income tax purposes.[1] This is the big one. Any gifts you make during your lifetime will save you income tax dollars at the federal level and possibly at the state and local level as well. There are lots of caveats to this, so speak to your tax advisor to get a sense of what the actual benefit may be for you. But as a rough example, consider that a New York City resident taxpayer in the top income tax bracket (and not subject to the alternative minimum tax) would save approximately 43 cents on the dollar in income taxes on a lifetime charitable gift. Not bad — a $50,000 charitable donation would effectively cost only $28,500.
  • But charitable bequests reduce your taxable estate, don’t they? Isn’t that effectively an estate tax deduction offering roughly the same benefit? Yes, such bequests do reduce your taxable estate. Continuing the example from the first bullet point, our hypothetical rich NYC taxpayer would save, at the top rate for estate taxes, approximately 57 cents on the dollar. But this savings is very deceiving – had he given away the same money during lifetime his estate would be that much less, and he will have effectively accomplished the same thing – and gotten current income tax deductions during lifetime to boot!
  • Charitable gifts made during your lifetime enable you to enjoy seeing the fruits of your giving. It can be as small as knowing that the shelves are stocked in the food pantry that you support or as large as seeing your name on a building on the campus of your alma mater – face it, many of us crave the “warm fuzzies” we feel when we support a cause, particularly when we see results or achieve personal recognition for our efforts. Certainly this is a non-tax benefit of lifetime charity, a guilty pleasure if you will, but one you can enjoy without having to admit it!
  • Lifetime giving patterns are a good indicator of your charitable intent and can be instructive for those who survive you. This is most important if you create a private foundation or some other charitable vehicle that will outlive you. Your surviving board members, often family, can view your lifetime actions as a roadmap of your values. Such a roadmap may help them continue your legacy in a way that, presumably, reflects your charitable intent.

Again, these are general rules which should be discussed and quantified with your tax advisor before implementation.  But the fact is, in most cases, charitable gifts made during lifetime yield better tax results and often more personal satisfaction for the donor.

[1] Subject to income and other limitations, including the type of contribution and the type of charity.

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Charitable Nation has, from time to time, showcased various wealthy individuals who are to be admired for their generosity and systematic approach to philanthropy.  (See, especially, Peter Lewis, David Geffen, Warren Buffett, John D. RockefellerChuck Feeney and Lady Gaga)  It can be both interesting and instructive to learn a bit about what makes these folks tick.

Now, the predictable response from the cynics among us is “Yeah, but did you know what a [nasty person] s/he was?”  I can’t and won’t argue that – building and maintaining a fortune is not easy and those who do so tend to have somewhat aggressive personalities.  And, in truth, the philanthropic impulses of some of the “1%” may be suspect, but I prefer to focus on the potential for good that results therefrom and give credit where credit is due.  The philanthropy of the 1% has made a big difference in this world by being impactful and long-lasting.  We can criticize the timing and/or amount of funding or the seemingly parochial views of some of the donors, but we must accept the fact that marketplace of philanthropic impulses is alive and well and made more vibrant by such generosity.

Several weeks ago, I received an e-mail from a reader directing me to a very interesting website, “The Generous Billionaires Club.” In this one website we can find information about the “Forbes Billionaires List,” “The Giving Pledge,” “Who’s Not Giving An Inheritance,” “Who’s Been Generous” and “Who’s Been Very Generous.”  (Almost makes me want to break out in song: “he’s making a list, checking it twice, gonna find out who’s naughty and nice…”)

Some interesting factoids:

  • According to the Forbes Billionaires List, 16 of the top 25 billionaires in the world are Americans but NONE of the 26 new tech billionaires are American.
  • The silver spoons in the mouths of the progeny of guys like Bill Gates, Warren Buffett, Michael Bloomberg and T. Boone Pickens may be a bit tarnished – in their parents’ estate plans, inheritances are minimized and philanthropy is maximized.  But, it’s not all bad – as Buffett has famously stated, he will give his children “enough money so they would feel they can do anything but not so much that they could do nothing.” In other words, the concept of “no” inheritance is relative.
  • Of the top 10 folks who have given away at least $1B of their net worth over time, 2 of them (James Stower and Herbert Sandler) are no longer billionaires.  Not mentioned in these statistics is Chuck Feeney, the co-founder of Duty Free Shops, who is definitely a former billionaire and whose private foundation, the Atlantic Philanthropies will have funneled $9B into charitable works by the time of it self-liquidation in 2016.

Whether you are a casual observer or an unabashed philanthropy geek, you can obviously have a lot of fun with these facts and stats.  In any case, I hope the information contained therein is instructive and inspirational for us all, regardless of the number of zeros that follow the value of our charitable giving

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I am a proud alumnus of Binghamton University, one of four major university centers in the 64 campus State University of New York (SUNY) system.  Binghamton is a young school, founded in 1946 as Triple Cities College, an extension of Syracuse University.  It became part of the SUNY system in 1950 and grew dramatically during the Rockefeller years, attaining its current status as a doctoral granting university center in 1965.  The 1970’s were tough for the University as New York State faced hard economic times and funding suffered accordingly.  Interestingly, the University never wavered – it continued to burnish its reputation as a very selective, high quality, world-class center of learning.  Over time, the financial hard times eased, but the evolution of Binghamton from a “state school” to a “state supported school” continued.  (What’s the difference, you may ask, between a “state” and a “state supported” school?  Essentially, “state supported” means less and less money each year from State sources.)  Regardless, Binghamton is today both the shining star of the SUNY system and an up-and-coming player in the international major leagues of colleges and universities.  Most important, it is a relative bargain, making high quality higher education available to a diverse population of students from all economic backgrounds.  binghamton-university-bearcats-logo

Sounds like a great success story, doesn’t it?  The problem is, because Binghamton is both young and part of a state system, its culture of philanthropy has not yet fully developed.  This issue is front and center on the agendas of both the boards of the Alumni Association and the Binghamton University Foundation – how to build and permanently sustain a culture of philanthropy within the University and alumni communities.  The question is obviously multi-faceted and complex.  Today, I wanted to spend a little time on one seemingly small but very profound step that the University itself has taken to help build that culture right at the true grass roots of the cause, the campus community and the student body.  The Student Philanthropy Committee was established earlier this year as a joint effort between the University and the student body.  The Committee functions under the auspices of the Binghamton Fund, the University’s annual giving program, and its director, Caitlyn Carlson.  Its mission is simple – to build a culture of philanthropy among students by cultivating awareness and engagement.  I recently caught up with committee co-chairs Andrew Loso, Class of 2015 and Dillon Schade, Class of 2016, to talk about what they were trying to accomplish.  It essentially boils down to the two parts of the Committee’s mission, awareness and engagement.

  • Awareness: According to Andrew and Dillon, the students today are more aware of the need for philanthropic support beyond tuition and fees than the members of my generation ever were. The committee has received little negative pushback from students, which is surprising when one considers that many, if not most of them come from modest financial backgrounds where cash is generally in short supply. The committee has gotten the word out en masse through events such as “Tag Day,” where physical assets made possible by donations were tagged throughout campus; manning a table at Spring Fling, a major, campus-wide social event; and giving a speech at the Senior Brunch. And, of course, there is nothing like the personal touch, where members of the committee use their personal connections to get the word out. The message is clear – “Join together – help ME do it!”
  • Engagement: One very simple yet concrete metric that the Committee had to work with was the Senior Challenge. Many schools have this – they encourage graduating seniors to make a modest donation equal in dollar value to their graduation year, i.e. $20.14. Simple, catchy and cheap, right? Unfortunately in fiscal year 2013 only 74 seniors (2.5%) participated. To Andrew and Dillon, this was simply unacceptable. Their goal for this year was to double participation to 150 students, which was still modest, but a step in the right direction. At 177 participants, the goal has been met and exceeded. Next year, they want to double again to 10%. Long term, they want to get to 30%, which experience at other schools has shown is about the upper limit for such a fundraiser.

Charities and nonprofits spend a lot of time and money to stay front and center in the minds of their current, former, and future donors.  It is not easy.  It is not a given.  Even if you assume that people want to give to certain causes, the fact is they have to know about the need and they have to be given an easy and nonthreatening way to contribute whatever combination of time, treasure and talent they can.  Binghamton University or [insert the name of your alma mater] cannot assume that current students see and appreciate the benefit of the education they are receiving.  They cannot assume as a given that alumni will automatically agree that paying it forward is the right thing to do.  Information, communication, and appreciation go a long way to making it all possible.  The students involved in the Student Philanthropy Committee are learning this first hand and at an early age and, in so doing, are helping the University in a small way now that will hopefully blossom over the years as giving becomes a habit – a habit begun in the undergraduate years of the college experience.

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Since the start of this blog, we have focused on the Philanthropic Continuum, that progression from “casual donor,” the person who gives when asked but without much thought, to the “serious or serial philanthropist,” where truly significant gifts and amounts are involved.  The more serious your philanthropy, the more important it is for you to treat it in the same manner that you would treat a business or investment portfolio.  Certainly, there are few Bill Gates out there whose annual giving might exceed the gross national product of a small country, but there are certainly enough philanthropists and protophilanthropists who have either adopted or should adopt a businesslike approach to their giving.  This is important whether you have a private foundation or donor advised fund or just your personal checkbook and it’s not an unreasonable approach; in fact such an approach is already in most responsible people’s DNA.  Heck, I recently spent a half hour researching the purchase of a meat thermometer and stainless steel meat skewers (its barbeque season…), the grand total of which did not top $20, including shipping, so why wouldn’t I approach my charitable giving in the same way – systematically, methodically, and rationally?

Fact:  Giving to charity is really not “giving” at all, it is “investing.”  If you don’t view it this way, then as a donor you are throwing your money away.  One’s charitable giving should be deeply connected to one’s valCaptureues and world view.  The donor should be engaged with the cause and feel a sense of ongoing connection to it.  If s/he achieves that, then the very act of giving to, no, investing in the cause brings the connection to the next level.  Tossing money down a black hole never yields results, but investing in well-conceived and competently executed solutions can be quite rewarding.

Fact:  Investing without a plan is, at best, inefficient.  Without systematic measurement toward a goal, you will never know if you have achieved anything at all. The most effective financial investors are those who are strategic in their approach to investments.  They first define their goals and then fashion a plan to meet them.  Continual measurement of progress toward the goal is implicit in the plan.  Some investors do this on their own while others hire advisors to help them.  Nonstrategic investors, on the other hand, buy a little of this stock and a little of that annuity and maybe chase some yield at their local savings bank, but in the end, the bulk of their growth can be measured more in terms of their additions to principal rather than by any real market rate of return. The same can be said for charitable giving.  Nonstrategic giving will most likely result in giving smaller amounts to a greater number of charities, many of which may not even make it to your values/world view radar screen.  Developing a philanthropic investment or business plan can help prevent that from happening.

Fact:  The business owner without a plan in place to grow his/her business is taken seriously by no one, least of all investors.  Investors will run screaming from an entrepreneur who says “invest in my idea and we will see what happens.”  Again, why would you treat your philanthropy any differently?  Don’t you want to see results?  Don’t you want to be engaged?  Wouldn’t you rather strategically connect with your cause as a player than participate passively as a bystander?

So the message is clear – make a plan!  Begin with your personal passion and identify charities that are worthy of it.  Determine how much you want to give, no, invest and over what period of time.  Consider the tax ramifications pertinent to your situation (and discussed throughout in www.charitable-nation.com) and adjust accordingly.  Develop personal relationships with the charities you support.  Learn more about the cause and become an unpaid ambassador or advocate, helping to raise awareness and ultimately more money.  Volunteer.  Find ways to use your professional skills and personal connections to help make a difference.  (Time, treasure and talent) Stay on top of the charities you support, and don’t be afraid to offer advice or criticism if and when needed but, of course, be realistic in your expectations –the size and reach of the organization and the relative size of your contributions will likely play a role in how effective you can be in an informal advisory role.  To formalize that role and perhaps increase your influence, consider taking a position on the organization’s advisory board or board of directors.

Unlike financial investing or for-profit business ownership, philanthropic investing will not result in a personal, positive rate of return.  It will, however, produce a discernible social return on investment that will be meaningful to you, but only if you take the time to define and measure it.

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Several years ago, a rabbi told me that he always carries coins and single dollar bills so that, if he sees a panhandler in the street, he can easily give a modest amount to him or her.  The idea is, while we do not know the circumstances of such an individual, the fact that s/he is asking should be proof enough that there is a need.  Shame on us if we ignore that need; shame on the beggar is s/he is scamming us.

How do you feel about this?  One-on-one philanthropy is tough because we just don’t know…

But do we ever?  I have done what I refer to as “symbolic” work at a soup kitchen, substituting for the regular staff on a couple of Christmas days.  I saw families and individuals in the facility, none of whom looked like the dirty and bedraggled homeless we see sleeping in doorways in New York City, but none of whom looked particularly prosperous either.  Some of the clients were strapping young men who were seemingly capable of at least manual labor.  I was told that most of them were down-on-their-luck working class poor, for whom the recent Great Recession was devastating.  Did the folks running the soup kitchen bar their entry because they might be scamming the facility?  Of course not.  The fact is, particularly on Christmas Day, no one goes to a soup kitchen if they can afford something better.  Although, the staff goes out of its way to treat all of its clients with dignity and respect.  Eating in a soup kitchen is, at its absolute best, a humbling experience.

Institutional philanthropy, particularly the short-term kind like a soup kitchen, is tough because we just don’t know…

On the weekend after Hurricane Sandy hit the New York metropolitan region, my wife and I were at our home trying to clean up the mess.  Our neighborhood was badly hit, not to the point of mass destruction and obliteration of buildings, but enough that our houses were not habitable for weeks or months thereafter.  On that Saturday, a group of women from the local PTA made their way through the neighborhood handing out sandwiches and drinks to the residents.  I was overcome with emotion as I sat on my front doorstep eating the sandwich.  How awful – here we were, recipients of a modest yet most generous handout (“hand-up”) when we were always the ones giving to charity.  It was a blow to our pride and ego, but one we accepted with grace.  Those PTA ladies will never know how grateful we were for this small act of kindness, nor the profound effect it had on us.

Personal receipt of charity is tough, particularly when our personal pride goes to war with our sense of need…

I think it comes down to this – the seemingly short term “brother, can you spare a dime?” kind of charitable circumstances we find ourselves in from time to time should neither engage nor disengage the guilt factor we may feel at contributing or not contributing.  Our feelings will depend on our personal constitution, and we should come to grips with that as a matter of personal philosophy.  Sidewalk philanthropy may or may not do it.  We may feel more comfortable when, like the PTA ladies, we respond to a more verifiable crisis.  In the bigger picture, however, it is incumbent on all of us, particularly in this day and age of the fraying social safety net and tendency among politicians to demonize the poor, to take a longer term view.  We need to support those causes that truly help people in need and trust that, over time and situation, such organizations develop adequate controls to do the kind of triage required to stretch their limited resources to help those who need it most.

A great, big “thank you” to bloggers Richard Marker (“Wise Philanthropy”) and Gray Keller who, with differing viewpoints, have blogged about this issue and inspired this post.

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I recently read the book With Charity for All – Why Charities Are Failing and a Better Way to Give With-Charity-for-Allwritten by former NPR CEO Ken Stern.  It is an interesting read, at once depressing yet oddly optimistic about what “could be” in the philanthropic world.  To those who are not philanthropy geeks, much of what Stern flags as issues may come as a surprise – a fair number of so-called “charities” act far more like profit making businesses than not-for-profits and if examined closely, may not pass for charities by anyone’s objective measure.  For example, he cites the nation’s many large, well-endowed not-for-profit hospital systems which, in terms of services provided for the poor, are virtually indistinguishable from their for-profit brethren.  For details and statistics supporting this conclusion, I suggest you read the book, but in summary, his points are clear:  “The issues….have substantial economic consequences.  Hospitals are the single largest component of the charitable sector and the value of tax incentives is enormous…..While estimates vary, the value of local, state, and federal tax incentives to nonprofit hospitals almost certainly exceeds $20 billion a year……Since charitable hospitals return only a fraction of that in charitable care, it raises the possibility that the public would be far better served by removing or reducing the subsidy and using the savings to buy better health care from the best and most efficient providers.  And it raises the question:  when a charity stops being charitable, does anyone notice?”

At the other end of the spectrum, Stern is also critical of charities which, unlike health care delivery systems, do not perform critical social functions.  He cites the various college football “bowl” games that have proliferated around the country stating:  “It is no doubt puzzling to most Americans that this string of open-air parties, football games and corporate promotion events have the same charitable designation as Habitat for Humanity, Teach for America, of the local food bank.”   It was not only puzzling for me, but a complete surprise!

This is just a small taste.  As I said, the book is frequently depressing, especially for optimists like me who believe that well run charities can truly change the world.  But it is also well written, easy to read, extremely thought provoking and well worth a few hours of your time.  While there are certainly things we as a society can do to better police abuses in the charitable world, there are also many things we can all immediately do to have an impact, and Stern gets prescriptive about this in the final chapter of the book:

  • Resist the old ways.  Think of charitable giving more in terms of investing for social impact.  Ignore overhead and administrative ratios or at least put them in proper perspective.  Focus on the end customer of the charity and whether s/he is being served by that charity.  Base charitable giving not on personal connections and relationships but on objective evidence of effectiveness (admittedly, hard to find).
  • Look for indicia of quality.  Identify top performing organizations not just by looking for four star ratings on Charity Navigator, but by finding those that are crystal clear about their goals and transparent about their research results on their websites.  Look for growth.  Look for charities that worry less about overhead and more about results.
  • Do the work.  “Average Americans spend more time watching television in a single day that they do on their charitable contributions in an entire year.  Like financial investing, social investing takes work: researching charities, reviewing websites and published reports, and sharing information among friends, peers, and other like-minded givers.”
  • Follow the leaders.  Signalers in the financial marketplace exist; they exist in the philanthropic marketplace as well.  People swear by the Oracle of Omaha (Warren Buffett) as the messiah of investing, so why not Bill and Melinda Gates as the bellwethers of philanthropy? Or organizations like GiveWell (a research organization), New Profit (venture philanthropy), and the Robin Hood Foundation, all of which are committed to careful research and analysis.
  • Pool donations.  This is an interesting concept – the idea of a philanthropic “mutual fund.” Pool the funds and let the professionals do the heavy lifting.  While options for this retail approach are extremely limited right now, it may be an idea whose time has come.

For those who are serious about philanthropy, it is advisable to think of the private foundation or donor advised fund not as a charitable pocketbook but as an investment portfolio that needs to be tended on a regular basis.  We chastise politicians who think that the solution to most problems is to throw money at them, yet many of us approach our own philanthropy in just that manner.  Perhaps the family foundation of the future will build its own infrastructure for more effective assessment and monitoring of the charitable projects in which they invest.  Perhaps the philanthropist of the future will become more coldly calculating in his/her approach, looking for solutions instead of stopgap measures.  And why not?  We do it in business all the time, relying on creative destruction to take us to the next economic level.  Perhaps what the charitable world needs right about now is its own little bit of creative destruction.

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