Jewish Federation of Greater Philadelphia 20th Annual Bronstein Tax Seminar Edward Jay Beckwith 2015 Copyright, Edward Jay Beckwith The Philanthropic Imperative:

Jewish Federation of Greater Philadelphia 20th Annual Bronstein Tax Seminar

Edward Jay Beckwith

2015 Copyright, Edward Jay Beckwith

The Philanthropic Imperative:What Clients Want and Charities

Need from Advisors

September 10, 2015Philadelphia, Pennsylvania

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PROGRAM OVERVIEW

• Why Is Philanthropy So Important to Donors

• Why Is The Philanthropic Discussion So Important to Planners

• The History and Scope of American Philanthropy

• Keeping Donors at the Center of Philanthropic Planning

• Getting Technical – Determining What, When and How

• Charitable Giving at Different Life Stages

• Pulling It All Together – What Works and Why

• Watch List and Key Current Developments

• Tools and Resources for Practitioners

• Questions, Thoughts and Comments

• Contact The Presenter

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Why Is Philanthropy So Important to Donors*

• Almost all (98.4%) high net worth households gave to charity in 2013, up from 95.4% in 2011

• Households with $5 Mil + gave an average of $166,602

• Dollars dedicated to giving vehicles (DAF’s, PF’s and Trusts) grew to 28% of dollars given

• Volunteerism continued as a major theme with these families

• HNW donors are motivated to give by the belief that their gift can make a difference and by personal satisfaction

• More than one in three donors report they plan to increase their giving in the next 3-5 years

*The 2014 U.S. Trust Study of High Net Worth Philanthropy, November 2014

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Why Is Philanthropy So Important to Donors*

• Most HNW households report they have a giving strategy (72.5%) and a giving budget (61.9%)

• Most HNW households report they are knowledgeable (72 %) about charitable giving. As their knowledge increases, so too does their awareness of alternative charitable tools, monitoring their giving, confidence in their impact, consulting with an advisor, personal fulfillment, having or planning to have a charitable vehicle and total dollars given

• Those who consult with an advisor are all more likely to have or plan to have a giving vehicle

*The 2014 U.S. Trust Study of High Net Worth Philanthropy, November 2014

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Why Is The Philanthropic DiscussionSo Important For Planners*

• The Philanthropic Discussion Nearly all advisors ask at least some of their clients about

their philanthropic interests and involvement Giving, whether directly or through the use of a giving

vehicle, is nearly universal among high net worth individuals. Advisor involvement in high net worth giving correlates with the variety of methods by which the giving occurs, with those who discuss philanthropy with their advisors being more likely to use giving vehicles

Who initiates the discussion is not as important to high net worth individuals as when the discussion is initiated. Nearly all expect their advisor to have fully understood their needs and goals and want the subject of philanthropy to be brought up early in the advisor/high net worth client relationship*The U.S. Trust Study of the Philanthropic Conversation, October 2013

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Why Is The Philanthropic Discussion So Important to Planners*

Advisors and clients disagree about the focus of their philanthropic conversations. Advisors believe their philanthropic discussions are equally balanced between their clients’ personal goals/interests and technical topics, but most clients say their advisors primarily focus on the technical aspects of giving, including tax consequences

Clients want advisors to adopt a more balanced approach, focusing on both their personal passions/charitable interests and technical topics. Less than half of high net worth clients are fully satisfied with the philanthropic conversations they have with advisors, likely influenced by this disparity in advisor focus and client desires

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*The U.S. Trust Study of the Philanthropic Conversation, October 2013

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• Advisor Perceptions of Client Motivations to Give and Reasons for Hesitation While advisors correctly report their clients’ top motivations to give

(personal passion, a desire to give back/make an impact), they over-estimate the importance of tax benefits and enhancing the family name/business, while under-estimating the desire to encourage future generations in philanthropy

Many advisors believe that a primary reason why a client may hesitate to give is the client’s perceived wealth inadequacy (i.e., concern about running out of money for themselves or their heirs). However, clients are actually more concerned about donations not being used effectively and an increase in donation requests


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• Impact of Philanthropic Discussions on Client Development Most advisors say discussing philanthropy with their clients is good

for their business development. The direct benefits include contributing to a more comprehensive, holistic advising approach and helping with new client acquisition. Both advisors and clients agree that these discussions deepen relationships and enhance the credibility of the advisor

For advisors who are actively engaged in their own giving, talking about their experiences with clients can have widespread positive implications for their business. High net worth individuals say knowing that an advisor has personal philanthropic experience and knowledge would factor into advisor selection and would enhance the credibility of philanthropic advice provided


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In addition, advising clients on philanthropy can help expand relationships to extended family, a benefit that isn’t fully leveraged by advisors. Just a fraction of high net worth individuals say that their advisor had suggested including future generations in giving, even though clients say that encouraging future generations to be philanthropic is one of the most important reasons they give. Many advisors seem to recognize this gap, saying they would like to increase their knowledge of how to engage heirs in philanthropic giving


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• Knowledge of and Continued Education in Philanthropic Advising Advisors consider themselves to be at least somewhat knowledgeable about

structured giving vehicles (charitable trusts, private foundations, and donor advised funds), and high net worth individuals generally agree. Clients who work with advisors on their philanthropic efforts give them high marks for competency and knowledge of structured giving vehicles

If a client’s philanthropic needs exceed the advisor’s base of knowledge, nearly all are willing to refer the client to another professional (most often to a philanthropic advisor or an attorney). In addition, most advisors show an interest in expanding their knowledge of philanthropic advising. They are interested in increasing their knowledge on a variety of topics, with developing strategic giving plans, learning more about giving vehicles, better integrating client philanthropic values and goals in the broader wealth plan and engaging clients’ heirs in philanthropic efforts topping the list


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The History And Scope Of American Philanthropy

• Historical Perspective Colonial period – Community-based effort to create a better life Industrial philanthropy of the late 19th and early 20th centuries Entrepreneurial philanthropy – Dotcom millionaires

• Scope of Philanthropy* In 2014, $358 Billion Dollars were donated to charitable causes Individuals gave the lion’s share (80%) - $258 Billion (72%) in

lifetime gifts and $28 Billion (8%) in bequests The Rest – Corporations - $18 Billion (5%) and Foundations - $54

Billion (15%)

*Giving USA -2015

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• Where Do The Contributions Go Religious organizations - $115 Billion (32%) Educational institutions - $55 Billion (15%) Human services - $42 Billion (12%) Health care - $30 Billion (8%) Arts, culture and humanities - $17 Billion (5%) Public/society benefit groups - $26 Billion (7%) International affairs - $15 Billion (4%) Environment/wildlife - $10 Billion (3%) Individuals - $6 Billion (2%) Foundations - $42 Billion (12%)

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• Estimated Total Wealth Transfer (2007-2061) $59 Trillion (in 2007 dollars)* $36.0 Trillion to Heirs $5.6 Trillion in Estate Taxes $1.1 Trillion in Estate Closing Cost $6.3 Trillion in Charitable Bequests

• Estimated Charitable Transfers (2007-2061) $6.3 Trillion at Death (Bequests) $20.6 Trillion during Life (Gifts)

*“A Golden Age of Philanthropy Still Beckons: National Wealth Transfer and Potential for Philanthropy” Center on Wealth and Philanthropy – Boston College (2014)

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• The Role of Tax Benefits Our tax laws are complex; Often even a seasoned tax professional

does not fully understand the tax aspects of charitable giving. Time learning the area is time well spent. Within the subject are a number of planning opportunities for a wide variety of taxpayers who can help them satisfy their interest in assisting a favorite charity

The tax laws reflect national policy to encourage, impede or channel the use of income or property

Historical Perspective

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The History And Scope Of AmericanPhilanthropy

• Economic Rationales for Tax Deduction of Charitable ContributionsTax deductibility of charitable contributions reduces

the economic cost to the donor and therefore encourages charitable giving

The community as a whole may derive value from donations made to charity

Charitable organizations provide goods or services that the government might otherwise provide, thereby alleviating some of the burden on the government

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Keeping Donors At The Center Of Philanthropy

• Philanthropic Triage First, begin with the Donor – Setting Goals Then, identify the Donee – Matching Resources to Needs Finally, select the Best Planning Vehicle(s)

• Preliminary Considerations in Setting Goals Donor’s values and objectives Donor’s prior philanthropic experience Donor’s motivation Scope and duration of the gift

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• Common Donor Motivations It’s simply the right thing to do Somebody helped me -- now it is my turn to help others Religious or family tradition Doing well (in business) by doing good It keeps me busy and I enjoy it

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• Philanthropy as a Component of a Well Crafted Plan for a Family’s Private Wealth A charitable gift is not a product – it is part of a comprehensive

process The Planning Team – charitable donees working with the donor’s

advisors Developing a Vision: Reflecting a Family’s Values – “If you could

change just one thing in the world, what would it be?” Matching resources with needs Evaluating potential charitable donees

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Getting Technical – Determining What, When and How

• Planning Basics• What Do I Want to Give

Ordinary Income Property Capital Gain Property Income in Respect of a Decedent

• To Whom Public Charity Private Foundation

• How is The Gift to be Arranged? Outright or in trust Partial Interest Benefits to donor or others Fulfilling a pledge

• Basic Tax RulesQ̶ Estate, Gift and GST taxesQ̶ Income Tax

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• Basic Tax Rules – The Starting “Premise”‒ Donor must transfer legal title and dominion and control over

something of value‒ Gift must be irrevocable ‒ Donor’s tax deduction will equal the Fair Market Value of the property

donated‒ “Split Interest” rules limited gifts which are partially for Charity and

partially for private beneficiaries

• Estate, Gift and GST taxes‒ Starting Premise “IS” the Rule‒ Charitable Beneficiaries are NOT “Skip Persons”

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• Quantitative and Qualitative Income Tax Rules Modify the Starting Premise

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• Valuation and Substantiation‒ Qualified Appraisals‒ Contemporaneous written acknowledgements‒ Special valuation limitations for gifts to Private Foundations‒ Five-Year Carry Forward

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Getting Technical - Determining What, When and How

• Component Funds at a Public Charity‾ Unrestricted Funds‾ Designated Funds‾ Field of Interest Funds‾ Donor Advised Funds

• Separate Donor Centered Charitable Entities‾ Private Foundations

Operating Grantmaking Private Foundation rules Limitations of income tax charitable contribution deductions

‾ Supporting Organizations Types Functionally integrated

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• Funding Mechanisms‾ Outright Gift‾ Gifts of Partial Interests‾ Life Income Vehicles

Charitable Remainder Trusts Charitable Gift Annuities Pooled Income Funds

‾ Charitable Lead Trusts

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• Fashioning Restrictions‾ How rigid can they be? - The Donor’s Perspective‾ How rigid should they be? - Gift Acceptance Policies‾ Who can enforce restrictions?

Donor Persons benefited by gift State Attorney General

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• Source of Restrictions‾ Donor‾ Donee‾ Solicitation materials‾ Board resolution‾ Operation of Law

• Court Modification‾ Doctrine of Cy Pres (to prevent the failure of the charitable

purpose)‾ Doctrine of Deviation (to remove administrative obstacles to

accomplishing the intended charitable purposes)

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Charitable Giving At Different Life Stages

• The type of charitable giving a client may be receptive to may depend on the client’s stage in life and generation Life events - Marriage, divorce, remarriage, starting a

family, death or illness of loved one, sale of business, retirement, receipt of inheritance, etc.

Age/Generation of client – Before Boomers, Baby Boomers, Generation X, Generation Y/Millennials

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Life Events

• Life events for which charitable strategies should be considered: Marriage/Re-Marriage –

Clients may ask their guests for contributions to a specific charity in lieu of wedding gifts or indicate that a charitable donation is being made in lieu of party favors

Birth of child Clients may make a charitable gift in the name of their child or ask for

donations in the child’s name in lieu of baby gifts Clients may review their federal and state income tax situation and may

be looking for additional income tax deductions. Charitable giving is an easy way to offset income

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Life Events

• Life events for which charitable strategies should be considered:

‾ Death or anniversary of death of a loved one/Receipt of Inheritance – Clients may make a charitable gift in the name of the decedent as a way of

remembrance Clients may consider establishing a fund or endowment in the name of the

decedent

‾ Illness of a loved one – Clients may make charitable gifts to organizations seeking a cure for the

illness of a loved one Clients may participate in fundraising events to raise awareness of the

illness Clients may wish to volunteer with organizations

Life Events

• Life events for which charitable strategies should be considered: Receipt of Significant Income (i.e., Sale of Business, Significant Bonus,

etc) – Clients may want an immediate income tax deduction to offset their income Cash contributions or creating a donor advised fund are both great ways to

obtain the charitable deduction within a short time frame o If the client isn’t sure what charity or charities they want to benefit, a donor

advised fund may be the better vehicle because the client gets the immediate income tax deduction but can determine the charities to receive the funds later

Retirement Sale of Appreciated Asset –

Rather than sell the appreciated asset and get hit with capital gains tax, clients should consider contributing the appreciated asset to charity and getting an immediate income tax deduction

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Generation Y/Millennials (Born 1980 to early 1990s)

• With limited means while in school or beginning their careers, young adults may be more interested in making spontaneous cash donations or participating in or volunteering time to charitable events

• Young adults are less likely to consider long term charitable giving strategies while their future is still unknown. They need to balance their charitable giving with their financial needs.

• Young adults may be more inclined to make charitable gifts online or through social media

• Attractive Charitable Planning Techniques: Cash gifts – As young adults mature, they may be more inclined to begin monthly charitable giving

programs or participate in activities with a fundraising element (such as races, cocktail receptions, spin events, etc)

Donor advised funds – By creating a donor advised fund, young adults can receive an immediate charitable deduction and direct distributions each year to their preferred charities (i.e., university, religious organizations or to fundraising campaigns that their friends may be participating in)

Donate time – As available assets may be limited, young adults can more easily donate their time by volunteering

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Baby Boomers (Born 1946 to 1964)

Generation X (Born 1965 to 1980)

• By their 40s and 50s, individuals with families may be more interested in the tax savings achieved from charitable giving

• Attractive Charitable Planning Techniques: Gifts of Appreciated Assets – To avoid capital gains tax and enjoy the benefits

of a charitable deduction, these individuals may consider contributing appreciated securities or other appreciated assets to charity. This may be particularly important to high income individuals who need deductions.

Insurance and Charity – If an individual has an important cause to which they want to make a significant future gift, they may consider purchasing an insurance policy and naming the charity as the beneficiary. This will generate an annual charitable deduction for the premium paid and leave a significant future gift to the charity.

Creation of Private Foundation – Depending on the amount being contributed, creating a private foundation is a good way to establish a family plan of giving by naming family members to the board of directors of the foundation.

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Before Boomers - Silent And the Greatest Generations

(Born 1945 or earlier)• Individuals in this generation are in or entering retirement and may be relying on

the availability of their assets to support them Accordingly, these individuals may be more interested in charitable plans that

take effect upon their death or provide them with an income stream for life

• Attractive Charitable Planning Techniques: Gift of Assets No Longer Used – These individuals may also have assets which

they no longer use and which the charity can either use or sell without the recognition of gain. For example, a boat, a vacation home, tangible property, etc

Strategies that take effect upon death: Retirement Plan Beneficiary - By designating a charity as the beneficiary of a

retirement plan, an individual’s estate receives an estate tax charitable deduction and does not burden the individual’s family with the deferred income taxes owed on distributions from such plans

Specific Bequests – A simply charitable bequest in a will or revocable trust provides an individual’s estate with an estate tax charitable deduction and allows the individual to retain the asset during life

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Before Boomers - Silent And Great Generations (Born 1945 or earlier)

• Attractive Charitable Planning Techniques: Strategies that provide income streams for life:

Charitable Gift Annuities – A charitable gift annuity provides an immediate income tax deduction as well as a guaranteed annuity for the life of the donor

Charitable Remainder Trusts – Provides an immediate income tax deduction as well as an annuity or unitrust to your client or their family members. If the annuity or unitrust is paid to your client, this guarantees an annual income stream. A client that supports family members can also create a CRT with the annuity or unitrust being paid to such family members. This is a tax efficient way to provide the same amount of annual payments to family members with reduced gift tax consequences and an immediate charitable deduction

• These clients may also have a significant amount of wealth that they want to contribute to a private foundation By naming family members as board members of the private foundation, the

older generation can get the younger generation involved in charitable giving

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Pulling It All Together – What Works And Why

• Comprehensive Planning A donor is best equipped to fashion a philanthropic plan once he or

she has a good grasp of what they have, what they need and what they can do with what they have

Start with the basics and use all available resources to enhance the planning

Donor intent matters - handle carefully and comprehensively Sometimes the simplest and easiest concepts are the most

successful (and safest) strategies Gifts of appreciated stock Charitable Gift Annuities and Pooled Income Funds Gifts of life insurance products Donor Advised Funds

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Pulling It All Together – What Works And Why

• Private Foundations are not to be feared or avoided

• Supporting Organizations often are the best of both worlds

• Life Income Vehicles should be tailored Charitable Reminder Unitrusts work in a low interest rate environment Limited-term Charitable Remainder Trusts work at all ages

• Pairing Technologies can create “Win-Win” outcomes Charitable Remainder Trust with a Wealth Replacement Trust Charitable Remainder Trust with a Charitable Lead Trust Private Foundation with a Donor Advised Fund Private gifts with a formulated gift over to charity

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Watch List and Current Developments

• Tax Extenders

• Healthcare

• Donor Advised Funds

• Unrelated Business Income Tax

• Excess Benefit Transactions and Executive Compensation

• Additional Supporting Organization Regulations

• Elections

• Fundamental Tax Reform

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Tools And Resources For Practitioners

• www.irs.gov/charities• www.pgdc.com• www.guidestar.org• www.cof.org• www.foundationcenter.org/

http://www.irs.gov/charities

http://www.pgdc.com/

http://www.guidestar.org/

http://www.cof.org/

http://www.foundationcenter.org/

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QUESTIONS, THOUGHTS & COMMENTS

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CONTACT THE PRESENTER

Edward J. Beckwith, BakerHostetler LLPWashington, D.C.(202) 861-1646

[email protected]

2014 Copyright Edward J. Beckwith.

mailto:[email protected]

Documents

Jewish Federation of Greater Philadelphia 20th Annual Bronstein Tax Seminar Edward Jay Beckwith 2015 Copyright, Edward Jay Beckwith The Philanthropic Imperative: