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Legacy Planning: Positioning Your Business for Growth

Helping your clients reach their charitable goals can add long-term

value to your practice.

“It might seem counterintuitive, but advisors who help their clients fulfill their philanthropic

inclinations can put themselves in a position to add long-term value to their practice.”

American Endowment Foundation

www.aefonline.org | 1-888-440-4233

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Introduction

According to the Center on Wealth and Philanthropy at Boston College (Schervish), the boomer

generation in the U.S. aged 46-64 is wealthier than any previous generation. The transfer of

wealth to the baby boom generation is proceeding at a record level with more than $1 Trillion

estimated to be transferred every year for the foreseeable future.

This massive wealth transfer creates enormous opportunities for advisors who are motivated to

work with the philanthropic wealthy. Research shows that these affluent individuals are looking

to their financial advisors for ways to be more strategic in their philanthropy and do so in more

tax efficient ways. Being proficient at delivering tailored charitable solutions enables advisors to

significantly add value to their practice.

Today, thanks to the creativity that characterizes American philanthropy, there are many

charitable solutions available to families to help them reach their charitable objectives. Although

private foundations have long been considered the gold standard of philanthropy, donor advised

funds are now the most popular alternative for family philanthropy. Popularized by large mutual

fund companies and regional community foundations, donor advised funds are now the fastest

growing form of charitable giving in America today.

Unfortunately most programs cut out the trusted advisor relationship by offering a limited menu

of pooled investment options – often proprietary investment products of the sponsor.

If you work with high net worth clients, you know that it can sometimes be difficult to support

your clients’ charitable interests without undercutting your own business success - but, it doesn’t

have to be.

Since 1993, American Endowment Foundation is the only leading Donor Advised Fund program

to offer this level of independence and personalized charitable management.

What is a donor advised fund?

AEF donor advised funds are, in practice, incredibly simple. The donor contributes a wide range

of asset types. The gift qualifies for immediate and maximum tax benefits. The assets are

placed in a traditional investment account which the donor’s financial advisor then manages.

The donor recommends grants from their Fund to any U.S. public charity on his or her

convenient timetable. The donor can arrange successor advisors so the Fund can continue over

successive generations and follow the family’s legacy of charitable giving.

Why clients like donor advised fund solutions?

When making a charitable contribution, most people reach immediately for their checkbook to

write a check. This is understandable - giving cash is both simple and easy – especially for

small gifts where the donor is seeking immediate recognition. Donations of this type typically

come from available short-term income.

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In contrast, donors making larger gifts do so for a variety of reasons that often go beyond just

“charitable giving,” Many, for instance, want to:

Support multiple charities and hold these charities accountable.

Establish a vehicle to express their unique philanthropic intentions.

Streamline their giving - keep track of grants, amounts, and giving history.

Benefit from tax advantages by contributing appreciated long-term assets.

Establish a vehicle to educate children and pass along family values.

Enjoy flexible options to choose recognition or preserve their privacy.

Create a lasting intergenerational legacy.

Contributed assets come typically, not from income, but rather from appreciated wealth

accumulated over many years so the tax consequences tend to be more complex and far

reaching. Often the gifting is long range and strategic, requiring the trusted advisor’s

involvement. Some families have special charitable-giving needs, such as bridging

generational, philosophical and geographic separation.

Donor advised funds are popular because they offer simple, smart and meaningful solutions that

can be tailored to unique donor needs and objectives. And when combined with other forms of

charitable giving (charitable trust, private foundations, life insurance policies, retirement plans,

bequests, etc.) they become that point of intersection where a family’s charitable dreams can be

developed and come true in ways not otherwise possible.

The philanthropic opportunity for advisors

Americans are exceedingly generous people. Because 98% of high net-worth households make

charitable contributions, a significant portion of that wealth will be funneled into philanthropy.

These families are looking for philanthropy to serve both a public purpose and a personal value.

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The historic transfer of wealth along with heightened awareness and publicity about charitable

giving has created new opportunities for financial advisors who work with (or seek to work with)

high net-worth individuals and families, yet many advisors are missing out on these

opportunities due to the misperception that charitable giving will lead to loss of business or

interaction with the client. In fact, the opposite can be true.

What's keeping wealth managers out of the loop?

For starters, experts say, many otherwise perceptive advisors are not comfortable initiating the

conversation. Here are some of the reasons stated:

The client has not expressed charitable interest so the subject is not brought up.

The advisor is not familiar with charitable giving strategies enough to initiate the subject.

The advisor perceives discussion about charitable giving as a potential invasion of client

privacy.

The advisor has no personal experience/history with charitable giving.

To better maintain their client base, as well as help their clients successfully transition their

estates, professional advisors need to rethink and expand their approach to charitable planning.

And yet, these same studies reveal that donors want their advisors to bring to them creative

solutions to charitable giving, and if they don’t, clients may change to advisors that do offer this

service.

Experienced advisors report that by advocating charitable giving solutions, they enhance their

client service, build a meaningful bridge to the next generation and add long-term value to the

practice. And their clients appreciate it.

What are the advantages to the financial advisor?

Many advisors see donor advised fund solutions as low cost opportunity for the client to

test the waters, learn how the process works, and get comfortable with a legacy dream.

Many times the donor advised fund may start at a small amount because of the client’s

immediate tax situation, but often it becomes a gateway to more advanced planning

down the road with more substantial assets.

Advisors often manage only a small portion of the investable assets of a wealthy client’s

total net worth. Making clients aware of the tax benefits of charitable giving as well as

the opportunity to build a lasting legacy, provides a gateway to converting illiquid assets

(i.e. real estate and closely held stock) to managed assets. These illiquid assets typically

make up a larger portion of an affluent client's net worth.

By gaining a reputation for expertise in the area of wealth transition and philanthropy,

advisors can attract and cultivate new relationships with successful families looking for

philanthropic and wealth management services. Helping these families reduce their tax

bite and become more strategic in their giving can lead to managing the family's

personal investments.

Charitable giving can stem the loss that might otherwise occur due to tax and estate planning decisions or natural client attrition. Charitable giving can help prevent an even bigger loss.

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Only 2% percent of children keep their inheritances with their parents’ financial advisor. And

with the death of their husbands, only 45% of wives keep their assets with the same financial

advisor.

Most clients also suffer a big loss in estate transition. "70% of intergenerational wealth transfers

fail," according to a Williams Group study examining the long-term effects of wealth transfers in

3,250 families. "Failure," according to the study, means situations where the heirs dissipated

wealth, often with the family assets becoming a source of friction and dispute. The study notes

that poor family transition planning usually causes these failures.

Ironically, charitable giving can be key in stemming the loss of clients as well as decreasing the

failure rate of intergenerational wealth transfers. Part of the reason may be the sense of

purpose, meaning and values that philanthropy instills and strengthens among family members.

By committing to an understanding of the softer side of their clients’ charitable dreams and

goals, advisors will be adding a very special competitive advantage to their practice.

What are the advantages of donor advised solutions to the client?

Simplicity and Speed: Simplicity is probably the biggest reason why donor advised funds have become so

popular with donors and advisors. Donor advised funds eliminate the complexity of private

foundations and are much simpler and easier to manage.

One advisor makes this comparison: “A private foundation is like setting up a bank.

Responsibilities include creating a board of directors, overseeing tax returns and legal

requirements, including a 5% minimum distribution, excise tax on earnings, as well as

other administrative tasks that accompany a private foundation.

By contrast a donor advised fund is like setting up a charitable checking account or a

charitable investment account. A Fund can be established by completing a simple

application and can be set up in as little time as one day.”

Tax Advantages - save taxes in four ways:

Contributions are tax deductible in the year they are made. Because AEF is a public charity, contributions qualify for immediate and maximum tax benefits. Deduction for cash: Up to 50% of adjusted gross income (AGI). Deduction for securities and other appreciated assets: Up to 30% of AGI. (Five year carry forward of unused deductions.)

Avoid capital gains on gifts of long-term appreciated property.

Assets in a Fund are not subject to the donor’s estate taxes.

Investments in a donor advised fund can grow tax free.

Lower Cost Alternative

Administrative costs and ongoing administration for donor advised funds are often

significantly lower than for private foundations. Through economies of scale, and

streamlined operations, donor advised funds are an efficient family foundation alternative.

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Flexible Grant-making

The donor advised fund lets donors structure their giving over time, enabling them to plan

and leverage the impact of their grants. In addition, because of the lower cost and

advantageous tax benefits, donor advised funds make it feasible for donors to contribute

more to their favorite charities. Donors can make contributions in a manner that is timed to

take the greatest advantage of any associated tax benefits, and they can recommend

grants to charities whenever they choose. In other words, your client can donate now and

decide which charities to support later.

Recognition or Privacy

Donors can personalize the Fund with a family name (e.g., “The Smith Family Fund”) or

choose to be anonymous. Donors may want to support a charity without disclosing their

identity to the organization. They can choose to do this on all their grants or selectively by

individual grant.

Bridging Geographic Separation

The donor advised solution is attractive when the family members change residence or

when their charitable interests of the family evolve in different directions. The donor

advised fund often becomes the “glue” that keeps the different generations together.

A Parenting (or Grandparenting) Tool

The donor advised solution will allow children as young as 8 years old to become involved

in the family’s grant making charitable activities.

With all these advantages, it's not surprising that donor advised funds have emerged as today’s

most popular and fastest growing charity giving vehicle.

Client scenarios to look for

Engaging a client in the topic of charitable giving starts with recognizing situations when

introducing the conversation is both appropriate and timely. Some examples:

Client experiences an extraordinarily high income year. This can be a good

moment to point out that the client has a choice between involuntary giving (taxes) and

voluntary giving (charities).

Client concerned with tax implications from selling a highly appreciated asset

(closely held stock, real estate, etc.) in the near future. Because of low-cost basis

often in these types of securities, the tax bite can be substantial. The donor advised

fund solution allows the donor the highest tax benefits available (better than a private

foundation).

Client frustrated with trying to keep up with the receipts of their “checkbook

charity”. Some clients struggle with record keeping - receipts get lost and/or not all

benefits get realized from a tax perspective. Furthermore, giving to charity by writing a

check is the most common form of philanthropy in the world, but it may not be the best

alternative from a tax mitigation perspective.

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Reviewing assets for the purpose of business succession or estate planning.

While this is a prime opportunity to introduce the topic of charitable giving and a family

legacy, the initiation of this conversation should begin earlier. Ideally, it starts with

getting to know more about the family: who the children are and what is important to

the family.

Family foundation alternatives

Advisors’ resistance to philanthropic planning often results from the complexity of some

charitable-giving vehicles. However, the complexities of philanthropy can be overcome by

carefully choosing the appropriate charitable-giving vehicle and a partner who can simplify the

process.

While there are many charitable-giving vehicles, two family foundation alternatives have

emerged as the most viable alternatives today - private foundations and donor advised funds.

The chart below summarizes key differences.

Private Foundation Donor Advised Fund

Valuation of appreciated, long-term, capital-gain for charitable deduction like closely held stock or real estate

Cost Basis Fair Market Value

Valuation of publicly traded securities (held more than one year)

Fair Market Value Fair Market Value

Income tax deduction - percentage of AGI, with 5 year carry over

30% for cash, 20% for appreciated assets

50% for cash, 30% for appreciated

assets

Excise tax on investment income 1-2% of income No excise tax

Set up expense Costly No set-up fees

IRS approval process Time consuming A Fund can be

established in less than a day

Annual distribution requirement 5% None

Investment options Wide range Wide range

Preparation of tax returns, IRS compliance, accounting, grants management, fiduciary oversight, legal and audit

Donor must arrange for these services

Provided by AEF

Confidentiality *None - All information is publicly available via form

990-PF

Donor has flexible options:

Full recognition, or partial/full anonymity

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*Private foundations provide little confidentiality. With the advent of the Internet, information is more available than ever. Today, anyone with a computer can access Guidestar (www.guidestar.org) to gain information on any private foundation, including a scanned version of its 990-PF. Available information includes balance sheet detail (including investment holdings, a listing of directors (including contact information), every grant that is made (organization name and amount), and detail of administrative and investment management expenses. This information is not available on AEF’s 990 tax return.

Today’s donor? A study by The Philanthropic Initiative describes some of the characteristics of “today’s donor:” Although many donors are engaged in “checkbook philanthropy,” many others are showing a growing interest in giving that is more strategic and linked to specific dreams.

For experienced donors, “making a difference” is likely to be more of a motivator than tax savings. Such donors typically have an established advisor network, but there is no guarantee that their philanthropic dreams are being fully serviced by that network.

Many donors newer to philanthropy are adopting an entrepreneurial model of charitable giving. Some want hands-on roles and their professional backgrounds may encourage strategic planning and accountability. They want their charitable giving to have high-impact with measurable results.

Rather than giving to established charitable institutions where others decide how their charitable dollars will be spent, they want a sense of control and accountability; they want the flexibility to tailor their giving as their interests and needs emerge and develop over time.

Many seek legacy goals and see charitable giving as a powerful tool to teach and to pass on family values to the next generation; they see their financial advisor as a key player in enabling the next generation to carry the family’s legacy.

Many of the newly-wealthy are far younger than previous generations and much of their wealth has been accumulated far faster than in the past; technology and advanced financial/investments services play an important role.

In the same study donors have identified a number of factors that motivate families to

establish donor advised funds, including:

The desire to create an enduring legacy of family charitable-giving.

Giving provides and “elevated high ground” for families to work together.

It offers the opportunity for several generations to join together in a common purpose

It often becomes the “glue” that binds families that are philosophically or

geographically separated.

It often becomes a replacement enterprise for family members where a family

business has been sold.

What to look for in a donor advised program

The following is a simple list of questions to consider when assessing donor advised funds for

your client’s philanthropic needs:

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Affiliations Is the organization that sponsors a donor advised fund affiliated with another

entity (for-profit or non-profit) or is it independent? How might these affiliations help or

hinder your client or you as the investment advisor of a Fund now or in the future?

Contributions What types of assets are eligible for contribution, e.g. cash, marketable

securities, closely held securities, real estate, and life insurance? Is there a requirement

that the contributed asset be immediately liquidated?

Investments What investment choices are available to you? Are investments pooled or

can the Fund be separately managed? Can you, the trusted financial advisor, play an

ongoing role in providing investment management for the Fund?

Grant Distributions Are there restrictions on grant distributions, i.e. geographic,

religious, etc.? Is there a minimum annual distribution requirement, or a maximum

annual limit?

Succession How flexible are the provisions for succession upon death? Is involvement

limited to one generation?

Costs Is there a set-up fee or termination fee? What is the annual administrative fee?

Are there hidden fees: annual fees, minimum account level charges? Does the

organization require a certain portion of the Fund to be set-aside for its own purposes?

Will they allow the donor to recommend a transfer of the Fund in the future?

Who offers donor advised funds

While there are a number of donor advised fund programs available, most are the charitable

arm of a for-profit service provider (mutual fund, broker, or bank), a local community

foundation or a limited charitable institution.

Commercial Programs Product focus

Community Foundations Community Focus

Religious Charities Religious Focus

Independent - AEF Donor and Advisor Focus

American Endowment Foundation (AEF), established in 1993 as an IRS approved public

charity, is the leading independent, national donor advised fund with no such affiliation. It does

not sell financial products or services nor does it provide financial, tax or legal advice. Its sole

focus is donor advised fund administration.

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Unlike other commercial sponsors, AEF’s 100% independence offers a number of important

benefits to advisors looking for a donor advised fund program:

1) Open investment architecture: Most commercial and community foundation programs

restrict investment choice to a limited menu of proprietary mutual funds or pools. AEF does not

pool investments. Each Fund can include a wide variety of mutual funds and/or individual

securities in separately managed portfolios. AEF’s program enables the advisor to use his/her

preferred custodian/platform.

2) Compensation designed to work the way the advisor works: Many commercial Donor

Advised Fund programs and many community foundation programs exclude the financial

advisor. AEF’s program keeps the financial advisor engaged on a brokerage or managed

account basis.

3) Independence: Most Donor Advised Fund programs are the "captive charity" of a financial

services company or another charity. AEF is truly independent, and does not provide financial

advice, sell financial products, or offer custody services. We accrue no benefit from brokerage

services, commissions, finder fees, or product sales. AEF has no hidden and/or secondary

agenda (program, social, religious, geographic, investment, or succession).

4) Contribution flexibility: Most commercial Donor Advised Fund programs accept only cash

and marketable securities. AEF also accepts life insurance policies, closely held securities, real

estate, etc.

5) Liquidation flexibility: Most commercial and community foundation programs require

immediate liquidation of contributed assets. AEF accept and hold a wide array of asset types.

6) Grant flexibility: AEF is open to creative grant-making strategies, including program related

investments where the donor can recommend an investment or recoverable grant in a qualified

charity.

7) Succession: Many community foundation programs limit succession to the life of the donor

and the donor's spouse and/or to the children of the donor. At that point, the family is no longer

involved. AEF allows a Fund to continue over successive generations.

8) Geographic scope: Many community foundations limit grants to their geographic area of

interest. AEF's scope is nationwide.

9) Personalization: Most commercial and community foundation programs promote their own

corporate identity. AEF creates customized letterhead in the name of the donor’s Fund for use

in distributing grant checks to charities.

10) Superior service: AEF does not operate a call center. Advisors and donors communicate

directly with AEF’s principals.

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Conclusion America’s wealthy are experiencing an historic philanthropic opportunity. Whether they are willing to convert a portion of their wealth to charitable giving depends on a number of factors, one of which is the ability of their trusted financial advisor to counsel with their clients on simple, smart and meaningful solutions that will help them reach their charitable dreams. By serving their clients, they create an extraordinary opportunity to add long-term value to their practice.

America’s Independent Donor Advised Fund program

AEF has served as a steward for the philanthropic wealth and legacies of successful individuals and families for more than 20 years. Today, as America’s independent donor advised fund program, we have built a uniquely neutral and transparent platform with a flexible service offering that works on all platforms, thus providing a natural alignment between our firm and the advisor. AEF was thoughtfully designed to address the unique needs of our donors and their trusted advisors. Our experienced team of professionals is here to help you at each stage. We are committed to customizing a solution that meets each of our client’s unique objectives.

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For more information we welcome your call at 1-888-440-4233

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Two Success Stories

Small contribution grows to $millions

A client transferred $20,000 to AEF from another donor advised fund

that was more restrictive and had a limited menu of investment

options. He specifically wanted to take advantage of the greater

investment flexibility at AEF and to continue to work with his advisor.

After a short period, the donor contributed $800,000 in appreciated

stock and now works through his trusted advisor to grow the Fund.

The donor and his wife engaged their grandchildren in the process of

choosing and working with different charities. It was an opportunity

work with them, and teach them values that were important to the

grandparents - not to mention it was a great deal of fun.

In time, the donor contributed a 25% undivided interest in real estate

valued at $5.2 million. Proceeds from the sale were then converted to

managed assets to support a number of charities now and for future

generations. The advisor continues to manage all these assets.

The donor has gained peace of mind that the advisor is there for his

children and grandchildren to continue to serve an important role after

his death to help the family during this time of transition.

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References:

Schervish, Paul G., and John J. Havens. 2001. Wealth and the Commonwealth: New Findings on the Trends in Wealth and Philanthropy. Nonprofit and Voluntary Sector Quarterly 30, no. 1 (March): 5–25. Sisk, Michael. 2011. How to Keep the Kids. Barron’s (June 4): S20–S21. Available at http://online.barrons.com/article/SB50001424053111904210704576357873121823708.html.

Collapsing a private foundation

Tom and Joan Baldwin wanted to continue their life long involvement in education and other charitable causes. They had previously established a private family foundation to create a scholarship program at their alma mater and support other charitable causes across the country. The foundation had sounded good in theory, but administering it became burdensome, and the Baldwins discovered they needed an accountant and an attorney to handle the extensive paperwork. Furthermore, Tom said, “I’d get calls and letters every day from people wanting donations. . . . We discovered that there is nothing private about a private foundation.” “We had to do everything on our own. It was taking up a lot of our time making sure everything was running right." On the advice of their financial advisor, the Baldwins created a donor advised fund with the American Endowment Foundation and terminated the private foundation. The process was surprisingly easy. The choice was a simple one for Baldwins. “The private foundation was probably not in my best interest,” he says, “I miss nothing about it. Now, instead of filling out paperwork, we make simple grant recommendation and school that runs the scholarship vetting.” "The original concept for us was that we were going to donate so many dollars annually. With the donor advised fund we can do this without all the administrative burdens and complexity of the private foundation. And we are engaging our grandchildren in the causes that are important to us, as well as allowing them to develop and pursue their own interests."