New trends in charitable giving
This PFP staple isn’t just for the ultra-wealthy anymore
BY JOHN NAPOLITANO
When it comes to charitable giving, there are those who are
purely philanthropic and would donate as much as they can
afford regardless of the tax consequences. The other side of the
spectrum is the purely tax-driven contribution.
The reality for us as practitioners is that
charitable giving is dominated by the high-income and high-net-worth crowd, and
with that audience the trends and tax consequences always matter.
A new trend that I see is the suddenness of
what is known as flash giving. This is giving
that generally follows an unplanned local or
international disaster. Whether it is washed-out roads in Vermont or tsunamis in Japan,
these types of sudden, unanticipated events
mobilize billions in unplanned contributions
from U. S. taxpayers. These events have definitely redirected millions in traditional gifting
for many of your clients.
Of course, world tragedies are not new, but
the rapid mobilization of disaster funds and
larger charities is a fairly recent trend. If you
have clients who always seem to go for spontaneous giving, perhaps another big trend
can also be helpful — the use of charitable
A charitable gift trust is basically a not-for-profit holding tank. Sponsored by mutual
fund companies and other asset management or custodial platforms, charitable gift
trusts allow your clients to make deductible
contributions today, and have the money sit
in an account where the client or their advisor actually gets to control or manage the
holdings in the account. These accounts can
be very effective for the client who frequently
contributes spontaneously and those who
may be unaware of the AM T or other tax consequences of their actions.
Gift trust accounts are also helpful for cli-
ents who may have a windfall. The windfall
earner can make a large contribution to the
gift trust, then dole the funds out of the gift
trust in the manner and frequency that they
want to continue in future years.
to go for
gift trust of a large mutual fund family is not
about to change its name to accommodate
your wealthy clients.
A second benefit to the private foundation over a gift trust account is the ability
to appoint the board of directors and the
leadership for the entity. I have many clients
whose primary concern is that their wealth
not cause their offspring and grandchildren
to be trust-fund babies who may have less
motivation to succeed in life. These clients
are keenly focused on their values, and want
to make sure that these values are instilled in
next generations in as many ways as possible.
One such way is to ask for their participation
in private foundation management to witness
this piece of the family values that grandpa
wants to preserve for the generations.
Another trend in the private foundation
space is government scrutiny. IRS audits
are on the rise, and those using their private
foundations to provide salaries and other
personal benefits to friends and families are
under closer scrutiny from taxing authorities than ever before. While there are bona-fide reasons for a private foundation to have
salaries and other operating expenses, they
are subject to a reasonableness test if ever
audited at the private foundation level.
COST-BASIS CHANGES SIGNAL
‘MESSY’ TAX SEASON AHEAD
With new cost-basis reporting requirements in effect for the 2011 tax year,
Charles Schwab is warning investment
advisors to brace for a hectic tax season
and prepare for a flood of questions from
clients who will receive for the first time
a revised Form 1099-B packed with new
The first phase of the new rules will
require custodians, broker-dealers and
others to report the cost basis for all equities purchased on or after Jan. 1, 2011,
on the new 1099-B to the IRS and clients.
That means that in mid-February, millions
of investors will receive an unfamiliar version of a vital tax document.
Under the legislation, the default
method for brokers to calculate cost basis
is first-in, first-out. Clients or their advisors can designate an alternate method
(last-in first-out, lowest price to highest,
etc.) either as a default or for specific lots,
but once a trade settles, the method cannot be changed. That method lock-in will
also have implications for how advisors
engineer tax-sensitive investments.
— Kenneth Corbin
with low basis or even significant liquidity
issues, such as a closely held business or real
estate. With the long-anticipated possibility
of higher income and capital gains tax rates,
contributions of complex assets could become even more popular.
John P. Napolitano, CFP, CPA, PFS is chairman and CEO of U.S. Wealth Management
in Braintree, Mass.
FOUNDATIONS VS. TRUSTS
Gift trust accounts started as a way to get private foundation-like flexibility for less-than-ultra-wealthy charitable contributors. Now,
large firms market their gift trust accounts as
a supplement to a private foundation strategy. And while it does give you the same force
and effect from both the gifting and the tax
portion of the gift, there are some things that
wealthy clients can do with foundations that
you cannot do with a charitable gift trust.
First is the name of the entity. Some of
your very wealthy clients simply want to see
their family name and values connected to a
charitable entity that lasts in perpetuity. The
CHARITABLE GIFT ANNUITY
Another strategy is a gift with strings attached.
There are products called charitable gift annuities where the donor, or anyone else that
the donor delegates, becomes entitled to a
lifetime stream of income from funds that
the donor has gifted to a charity according to
the terms of their agreement with that charity. When the donor dies, the charity keeps
any remaining principal, and that is their
ultimate gift. The amount of the income the
donor receives is calculated as it would be
for many traditional income annuities, and
generally calculated based on the amount of
their contribution, current interest rates, the
age of any income beneficiaries in addition
to the donor, and other factors depending
on the charity’s policies and procedures. The
income amount is typically fixed, and will not
fluctuate based on interest rate changes or
See GIVING on
UNPREPARED FOR RETIREMENT
Three quarters of small-business owners believe that so many Americans are
financially unprepared for retirement
that the problem has reached the level
of a crisis, but just under a fifth of them
actually offer their employees a 401(k) or
similar plan, according to a survey of 501
small-business owners by Harris Interactive, on behalf of Nationwide Financial.
Only 11 percent of the small-business
owners surveyed said that they are likely
to add an employee-sponsored 401(k)
plan within the next two years. Sixty-nine
percent said that their business was too
small, and more than half said such a plan
would be too expensive.
Thirty-seven percent of the business
owners with more than six employees
said that they are under pressure from
employees to offer a retirement plan.
Four in five said that having a retirement
plan was also effective in helping them
attract qualified employees.