education: past conferences

Recap: Conference on Philanthropy 2005

Thursday, April 28

The Greater Good: How Philanthropy Drives the Economy and Can Save Capitalism

Claire Gaudiani
New York, NY

Americans became philanthropic in 1630. The Pilgrims created a "Declaration of Interdependence" which stated we needed to share with on another until everyone's needs had been met. In 1647, the president of Harvard asked a wealthy single woman to give money to an endowment that would provide scholarships for young people who could not afford tuition.

If you grew up without contracting polio or have ever taken an antibiotic, you have been the beneficiary of philanthropy. The Mothers March of Dimes raised the money to find a cure for polio. A grant from the Rockefeller Foundation in the 1930's funded the research that produced penicillin.

In most other countries, there is not a culture of philanthropy like there is in the U.S. They think we are generous because we are rich, when in reality we are rich because we are generous. We can do magic if we can help our clients realize how their philanthropy can fund changes to our American landscape for the better.

Three categories of giving that have developed the American economy:

1. Human Capital
Traditional gifts - contributing to existing charitable ideas (scholarships, etc.).
Transforming gifts - implementing ideas that no one has ever had before (penicillin).

2. Physical Capital
Bricks and mortar. The nine museums in Chicago bring more money into the Chicago economy than all of the Chicago professional sports teams combined.

After building his wealth in railroads, Johns Hopkins received advice from Mr. Peabody in 1876 to give two $7M gifts to benefit society; one to build Johns Hopkins hospital and the other to build Johns Hopkins University.

3. Intellectual Capital
Radar was developed by a philanthropic gift by Albert Loomis who gathered the greatest physicists in the world and supported them until they could develop a new way of seeing the enemy in a new way in order to protect our borders.

Harry Guggenheims came back from World War I where he saw German government warplanes in action. He asked his father to use his family foundation to fund aviation research in the U.S. But first they went to our government for help. His father happened to know Calvin Coolidge, who declined to offer government support because he felt the automobile was the wave of the future. So the Guggenheims went back to New York where they found some friends who helped them fund the start of six private schools of aeronautical engineering. All six institutions still exist today.

CRT Terminations, Gifts of income Interests for Charitable Opportunities

Jarrett Bostwick
Gardner, Carton & Douglas, LLP
Chicago, IL

NIMCRUTs
When a client is in a situation where their CRT (usually an old underperforming NIMCRUT) is in trouble, they can convert the NIMCRUT into a Charitable Gift Annuity. In almost all cases, if they are old enough the client will end up with an income about 50% greater than they were receiving from the NIMCRUT.

Jarrett had three cases recently that involved NIMCRUTs that were set up in the early 90's with 10%, 12% and 14% payout rates, none of which were producing anywhere near their originally intended income streams. All of these cases involved donors who were now in their 70's. The donors wanted increased income and less administrative complexity. Jarrett's solution was to convert the NIMCRUTs to CGAs. His firm obtained a Private Letter Ruling (PLR 200152018, 12/28/2001) to sanction this strategy. The IRS said that the assignment of the Income Interest was eligible for an income tax deduction, and did not cause any value to be considered to be added back into their taxable estate. The basis in the CGA is zero, so there was no capital gain income tier for the CGA payments.

The donor assigns their income interest in the CRT to the charity who has the remainder interest. But first, the remainder beneficiary designation must be made to be irrevocable (if it is not already) so that when they receive both the income interest and the remainder interest, the CRT can be shut down since under the doctrine of "trust merger" the charity can merge both components, thus shutting down the trust and making all the assets to be owned by the charity at that point. The charity can issue the CGA, backed up by owning all the assets that were once in the NIMCRUT.

This strategy provides the donor with a new charitable income tax deduction for the present value of the calculated remainder that would accrue to the charity. This extra tax deduction (over $300,000) gave them the planning opportunity to pull some substantial funds from the IRAs and neutralize the tax on the IRA withdrawals.

Two of the three cases involved Donor Advised Funds as the receiving charity, which were in a position to issue the CGA to the donor after the NIMCRUT was terminated.

It is important to note that, in these cases, the remainder beneficiary was revocably designated in the NIMCRUT document. When they accelerated their remainder interest they contemporarily made the remainder interest irrevocable at the same time as they contributed their income interest to the charity in exchange for the CGA. As a result, there was a carryover of their original basis in the NIMCRUT assets, which caused a portion of the CGA income payments to be taxed as Capital Gain income. This would not have been the same result if the remainder beneficiary was originally named as irrevocable, because the two components of the trust could then not have been merged contemporaneously, thus causing the loss of the carryover of basis to the CGA.

ESOPs
Since the first of the year, Jarrett has seen the demise of NQ Deferred Comp planning and in its place a dramatic rise in ESOP plans. This gives rise to using charitable strategies for the QRP coming out of the ESOP as an exit strategy, which can then be contributed to a CRT.

Friday, April 29

Legal Updates

Ted Batson and Greg Baker
Renaissance, Inc.
Indianapolis, IN

Greg Baker went through a very thorough outline in the handout materials containing many links to other current resources, which are tracking the current legislative activities that affect charitable planning. Here are just a few of the highlights:

American Job Creation Act of 2004 -
• All charitable gifts which create a tax deduction of $500,000 or more will require the certified appraisal be attached to the donor's tax return in the year the deduction is taken.

Working Families Tax Relief Act -
• Tsunami Relief Act may be leading the way for the possibility that, in the future, charitable gifts made after the end of the year but prior to April 15 may be taken as a charitable deduction.

Senate Finance Committee Hearings on Charity Abuse -
Summer hearing began in June 2004 to discuss the following:
a.) Governance and best practices of charities;
b.) Charities accommodating tax shelters;
c.) Donor gifts of tangible and intangible property;
d.) Current problems and issues in the charitable community.

Joint Committee on Taxation Hearings in January, 2004-
Key Items:
• Limit the income tax charitable deduction for gifts of long-term capital gain property to the lesser of the donor's cost basis or fair market value! This would not apply to marketable securities.
• Eliminate deductions for gifts of in-kind property

Senate Finance Committee hearings April 5, 2005 -
Primary Areas of Concerns:
• Charity Governance and Oversight
• Noncash contributions
• Lavish expenses for charity insiders
• Excessive delay in charitable benefit
• Abuse of Supporting Organizations

Other Legislative Proposals -
• Charitable Rollover of IRAs
• UBTI for CRTs
• Private Foundation Expense Deductions
• Charitable Gifts by S-Corporations

Sense of the Senate -
On March 1, 2005 the Senate passed a non-binding "Sense of the Senate" to pass the following measures:
• To provide incentives for individuals to give tax-free contributions from IRAs for charitable purposes.
• To provide non-itemizers with the opportunity to claim an income tax deduction for charitable gifts
• To provide incentives for charitable gifts from corporations.

Ted Batson went through a good outline in the handout materials relating to the new Treasury Regulations and other IRS materials:

• Four tier accounting rules are now clarified for Qualified Dividends, etc.
• Increased scrutiny on how Private Foundations are operated, particularly the personal compensation paid.
• Early termination of CRTs
• Spouse's right to elect against the estate - could potentially be a BIG PROBLEM causing CRTs to be disqualified at death thus pulling the remainder interest back into the taxable estate. (Revenue Procedure 2005-24) Safe harbor is met by trustee keeping a signed disclaimer from spouse in trust file.

Writing Effective Investment Policy Statements for Charitable Entities

Quinn Frazer, J.D.
Gardner, Carton & Douglas, LLP
Chicago, IL

Uniform Management of Institutional Funds Act (UMIFA 1972)
• Applies to non-profit institutions, but not trusts.
• Must be passed in your state to be applicable
• Prudent Person Rule replaced by Business Judgment Rule
• Allows Board to delegate authority to invest funds to employees and to agents, including investment counsel.
• The Board may contract with independent investment advisors, managers, banks or trust companies
• Board member liability is established by state law.
• New revisions to UMIFA will apply to all assets that the institution is involved with, including charitable instruments.
• You must have an Investment Policy in place to be protected by the provisions of the Act.

The presentation outlined how the new revisions to UMIFA will affect the Uniform Trust Code (UTC), and the Uniform Principal and Income Act (UPIA). In all cases the new rules are going to require that the Investment Policy integrate with the Spending Policy of the non-profit organization.

The Senate Finance Committee hearings on charities are leading to a new Federal Prudent Investor Rule for non-profits.

Elements of a well-constructed Investment Policy Statement should contain the following elements:
• Statement of Purpose
• Statement of Responsibilities
• Investment Objectives and Goals
• Investment Guidelines
• Investment Performance Review and Evaluation
• Communications

Philanthropy from a Nonprofit Perspective: The Charity Culture Exposed

Debra Ashton
Boston, MA

Many donors do not have qualified advisors to help them make sound planned gift planning decisions. Most are not fortunate enough to have a member of Advisors in Philanthropy as their personal advisor.

When Planned Giving Officers (PGO) and Commercial Planners (CP) don't collaborate, it puts the donor in the middle, not knowing whom to believe.

The leadership of most charities is short sighted when it comes to staffing their fundraising department. They hire at the lowest possible salary and then only offer cost of living increases thereafter. The only way for the fundraiser to advance in their career is to move to another charity that is willing to pay them more out of desperation.

PGOs have no clue how to advise high net worth clients with multifaceted concerns. But they do spend years building emotional bonds and when the donor is ready to make a significant gift, the PGO gets frustrated when the attorney kills it. CPAs and attorneys often reject charitable intent of the donor as legitimate. On the other hand commercial advisors assume a protective role, presuming that the client is being manipulated by the PGO.

We need to continue this conversation so as to promote more understanding and collaboration between PGOs and CPs. Debra claims Advisors in Philanthropy is the "best kept secret in North America". We need to recruit more members so we can impact the advisor community to promote more collaboration with the non-profit community for the benefit of the donors and society.

What Do Donors Say They Need From Their Advisors?

Steve Johnson
The Philanthropic Initiative, Inc.
Boston, MA

The top 1% of the population holds 42% of the wealth. The average American gives 2% of their income to charity annually. 8 out of 10 Americans worth over $1M leave nothing to charity from their estates.

What donors need:
• Inspiration to become philanthropic
• Help getting started: tax/financial planning tools and techniques
• Facilitation: an honest advisor and a "Safe Place" where they are not always being "sold" something by an advisor or fundraiser.

Advisors are a fulcrum for accessing the potential of most philanthropic dollars. But advisors are reluctant to bring up philanthropy in their discussions with clients.

Many donors say saving taxes is important, but that they are tired of the "tax lead" often put forth by their advisors.

There are three distinct skill sets for effective Philanthropic Counseling:
1. Technical Skills
2. Values-based (soft-side) Skills
3. Practice Management Skills

Attributes of a philanthropic inclined advisor:
• Asks questions instead of telling
• Discusses values; personal, family, civic, aesthetic, ethical
• Involves the family early
• Encourages client to use their own business/professional skills
• Believes in the team of advisors concept

Saturday, April 30

Practice Management Panel

Sylvia Crecelius, CFP
Robert Thompson, JD
Les Winston, CPCU, AAI
Phyllis Wordhouse, CFP

How do you market your services and find new clients?
PW - Gives talks and runs classes about money for women in school districts and colleges.
SC - Has a mature practice, so does not look for new clients. Still gets automatic referrals for existing clients and takes those when she has openings.

Can you describe your office administration?
LW - Has two administrative aides and a receptionist.
RT - Has five employees who do administration, including a marketing person.
SC - Has one fulltime employee. Also has virtual relationship with a major law firm in Florida who helps her service clients.

Can you share an particular efficiencies you have developed in your office?
RT - He stopped wearing a watch four years ago, and carries no appointment book. He depends on staff to keep him on track.
LW - Makes own appointments. Uses cell phone to be reachable.

How do you incorporate philanthropy into your practice?
PW - Speaks and writes articles. Also includes questions in her Questionnaire. Has set up many "inventory CRTs", starting at $5,000 to which middle America type people continue to add money monthly.
SC - Incorporates Stewardship principles into her work with clients.

Can you share a time when you helped someone become more philanthropic?
LW - Capitalized on a greedy client's desire to save taxes on the sale of a highly appreciated farm property. Client has now become excited about how to distribute the $6M in his CRT to charity.

Can you share a more creative philanthropic solution you have used?
RT - Uses CRTs as part of Structure Settlement agreements.
SC - Took a contract sale of commercial airplanes and contributed the installment Note to Wings of Hope, keeping the client connected to the airline industry which was one of his life goals.

What errors have you made in your practice?
PW - Got into partnership with two others who have cost her $1M and is still in litigation today.
RT - Only had a verbal agreement with a partner that did not hold up when disagreements arose.
LW - Has had two malpractice suits. In one case, the client withdrew money from a Variable Annuity which was declared taxable income because the clients had purchased another annuity from the same company in the same year so both annuities were aggregated for tax purposes.

What one piece of advice would you share with our newer members?
PW - After searching for the truth about investing via seven Broker/Dealers she has now found it by going fee-only with Matrix Asset Allocation.
SC - Was mentored early on by Loren Dunton, the father of financial planning. She learned the depths of philanthropic planning through the Professional Mentoring Program.
LW - Obtain your Chartered Advisor in Philanthropy (CAP) designation. Also, find a unique question to ask your clients, i.e., "What is the age at which you expect to die?". This gives the period for which the client needs to plan for their wealth distributions.
RT - Separate (if you can) your business life from your pro-bono life.

Has anyone used any outside consultants to make your office more efficient?
PW - The book "Virtual Office" by David Drucker.
LW - Uses National Financial Partners as a B/D, who takes care of his back room administration.
RT - Uses Foundation Source to set up and administer private foundations.

In your business and personal journey, are you where you want to be?
PW - Yes, except she wants to get her building sold.
LW - I want to evolve into a more satisfying life taking more vacations.

Breaking Confidence: Behind Closed Doors at America's Charities

Renata Rafferty
Rafferty Consulting Group
Indian Wells, CA

The charitable sector has two sides: The wonderful mission-fulfilling side and the broken down infrastructure side.

There are 900,000 charities in this country. There are about 300 IRS agents assigned to the Exempt Organization division. The majority of their time is spent to review IRS Form 1023 applications for new non-profits. That leaves about two agents left to review the 900,000 Form 990's the IRS receives from each charity each year.

The charitable "industry" is very fragmented and the various factions do not coordinate with one another. As a result, the $241B per year they receive is not used efficiently to further the mission for which they were founded. There is an attitude of "we're doing good" so don't ask us how much good we really could be doing if it were an efficient industry.

The only accountability a charity has is to the almighty dollar. They will jump through any hoop a donor makes them jump through. But the donors don't know they have this power. All they need to affect change in a charity is for the donors to be made aware of their power. This is the focus of Mrs. Rafferty's book, Don't Just Give It Away. She wrote the book to make donors proactive in holding their charities' feet to the fire.

The difference between "giving" and "charity" is this:
Charity hopes to give some social good in return for the dollars given.
Giving (philanthropy) has to do with doing good for human kind, which comes from a donor's vision for society and their willingness to fund that vision.

Renata Rafferty has been consulting with donors and charities for over 20 years, but had never experienced the likes of people she has met at the Advisors in Philanthropy Conference, and would like to continue conversing with us regarding her experiences and her passion.