The Strategy Behind Philanthropy

Facilitating the evolution from charitable donor to philanthropist could be one of the most satisfying things you do for your clients. By NANCY E. ANDERSON, J.D., CTFA, CAP, CEPA, ADPA | Winter 2019



Philanthropy. The word derives from a Greek word meaning “love of mankind.” Philanthropic acts, therefore, imply a humanitarian vision—a kind of “seeing ahead” toward an objective.

The word charity, on the other hand, comes from the French word chrité, meaning “providing for those in need” or “generosity and giving.” Here, the connotation is responding to a present and apparent need.

While the two words have obvious overlap in common usage, drawing a distinction between them is helpful in guiding clients, whether individuals, families, or organizations, seeking to maximize the impacts—and amounts—of their giving.

Here’s one simple example: After a natural disaster, writing a check or volunteering one’s time can be considered charity. But for some, natural disaster preparedness becomes a humanitarian cause. Their charitable intent transforms into philanthropy when they begin to strategize about how to maximize their impact over time.

When clients have firmly established priorities and their financial house is in good order, they want to increase their charitable giving. Though they may not think of themselves as “philanthropists,” that is nonetheless what they are preparing to become—they are ready to move beyond just responding to planning. Facilitating this evolution could be one of the most satisfying things you do for your clients.

Here are some simple steps to help guide your clients through the transition from charitable donor to philanthropist.

Step One: Create a Simple Philanthropic Strategy

Before writing a check or setting up a charitable trust, create a philanthropic strategy:

1. Create a mission statement that includes general categories of strategic focus—for example, education, health, art, research, conservation, diversity, or natural disaster responsiveness—as well as some specific goals you’d like to accomplish in one or more of those categories.

2. Identify the number of organizations you want to benefit.

3. Commit to a dollar amount for your annual contribution (to be reviewed each year).

4. Engage your successors to prepare them to carry forward the philanthropic mission and vision.

A philanthropic strategy doesn’t have to be complicated. It just needs to be sufficient to help your client stay focused on the philanthropic mission. Think for a moment about how this kind of simple but profound embrace of strategy could transform giving. The amounts given to causes tend to increase when intent is grounded with a clear strategy. This creates a win-win situation, because your client is both giving more and more satisfied about that giving. Over the course of my work, I have seen philanthropy bring clients together, provide personal satisfaction, increase mental, emotional, and spiritual health, and help create global connections.

Research bears this out, too. A 2017 study conducted at Indiana University’s Lilly Family School of Philanthropy concluded that “giving makes us happy. The study found that giving to charitable organizations is positively related to life satisfaction.”

Step Two: Focus on Impacts and Transfer of Values

There are great tax benefits for your clients who give to qualified charitable organizations. However, today’s philanthropists are increasingly making gifts of time and talent to help their communities and causes. There has also been a shift in mindset about recognition.

In the past, many buildings—from libraries to museums and more— carried the name of your client making the gift. Today, visibility and recognition are less important to philanthropists. Instead, they are more interested in the impact the gift will have. They want to learn about a recipient charitable organization at a deeper level. They want to know who is leading the organization, understand its finances, meet its board members, learn about its outreach programs and reputation in the community.

And beyond all this, true philanthropists dedicate time to create a sustainable process that can be shared with the next generation, thus allowing the next generation to become socially responsible and involved in ways that fulfill the life purpose of the philanthropic mission.

That generational transfer of values is what I see clients desiring more than anything. It starts with values-driven discussions that can form the mission statement, which should in turn inform the philanthropic strategy. Then, direct interaction and participation with carefully selected charitable organizations will be inherently connected to the client’s expressed values.

Step Three: Actual Giving

With an overall strategy and impact mindset in place, it’s time to help clients get specific about implementing the strategy and making actual gifts. In both cases, what’s needed is both vision—the very heart of philanthropy itself—and discipline to execute a strategy.

There are many tools available to your clients for making financial gifts to charitable organizations and implementing a strategy:

• Cash: A gift in cash is the simplest form of charitable giving as the tax deduction will be equal to the amount donated without any retained benefits. If you contribute $250 or more, you must prove to the IRS that you (a) made the donation and (b) you didn’t receive any benefits.

• Stocks: Gifting stocks directly to a charitable organization is tax-efficient for the grantor, especially if the gift consists of long-term appreciated securities. There will be no capital gains taxes on the transfer, and the gift can provide a charitable deduction in the grantor’s income tax return in the year of the gift. The deduction can equal the full fair market value of the stock, up to 30 percent of adjusted gross income (AGI).

• Donor-Advised Funds (DAFs): These are easily established investment accounts that are administered by a charitable sponsor, such as a community foundation, a financial institution, or other non-profit charity. A simple account application and a name for the fund—such as Smith Family Foundation—will create the account. There is no start-up cost, and minimum contributions start as low as $5,000 depending on the sponsor’s guidelines. The grantor can serve as advisor or successor advisor and make recommendations for distribution out of the account to non-profit organizations at any point in the future. However, the tax deduction for the initial contribution is realized in the year it is given.

Some sponsors will accept DAF contributions in the form of appreciated stock, real estate, and other unique assets. There is an immediate tax deduction for the full fair market value of the gift. Because DAF sponsors are public charities, contributions to them receive favorable tax treatment, including a tax deduction limit of 30 percent of AGI for gifts of stock or property compared to a 20 percent limit with a private foundation as defined on IRC Sections 170(b)(1)(C) and (D).

An attractive feature is that distributions from the funds can be made across multiple charities and there is no specific amount or number of charities required. Also, money in the DAF grows tax-free, and there is no legal payout requirement. Private foundations, on the other hand, require a minimum annual payout rate of 5 percent, as below.

• Private Foundations: These are formalized charitable accounts with a higher degree of regulation than DAFs. Private foundations require similar formalities as corporations, including annual board meetings, bylaws, and documentation. They allow individuals to retain control of donated assets and only distribute a minimum of 5 percent out to qualified charities. Assets in a private foundation can be directed in whole or in part to a DAF.

• Charitable Trusts: Charitable trusts agreements allow you to create a lifetime benefit to the grantor or others through a payout distribution and with a split interest to a charity or family depending on the trust type. There are two types of charitable trusts: charitable remainder trust (CRT) and charitable lead trust (CLT).

CRTs have been around for decades, and many families create them during their lifetime or at death. They allow for a transfer of appreciated assets, avoidance of capital gains, and an immediate charitable deduction. The lifetime beneficiaries (grantors) receive a payout for life or for a term specified in the trust documents. At the end of the term or grantor’s death, the remainder is paid out to charities. This is an attractive planning vehicle for those with highly appreciated investments who want to diversify their holdings without paying substantial income taxation and still enjoy the inflow of annual payouts. As you create the CRT documentation, you will be able to identify your preference to receive annuity payouts that are either fixed (“CRAT”) or variable. Variable amounts can fluctuate or adjust based on the growth of the portfolio on an annual basis; these are called “unitrust” payouts (“CRUT”).

CLTs have many similarities to CRTs since they have a split interest feature; however, in the CLT, the stream of income from the assets gets paid to a charitable organization each year as opposed to the grantor. Each year, the grantor receives a gift tax deduction on the value of the income stream since the charities are receiving the annual income flow. The remainder reverts to the grantor or a family member at the end of the trust term. This is a great strategy when using cash or assets with growth potential. As with CRTs, the payouts to charities can be fixed (“CLAT”) or variable (“CLUT”).

The only additional consideration when creating charitable trusts is that they require annual administrative management and tax reporting of expenses.

• Gift Annuities: Many large nonprofit organizations, including universities, offer charitable gift annuities. You can support a cause by making a gift to a charity and you receive a deduction the year of your gift. The following year, and each successive year thereafter, you and another person will receive distributions. This is a simple contract you can create directly with the charity. A portion of the annuity payments is tax-free for the life expectancy of the grantor. This may be helpful to donors looking to increase their retirement income and is an alternative to a CRT.

• Pooled Income Funds: These are charitable gift options that allow you to generate income while giving a small portion to charity. You can “pool” together different securities and even cash to create a larger amount of money and produce income for your lifetime. The remainder of the pooled income fund is donated to charity. Some charitable deductions for tax purposes may be available.

• Retirement Assets: Retirement accounts may also be a good vehicle to pass to charities at death or during a lifetime. The IRA Charitable Rollover allows individuals who are at least 70½ years old to donate up to $100,000 to charitable organizations directly from their IRA without the distribution being counted as taxable income. The gift must come from a traditional or Roth IRA, and gifts must be made directly to a qualified charitable organization. Additionally, no consideration must be received in exchange for the gift. A receipt must be obtained from each charity to which a donation is made.

A potential further benefit is fulfillment of required minimum distributions (RMDs) from IRAs. If the gift-giver does not need the income, yet RMDs are necessary, then channeling the funds to charity via qualified charitable distributions (QCDs) can be an ideal tax-advantaged strategy. Be sure to request distribution checks made out directly to the charity—though it’s permitted for the account owner to receive the check and present it personally to the charitable organization.

• Life Insurance: Charitable organizations may be named as beneficiaries of life insurance policies. The gift will be completed at death, providing charitable income tax deductions.

Giving USA reports American individuals, bequests, foundations, and corporations gave an estimated $427.71 billion to U.S. charities in 2018. There’s tremendous impact wrapped up in that overarching figure—and there’s even more impact that can be achieved as your clients make the jump from being charitable donors to philanthropists that inspire generations to come to carry on their philanthropic legacy.

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Nancy E. Anderson, J.D., CTFA, CAP®, CEPA, ADPA, is a senior vice president and head of wealth strategy and trust services at Calamos Wealth Management in Naperville, Ill.