Feeds:
Posts
Comments

Archive for the ‘Uncategorized’ Category

Giving Patterns of the Not So Rich But Very Famous

Posted in Uncategorized, tagged , , , , , , , , , , , on April 18, 2013 | Leave a Comment »

Phew!  Once again, we made it (barely) through tax season or, as we prefer to call it in the profession, the “silly” season.  Of course, the silly season in taxation is the polar opposite of the silly season in various sports and journalism, where it is perhaps more appropriately defined as the off-season when real news and action is light.  By contrast in tax, the silly season is that surrealistic time right before April 15th when down is up, white is black, good is bad…well, you get the drift.  It is truly the bizarro world.

 

Tina? Sarah? Only her hairdresser knows for sure…

So, now it is the so-called “off-season” for us.  And what do tax accountants do in their off season?  They become tax yentas, catching up on some light reading, like President Barack Obama’s and Vice President Joe Biden’s tax returns.  That’s right; there is a website that is specifically devoted to providing this unvarnished data for our reading pleasure.  For historical flavor, they also throw in the various tax returns of former Presidents Bush, Clinton, Bush, Reagan, Carter, Ford, Nixon and Franklin Roosevelt.  Not to mention presidential/vice presidential wannabes like Romney, Ryan, Gingrich, Santorum (who?), McCain, and Palin (or is it Fey?).  The stated purpose of the Tax History Project is “to provide scholars, policymakers, students, the media, and citizens with information about the history of American taxation.”  Uh-huh.  Personally, I think it just puts private information about public figures into the hands of those least able to interpret it.

 

Nevertheless, the takeaway…..

michelle-obama-2-600

Our President and First Lady appear to be fairly generous donors, giving away $150,034 to charity last year.  This represents just shy of 25% of their adjusted gross income ($608,611), a healthy measure by anyone’s standards.  Their contributions were generally in the $1,000 to $5,000 range.   The big one was to the Fisher House Foundation ($103,871), an organization that provides temporary housing to military families who travel to be with loved ones who are receiving medical care at major military and VA medical centers.  The first couple does not appear to have done anything fancy in 2012 with their charitable giving – it was all in cash, nothing in appreciated securities, and no fancy techniques were employed (CRT’s, CLT’s, private foundations, etc.).

 

pol_0121_joebidendance_480x360The Vice President and Jill Biden appear to be more like the rest of America (Joe and Jill Sixpack, if you will) – their charitable contributions ($7,190) represented less than 2% of their adjusted gross income ($385,072). More sketchy on the face of it was the fact that a significant portion of their contributions were noncash donations of “clothing, books, kitchenware, glassware, furniture, exercise equipment, bicycles, toys, and pottery.”  Clean out your house, take a $2,000 deduction.  (But who am I to throw stones?  I gave away a car last year. )

 

According to The Charities Aid Foundation World Giving Index 2012, the United States ranks # 5 in the world in terms of overall giving  and # 3 over a 5 year period. Not bad, but for a competitive people, not particularly good either. (“WE ARE NUMBER 3, HEY! WE ARE NUMBER 3!”- It just doesn’t roll off your tongue too well.)  The more important factoid, I think, is that the percentage of our disposable income donated to philanthropic causes has hovered for decades around 2% (Giving US Foundation, 2011 Report).  The Biden’s are almost at that pitiful level while the Obama’s blew it away.   Finally, preliminary (and ridiculously late) 2010 statistics from the IRS show that people in the Obama/Biden’s income category of $250K + gave away an average of $19,651.  So, it’s “Hail to the Chief” and “Boo to the Veep!”

 

Where does this leave us?  Poking fun at politicians and celebrities is fine, but at the end of the day, charitable giving is and should not be just a “feel good” exercise.  Being judgmental about it, I think giving levels in this country should be dramatically increased, especially as government spending in the social sector is curtailed.  That said, I also believe that it is up to each and every one of us to do our part in a way and to the extent we feel most comfortable, and that our giving, regardless of the amount, should always be done thoughtfully and systematically.  Many religions teach about tithing as an aspirational goal – giving away a minimum of 10% of your income.  10% is a lot – but what about setting a goal that is reasonable for you and then making it happen?  It could be 4%, 6%, or even 10% or more, but if you systematically make it happen each and every year, your philanthropy will become more manageable, budgetable, impactful, and ultimately more meaningful for you.

Read Full Post »

Don’t Confuse Morality with Frugality!

Posted in Uncategorized on March 29, 2013 | Leave a Comment »

It seems that everyone in the world knows about TED except me.  (If you don’t know about it either, I’m glad – it makes me feel better!)  Anyway, TED is a nonprofit devoted to, in its words, “Ideas Worth Spreading.” It started out in 1984 as a conference bringing together people from three different worlds:  Technology, Entertainment and Design.  Over the years, it has grown tremendously in scope and in so doing, has embraced the Internet as a way to leverage its reach.  I urge you to check it out.

Viewing a recent TED talk by Dan Pallotta entitled “The Way We Think About Charity is Dead Wrong” is well worth investing the requisite 18 minutes out of your otherwise busy life.  Dan is best known for creating the multi-day charitable event industry, including the AIDS Rides and Breast Cancer 3-Day events, which raised $582 million in nine years. He is president of Advertising for Humanity, which helps foundations and philanthropists transform the growth potential of their favorite grantees.

We recently explored one of Dan’s theses in Charitable Nation, that being that charitable overhead is not inherently bad if it helps the organization become more effective.  However, Dan goes into far greater (and, dare I say, more interesting) detail, examining how philanthropy has historically been relegated to a second or even third class position vis-à-vis the for-profit world and is routinely criticized when overhead costs appear “excessive” – criticism that would never occur in the for-profit world where the accepted economic maxim is that a dollar of marginal cost is worth incurring when more than a dollar of marginal benefit is anticipated.  Dan dares to dream big dreams and he challenges us to do so as well.

On the one hand, Dan’s talk is somewhat depressing, presenting this Sisyphean vision of a philanthropic world doomed to failure for lack of proper investment and understanding by society.  On the other hand, it makes the point that real change is possible if we abandon some of our outmoded ideas and look to invest in philanthropy in the right ways.  Some of the subsequent TED commentary surrounding Dan’s talk questions his math, which is understandable and fair and should be read in context with the video. I have not yet had a chance to review these thoughts but intend to do so (after the tax busy season, of course!)

If our collective goal is to try to solve some of society’s most pressing problems and, as philanthropists, truly move from success to significance, then it behooves us to listen to Dan’s words.

Read Full Post »

Efficiency in Charitable Giving – It’s Not Just Numbers

Posted in Uncategorized, tagged , , , , on March 20, 2013 | 1 Comment »

The New York Jewish Week, a publication that does not generally appeal to readers who are not, well, Jewish, nevertheless has an interesting article in its current edition called the Ten Commandants of Smart Philanthropy.  Although written with a smattering of Judaic references, this article should appeal to a wider range of readers because it contains a secular wisdom that is easily applied to one’s portfolio of charitable commitments.  Some of the “commandments” are somewhat self-evident while others require serious thought.  Following more or less all of them should increase the efficiency of your charitable portfolio, enabling you to more securely move from success to significance.  I encourage everyone to read it.

 

Today, I want to focus on one particular commandment discussed in the article, number 5, which states:  “Fund (good) overhead and capacity building.”  This seems to fly in the face of the generally accepted cold, hard accounting maxim that organizations should keep overhead to an absolute minimum. The Better Business Bureau (BBB), in its Standards for Charity Accountability, actually quantifies acceptable overhead standards (standards # 8 and 9) which state that a charitable organization shall:

 

  • (8) Spend at least 65% of its total expenses on program activities.

AND

  • (9) Spend no more than 35% of related contributions on fund raising.

 

So, in the jargon of the Jewish Week article, what is funding “good” overhead and capacity building?

 

The author of the article, Andres Spokoiny of the Jewish Funders Network makes the point:

 

“…..While there have been some abuses and some organizations are unnecessarily bloated, overhead — or operational costs — is what allows an organization to work with proper tools; to have good and trained professionals; to have contingency plans for emergencies, etc. “Good” overhead is not useless administrative circuits. Rather, it’s what allows an organization to function.”

 

Fair enough.  But I would add to that.  Let’s say that you are involved in grassroots philanthropy in your community.  Should you immediately write off a promising startup charity that may, in its first few years, incur overhead costs that far outstrip it actual program expenditures?  By knowing the people involved and understanding their mission, goals, approaches to building the charity, etc. you may be able to determine that the investment is well worth the risk.  On the flip side, should you cut off support for an old line, established, and fabulously wealthy charity just because its CEO is paid a seven figure salary?  Perhaps you bristle at giving money to such organizations but take the example of the well-known and well respected American Cancer Society.  It meets all 20 of the BBB’s Standards, including spending at least 65% of total expense on program (actually 80%) and no more than 35% of related contributions on fundraising (in fact, a meager 11%).  Yet in the same year the CEO John Seffrin was paid in excess of $2.4 million.  Does such seemingly generous compensation bother you?  What about when you consider the organization’s income in that year:  $396 million?

 

When it accredited the charity, the BBB obviously came to the conclusion that this was money well spent, at least in a financial sense.  Now, it is up to the donors to decide how effective the charity is in meeting its stated purpose “to eliminate cancer as a major health problem by preventing cancer, saving lives from cancer, and diminishing suffering from cancer through research, education, advocacy, and service.”

 

I wouldn’t be true to my CPA license if I did not believe that metrics are helpful in evaluating charitable organizations.  But one has to put all numbers in context.  The BBB, along with other rating and information aggregating services helps you gather the relevant data and analyze it alongside your own values and philanthropic vision.  The decision to support a charitable organization should be made the same way you decide to invest in a for-profit venture – by determining if the mission of the organization is realistic, attainable, and in synch with your own world vision and by satisfying yourself that the organization is internally efficient and focused on its goal.   By themselves, measures of efficiency and raw expense numbers can be misleading.  It is always best to look at the whole picture before making a commitment.

Read Full Post »

Tools & Techniques 101 – You Made the Contribution, Now PROVE It!

Posted in Uncategorized, tagged , , , , , on March 12, 2013 | 1 Comment »

As I tell my students at Baruch College, tax deductions are a matter of legislative grace.  Congress giveth and Congress taketh away.  Allowable deductions of all types are claimable, but subject to later scrutiny and possible disallowance by the IRS.  If your documentation is inadequate, then bye-bye deduction!  Charity is no exception.  In fact, charitable contributions may be one of the touchiest subjects of all.  A cranky agent may really chafe at a taxpayer who tries to scam the system – “Look at what a good person I am!  I gave $800 to the Human Fund this year and you’re not letting me deduct it?”  Believe me, such an approach doesn’t play well on the sympathy meter. But scenes like that are so avoidable – once you make the contribution, all you need to do is make sure you have the proper documentation and you’re all set.  Properly papering your file is essential, particularly now as you prepare to meet with your tax advisor to file your 2012 return.

 

The following information is a start.  Your tax advisor does not necessarily need to see all this paperwork because, at the end of the day, you are the responsible party for gathering, organizing, and retaining this documentation in the event of an audit. (Exception – definitely pass on the qualified appraisals of noncash contributions to your advisor).  If you have any questions about any of this information be sure to check with him/her.  And, of course, for some helpful online information check out the IRS’ excellent publication Charitable Contributions – Substantiation and Disclosure Requirements.

 

But for now, some basics:

  1. First of all, verify that your contribution is in fact deductible.  Not every tax exempt is a charity, and not all charities are in good standing with the IRS.  The best place to verify this information is through the IRS’ online searchable database (formerly known as Publication 78).  This database will help you determine the status and allowable deductibility for most charities.  The one exception is churches and synagogues, which are not typically listed in Publication 78.
  2. Gather the required documentation from the charities and your own files.  Remember, while the charity bears some responsibility for following these rules, you as the donor are ultimately responsible for ensuring that the documentation you receive is adequate to support your deduction. And it has to be contemporaneous, which means you must receive it before you file your tax return.    Biggest source of errors:  identification of quid pro quo contributions, valuation of the goods or services received, and the required adjustment of the deduction for this value.
  3. Qualified appraisals are absolutely required for larger value non-cash contributions (see table).  Don’t skimp – and if you don’t believe me, just ask Mr. Mohamed, a taxpayer who recently lost out on a $19MM deduction because he skimped on the appraisal.
  4. Relatively low-value non-cash contributions of items such as clothing, furniture, and household effects should be valued piece by piece based on fair market value, which is usually interpreted to mean “thrift shop value.”  A percentage of cost is not permitted unless it approximates the thrift shop value, nor is a “group valuation” such as “5 bags of clothing worth $X.”  In addition, deductions are allowed only for such property that is in good condition or better.  A good starting point is the Valuation Guide published by the Salvation Army.
  5. Vehicles such as automobiles, airplanes, and boats are subject to special rules depending on how the charity uses the donated property.  See my previous blog “Car Donations – Under the Right Conditions, What’s Old is New Again” for more details.

chart(Click to enlarge)

Read Full Post »

Does the Deduction for Charitable Contributions Really Matter?

Posted in Uncategorized, tagged , , , , , , on March 6, 2013 | 4 Comments »

Many charities and big donors feel that we dodged the philanthropic bullet in January when the American Taxpayer Relief Act of 2012 was signed into law by President Obama.  True, for wealthy individuals, the bad news was that the top tax rate increased from 35% to 39.6%, the annoyingly-named and applied “Pease” and “PEP” limitations were restored to their full strength, and all of these changes were introduced concurrently with the Obamacare provisions taxing compensation income by an additional .9% and investment income at an additional 3.8%.  BUT, HALLELUJAH, THE CHARITABLE DEDUCTION WAS PRESERVED!

 

Important, yes, particularly with tax increases a reality, but more importantly from a psychological standpoint than a purely rational/financial one.  The question is, do the tax incentives really matter?

 

The single most interesting behavioral thing I have learned about taxes over the course of my career is that, no matter how large or small our marginal tax rate, as long it is positive, taxpayers will look for ways to avoid paying it.  It is simple human nature.  So take with a grain of salt any talk about tax collections increasing when rates decrease – the fact is, the American Taxpayer (taxpayersaurus Americanus)   will go to enormous lengths to avoid paying tax — any tax — whenever and wherever possible.  Think about those sales tax holidays we occasionally enjoy in some of the high tax states around the country.  States will temporarily cancel their sales tax for a short period of time in order to encourage retail sales.  The results are often incredible.  You would think they were literally giving things away at the mall the way the consumers flock in to save, what, 8%?  It’s not the amount, it’s the principle of the thing, man!  Ok, it actually IS the amount, but no amount is too small.

 

Understanding this basic premise about taxpayersaurus Americanus explains much about why our tax system is so opaque and inefficient.  Everyone wants to beat it and Congress delights in putting in “incentives” to stir the pot – and to make us THINK we are beating it.  Take our current (permanent) tax policy debate.  Many folks worry that a cap may be imposed on itemized deductions, including charitable contributions, limiting their deductibility to a maximum of 28%.  Psychologically, this is troubling.   But from a purely economic point of view it is nowhere near as bad as it seems for most taxpayers, even high income ones.  Why?  Well, for one thing, before anyone even tries to limit the deduction, the alternative minimum tax (AMT) will most likely kick in and do its damage, particularly for taxpayers in high tax states like New York, New Jersey, and Connecticut.[i]    The AMT can impact taxpayers with income from the high five to the low seven figure range, a large group of people indeed.  And what is the top marginal rate for the AMT for these folks?  Interestingly, 28%!  So effectively, the charitable contribution for these folks is already capped at the magic 28%.  It is a very effective use of smoke and mirrors and one that would not change even if itemized deductions are limited.

 

The math works perversely in other ways as well, even when the taxpayer is deep into the 39.6% bracket and has broken through the shackles of the AMT.  In such a case, the so-called Pease limitation (extensively derided in a previous blog) can cut down the value of the charitable deduction to almost nothing.  Pease reduces total itemized deductions by 3% of excess adjusted gross income (AGI), i.e., AGI in excess of a magic number ($250,000 for singles and $300,000 for married couples filing jointly), but only to the extent of 80% of total deductions.  So using just percentages, let’s take this example to the extreme — our taxpayer’s itemized deductions consist solely of charitable contributions and are fully reduced by 80%.  Effectively, what this means is that only 20% of his contributions will be deductible at a rate of 39.6%.  Bottom line?  The true tax savings is only 7.9% (20% x 39.6%), a far cry from 28%.   More smoke, more mirrors.

 

Even so, I do not endorse limiting the charitable deduction.  Its existence sends a message that we, as a society, value charity and players in the “marketplace of philanthropic impulses” and its psychology is very powerful indeed.   But, I also believe that the true financial and incentivizing value of the deduction is overstated.  Psychologically, donors appreciate a deal, especially when the tax break lowers the overall cost of their contribution.  But true philanthropists will continue to give regardless of tax breaks.  For them, the reality is stronger than the psychology.  Giving is the right thing to do and consistent with their goal to move from success to significance.

 

[i] This has to do with the calculus of AMT – certain expenses including  but not limited to state and local income, property and sales taxes may be deductible for regular tax purposes but not for AMT.  So taxpayers in high state and local tax jurisdictions whose deductions will be significantly impacted by AMT will be subject to the AMT more often than taxpayers from low tax jurisdictions.

Read Full Post »

Charity is Good – Or Is It?

Posted in Uncategorized, tagged , , on March 5, 2013 | Leave a Comment »

Politicians love the concept of the sound bite.   They are short, pithy, digestible, and easy to grasp and accept at face value.  Non-thoughtful people are stirred by sound bites and often moved to action (vote) because of the attractiveness and brevity of what is said.  When a politician seeks to go into further depth, s/he is accused of being elitist and unduly professorial.  So, in this concentration-challenged and Twitter-obsessed society, we end up with a watered-down and vitriolic political discourse that consists of “5 point plans” that say nothing and culminate in the level of dysfunction we currently see in Washington.  It’s a pretty pathetic situation.

 

charity2So, indulge me while I craft my own sound bite:  “Charity is good.”[1]  Who can argue that?  But at the risk of sounding elitist and professorial, I’m going to take that sound bite and dissect it.  First of all, define “charity”.  According to the website dictionary.com, charity includes “(1) generous actions or donations to aid the poor, ill, or helpless or; (2) something given to a person or persons in need; alms.”  It is a pretty broad definition.  The Internal Revenue Code defines charity in a more legalistic yet similarly broad manner.  The basic 501(c)(3) organization, or charity, is one that is “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, or to foster national or international sports competition…or for the prevention of cruelty to children or animals……”

 

So, even though we have extensive regulations to flesh out the IRC and rulings galore to further interpret it, we are still left with definitional loopholes broad enough to drive a truck through – and charities that conceivably stretch the definition to the breaking point.  In a recent article, the online magazine Slate.com cited the Renegade Roller Girls of Oregon (Bend, OR) as an example of a “questionable” charity.  I’m not so sure about this and frankly, I think it deserves a bit more investigation.  (While I did find it in the IRS’ charitable organization search engine listed as a public charity, I was unable to locate it in the charitable database www.guidestar.org.)  Certainly, on its face, the Renegade Rollers sounds like an organization that “fosters national sports competition” so what could be bad?  One person’s philanthropic passion is another’s “what, are you kidding me?” example of bad public policy.  But the Renegade Roller Girls are small potatoes.  In that same article, the author goes on to cite a 2006 study by the Congressional Budget Office (CBO) that compared for-profit hospitals and charitable hospitals and found only small differences between them, leading one to question the need for any sort of tax exemption for hospitals at all, particularly since charitable hospitals represent only 1% of all US charities but garner a whopping 43% of all donations.  On the other hand, they do provide more than two thirds of the Medicare beds across the country, so weigh the public good against the tax cost.  Then there is the perennial argument about private schools and colleges – while they are indeed organized for “literary or educational purposes” do they go about it at the cost of draining resources from the public education sector where greater numbers of students are served?  And even if they do, is that a reason to strip their charitable status from them?  Doesn’t the fact that major scientific breakthroughs have come from some of these schools make an argument for keeping that tax exemptions?

 

My point is simple yet highly complex – yes, charity is good, but try defining charity first and you realize that the argument stretches far beyond the sound bite.  I have long maintained that the “marketplace of philanthropic impulses” will direct capital to the pet causes of the contributors and that this is not necessarily a bad thing.  But like all marketplaces it can be prone to excess and needs a certain amount of regulation to keep it honest and working for the public good.  As the tax debate in Washington continues to weigh the possibility of limiting itemized deductions to 28% (including the charitable deduction), perhaps a secondary debate should occur about a more realistic definition of “charity” for purposes of that deduction.

[1] Not to be confused with the 1987 Oliver Stone movie “Wall Street,” which left us with the enduring and ultimate sound bite of that generation:  “Greed is good.”

Read Full Post »

The Giving Pledge – 105 Generous Billionaires and Growing

Posted in Uncategorized, tagged , , , , , , , , on February 28, 2013 | 2 Comments »

Last April, I blogged about the Giving Pledge, the movement started by Warren Buffet and Bill and Melinda Gates in 2010 which was intended to encourage the wealthiest Americans to commit to giving the majority of their wealth to philanthropy. Initially, the founders focused on domestic billionaires because, as Mr. Buffett put it “…we had our hands full in the U.S.”

 

givingpledgeIn addition to this particular BHAG (“Big Hairy Audacious Goal”) of increasing meaningful philanthropic participation by ultrahigh net worth families, Mr. Buffett and the Gates’ wanted to take the philanthropic discussion up a notch and try to increase overall giving at all levels.  Don’t discount the symbolism factor of this leadership by example – it is a very powerful motivator and the reason for the public nature of the pledge.  Time will tell if this part of the goal is successful, or even measurable.

 

But certainly in the rarefied society in which the founders travel, the Pledge appears to be working.  When it was first kicked off three years ago in June 2010, there were 40 signatories.  By April, 2012, when I first blogged about the Pledge, participation had more than doubled to 81.  Today the total stands at 105.  12 of these folks are the first non-US signatories to the pledge, representing the United Kingdom, Australia, South Africa, Germany, Russia, India, and Malaysia.   The combined philanthropic pledge of this new cohort stands north of $10 billion.

 

The global component of such a movement is actually more difficult than you might think.  Just like everything else, there are definite international cultural differences regarding philanthropy.  Initially, when the founders met with folks in countries as diverse as China, India, and Saudi Arabia, they faced hurdles ranging from civic modesty to an overriding need to perpetuate family dynasties.  Not surprisingly, a lot was lost in translation, leaving some potential pledgers thinking they would be legally and contractually bound (no, just morally bound) or that they would be locked into supporting certain charities or foundations (which they are not).  In fact, the pledge could not be simpler or more flexible – all that is asked is that a majority of a pledger’s wealth go to philanthropic causes “that inspire them personally and benefit society” and that the pledger make a public statement about his/her commitment.

 

As successful as this campaign has been, we need to keep it in perspective.  Asking anyone at any level of wealth to give away the majority of their net worth to charity is a tough sell.  105 billionaires have made that pledge so far and we celebrate and thank them for it.  Using Forbes list of the “World’s Billionaires” as a scorecard, Buffett and the Gates’ now have only 1,121 folks to go.

Read Full Post »

Next Gen – Who Is the Next Generation of Philanthropists?

Posted in Uncategorized, tagged , , , , on February 26, 2013 | 1 Comment »

The United States is currently undergoing a massive generational transfer of wealth.  It is projected that at least $41 trillion will transfer from parents and grandparents to the post-Baby Boom generations over the next 40 years.  Further, it is anticipated that this new wealth may usher in a new “golden age of philanthropy” as the members of Gen X (born 1964 – 1980) and Gen Y/Millennials (born 1981 – 2000) – collectively called “Next Gen” — take over the reins of financial decision making.  The first “golden age” conjures up the major givers of a century ago such as Rockefeller, Morgan, and Carnegie.  This new golden age includes leaders Warren Buffett and Bill Gates, neither of whom is part of this current generational cohort, but also includes Mark Zuckerberg and Priscilla Chan – 28/27 years old, John and Laura Arnold – 38/39 years old,  and Sergey Brin and Anne Wojcicki – both 39 years old.  (See my recent post “Megaphilanthropy – Can You Even Get Your Head Around It?”)

 

Much handwringing will occur in all marketplaces as marketers try to sell their products and services to these folks.  This includes the not-for-profit sector as organizations and causes struggle to make meaningful connection and increase their share of wallet.  Understanding what makes this new wave of philanthropists tick is crucial.

 

A recent study by the Johnson Center for Philanthropy and 21/64 examined the motivations of these young philanthropists.  The participants in the study all come from very charitable high net worth families. For example, 53% of their families give over $250,000 annually to charity, while 30% give over $1,000,000.  So they tend to emerge from a high achieving, high expectation gene pool.  The good news is, contrary to the generational sloth perceived by certain Baby Boomers of the upcoming generations (“kids today – lazy, no motivation, no social conscience”) these Gen Xer’s and Millennials appear to take a long term view of philanthropy and look to get into it sooner.

 

Some key findings:

  • Driven by Values, No Valuables – Values appear to drive the Next Gen philanthropists, not valuables.  Surprisingly, or not, these values have often been learned at their parents’ knees.  89% credit their parents for their social consciousness, while 63% credit grandparents, 56% close friends and 47% peers.  They seek a balance between honoring the family legacy and assessing the needs of the day (eg. – supporting religious organizations versus environmental causes).  While they feel a commitment to philanthropy that is rooted in the past, they plan to meet that commitment in different ways in the future.
  • Impact First – This may be more perception than reality but Next Gen see embracing “philanthropic strategy” as a distinguishing factor between them and their parents and grandparents.  They see prior generations as being motivated more by a desire for recognition or social standing while they see themselves motivated by the desire for impact above all else.  They want to see, and find satisfaction in, the results of their philanthropic investments.
  • Time, Talent, Treasure, and Ties – Giving without significant, hands-on engagement feels like a hollow investment with little assurance of impact.  Relationships with the organizations they support are crucial.  The consensus is that one gives with all one has to give.
  • Crafting Their Philanthropic Identities – Philanthropy has traditionally been a second or third act, engaged in as one “matures” into their golden years.  Next Gen does not want to wait for this and is looking to currently craft their individual identities and actively ponder and develop their own legacies.

 

The results of this study are certainly encouraging.  Next Gen philanthropists of means want to move from success to significance more quickly and more often than their parents.  Those of us who look to assist in this transformation (advisors, fundraisers) should expect today’s givers to be more engaged and more demanding of results – and that this trend will only accelerate over the coming years.

Read Full Post »

Who Actually Owns that Private Foundation?

Posted in Uncategorized, tagged , , , , , , on February 20, 2013 | Leave a Comment »

Several days ago, a very troubling story hit the newswires.  Its seems that former San Diego mayor Maureen O’Connor got herself into a pickle, allegedly gambling, winning and losing over $1 billion over a ten year period.  This gambling addiction amounted to the unfathomable sum of almost $300,000 per day! (For a discussion of the tax consequences, see Tony Nitti’s tax blog.) Very sad.  According to the New York Times, Ms. O’Connor ended up “……eventually liquidating her savings, auctioning her belongings, selling off real estate, borrowing from friends and taking more than $2 million from a charity set up by her late husband, a fast-food tycoon.”

 

It was the last part of that sentence, about raiding the charity, that caught my eye.  Pure and simple, what she did was steal.  More technically stated in the private foundation world, it was extreme “self-dealing”.

 

The private foundation (PF) is a wonderful tool for high net worth individuals and families to amass assets to fund charitable endeavors.  Similar to the PF is its more accessible cousin, the donor advised fund (which I blogged about earlier this week.)  But, the very basic underpinning of these tools is that, once a donor has funded them, the donor no longer owns the assets and the assets can no longer be used for his/her private benefit.  Period.

 

Now, Ms. O’Connor’s situation is admittedly a whopper (or, perhaps more correctly, a Jumbo Jack®, since her late husband, Robert O. Peterson, founded the Jack-in-the-Box fast food chain).  Unless you have a really warped sense of right and wrong, it is pretty obvious that taking money from a private foundation and using it to gamble is not particularly kosher (nor is a Jumbo Jack®).  But, what about more subtle acts of self-dealing?

 

These rules are complex and should be examined on a situation-by-situation basis.  The takeaway is that all those involved with PF’s should be aware of the potential for abuse and should take corrective action before any issue escalates.    Let’s take a quick look at three not-unusual self-dealing circumstances:

  • Suppose that you make a legally binding pledge in your own name to endow an academic chair at your alma mater.   Can you fulfill that pledge with a grant from your private foundation?  The answer, most likely, is a resounding NO!  According to the IRS, using a private foundation’s assets to satisfy a donor’s legally enforceable charitable pledge is an act of self-dealing and not permissible.
  • What about hiring a family member to manage the foundation?  Self-dealing?  Yes, virtually by definition.  Permissible?  POSSIBLY.  Hiring a “disqualified person”[1] may work as long as the compensation and any expense reimbursements are reasonable under the circumstances and paid for services related to carrying out the foundation’s exempt purpose.  Safe to say, it is not reasonable to pay your idiot son-in-law a six figure salary to act as the janitor for the office of the family foundation.  But it may be reasonable to pay your MBA-credentialed daughter to manage the affairs of the foundation at a rate comparable to that paid by a similar organization under like circumstances.  It is very important to never lose sight of the old adage:  Bulls and bears make money while pigs get slaughtered.
  • Can you provide an all-expense paid retreat for the members of the board of your family foundation at an exotic locale?  Probably not because there would presumably be a large percentage of personal pleasure in such an excursion.  Better to hold the retreat as a rundown Motel 6 in Scranton, PA in the dead of winter – it would certainly be hard to prove under those circumstances that the expenses were anything but reasonable.  Also better to ask the question beforehand than to get penalized afterward.

 

Now, of course, there may be ways around some of these speed bumps – as we all know, most everything in the tax world is a lovely shade of gray as opposed to stark black or white.  And it is certainly difficult to endow a private foundation and not feel like you still have an ownership interest.  But the fact is, PF’s work the way they do in order to safeguard their charitable purposes as much as possible.  This requires stringent rules and a minefield of penalty taxes.[2]  Since PF’s are a creation of the government, the government is within its rights to regulate their usage through the imposition of these taxes and, when things get too out of hand, through criminal prosecution as well.

 

Apparently, that fact was lost on Maureen O’Connor.

[1] A disqualified person is generally any person who has a vested financial interest in a PF including substantial contributors (as defined), foundation managers, anyone owning more than 20% of an entity that is a substantial contributor, family members of any of the preceding individuals, or entities that are owned more than 35% by the individuals described above.

[2] The tax on self-dealing (§4941), tax on excess business holdings (§4943), the tax on investments that jeopardize charitable purpose (§4944), and the tax on taxable expenditures (§4945).

Read Full Post »

Tools & Techniques 101: The Donor Advised Fund

Posted in Uncategorized, tagged , , , on February 18, 2013 | 2 Comments »

donor advised fund

 

Moving down the Philanthropic Continuum, we come to one of my favorite tools in the charitable toolbox, the Donor Advised Fund (DAF).  Often referred to as the “poor person’s foundation” (but in a good way), the DAF enables the donor to accelerate charitable contributions into the current year without necessarily making grants to any public charities in that year.  DAF’s work very well in a whole range of circumstances but to me, they are tailor-made for the following situations:

 

  • Case 1:  The potential donor is faced with a significant liquidity event (sale of a business, exercise of stock options, large bonus, etc.) and is looking for a way to shelter some of that income.  S/he has always been charitably inclined but has never engaged in more than some current annual giving and does not know exactly where s/he wants to ultimately donate the funds.  Using a DAF provides a current year deduction coupled with the luxury of time to figure out the exact future distribution of funds.
  • Case 2:  Charitable giving is an important part of the donor’s life and s/he wants to ensure that she always has funds to give away. Using a DAF as s charitable savings account enables her to make her deductible contribution today while deferring the ultimate giving until later in life.  Meanwhile, assuming reasonable returns, the funds grow tax free, providing more assets.
  • Case 3:  A young couple wants to simulate the formalities of a private foundation in order to instill the culture of philanthropy in its children. A DAF is the perfect vehicle providing structure with minimal administrative burdens (no tax return, no excise tax, no required minimum distributions, etc.)

 

Here’s how it works:

 

  • There are numerous sponsoring organizations of DAF’s including commercial vendors like Schwab, Fidelity, and Vanguard and not-for-profit organizations such as the Jewish Communal Fund, the American Endowment Foundation and the New York Community Trust.  You choose the fund that works best for you taking into account investment choices, fees, account minimums, minimum subsequent investments and administrative services and conveniences.  The one common thread is that every one of these organizations is a “501(c)(3)” tax exempt charitable organization (or affiliate of the commercial advisor).
  • You make your irrevocable, tax deductible contribution to the DAF and claim credit for it in the year made.  (Some of these DAF sponsors accept gifts as low as $5,000.)  You do not get any further deduction for grants made from the fund.  The funds are no longer yours, although you retain advisor status over them.
  • Typically you can name your fund, although you cannot use the word “foundation” in the title.  Therefore, the “Smith Family Charitable Fund” would be acceptable but the “Smith Family Charitable Foundation” would not.
  • Unlike a private foundation, there is no requirement to make annual grants from the fund, so you can defer your distributions until far in the future.  Future generations of family members can assume advisory roles at the appropriate time to direct the ultimate disposition of the assets.
  • There is no separate tax return requirement or required bookkeeping.  The DAF sponsor does it all for you.
  • In any one year, the deduction for cash contributions made to your DAF cannot exceed 50% of your adjusted gross income (AGI).  Noncash contributions are limited to 30%.  Excess amounts are carried over and deducted over the next 5 years, subject to the same income limitations each year.  Contrast this to private foundations, which are subject to a lower limitation of 30%/20% of AGI.
  • There is a legal fiction that holds this all together – when it comes time to make a grant, you stand in an advisory role, merely recommending the grant to the DAF sponsor.  The DAF sponsor is responsible for the due diligence and technically does not have to honor your request.  More realistically, however, as long as you are recommending a grant that falls within the DAF sponsor’s guidelines (typically a grant to a domestic 501(c)(3) organization), the DAF will make the grant in the name of your fund.

 

In a future post, we will discuss the pros and cons of private foundations vis-à-vis DAF’s.  For right now, suffice it to say that donor advised funds work best for philanthropists with a need to control the timing of their charitable contributions and who desire a charitable pocketbook to help them support public charities that they find worthy.  Private foundations are more suitable for those who want to engage in the business of philanthropy.  Because of this, these tools are not mutually exclusive and each has its place at the table.

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 465 other followers