The following three-part article provides a comprehensive examination of philanthropic opportunities for families.

Part I: Philanthropy and the Family Unit

Many people find that one path to true happiness is donating time, talent and money to charitable causes that help others.  According to a study by the Giving USA Foundation, charitable donations fell by nearly 6 percent in 2008, the sharpest drop in 53 years (2009 statistics will not be available until June 2010).  It is very gratifying to say that we see many of our clients giving at the same rates (and more) than pre-recession levels.

That said, one question we hear often from clients is, ‘When and how do we begin including family members in our gifting strategy?’  Many affluent individuals worry about their children growing up with a sense of entitlement and are anxious to find way to instill the values of philanthropy in their children.

Involvement in philanthropy helps us navigate life’s developmental stages.  As early as age three, children begin to develop the ability to feel empathy for others.  By age six, children want and need to feel useful.  Philanthropy helps build a sense of empathy and accomplishment – ‘I’m helping others’ – while counteracting a potential sense of superiority or privilege.  In the teenage years, philanthropy helps children know who they are, and identifies their social roles.  Helping others – and the internal sense of satisfaction that comes from offering that help with joy and respect for those receiving it – helps children learn to master life successfully.  By giving of themselves and their time, they find a positive and fulfilling answer to the question, ‘Who am I without my family’s money?’  Equally important, it provides teenagers with an activity that can be shared by the entire family.

Kids take their cues from their surroundings, including the house they live in, the car the family drives, what activities you do together as a family.  Clearly, kids need a firm foundation for spending and saving before they can contemplate giving. One of the most effective ways to educate your children is to model the behavior you want them to emulate.

If your children are younger, create a practice of dividing their weekly/monthly allowance into three potsspending, saving and giving.  Mimic the matching component of a 401k.  For every dollar your child saves (or gives) match it dollar-for-dollar.  Each year, award your child $10 for each year of their age, to be distributed to a local charity.  This not only builds the habits of saving and giving, but also develops money management skills.  Work with your children to figure out how they want to donate the money set aside for giving.

If your children are teenagers, let them know what they are responsible for paying for from their allowance each month (and stick to the rules).  This will help your children make grown-up choices.  Wealth can be a burden, and kids have a better chance of creating positive attitudes about wealth when they learn to make decisions that truly impact them.

Spend time teaching your children the language of finance and explaining how you research or review opportunities or big-ticket purchases.  Do your children know how you arrive at major financial decisions?  Work with advisors who understand and talk about the emotional issues of money, not just the investment side of things.

At some point you may want to schedule a meeting with your Family CFO and your older children to help education them about financial issues, learn what it takes to assemble a good team of advisors and become comfortable with the process of evaluating choices and making decisions on issues ranging from savings and investing to developing philanthropic plans and giving.

Instead of making donations, checkbook in hand (or sitting at your computer screen), think about how you may pass the value of charitable giving on to your children.  Require your children to be involved in the family gifting strategies.  Create annual holiday rituals for community service or giving.  It doesn’t have to be complicated.  The family can simply volunteer to help gather/deliver food clothing or toys for needy groups or hold family meetings to determine which charities will receive donations.  The key is to find ways to involve everyone in the family.

To facilitate charitable giving in your family, you may wish to consider establishing a Donor-Advised Fund or Family Foundation.  These topics are addressed in upcoming blogs….stay tuned.

Part II: Family Foundations

Clients have different reasons for giving and often even they are not fully aware of the reasons.  Some clients want to make a difference, some want to leave a legacy, receive recognition, express gratitude for someone or some group that helped them earlier in life, or desire to help those who have experienced similar difficulty or disability as they have.  Understanding reasons for gifting may be the key to determining what mechanism is best for family gifting strategies.

Family foundations have a strong appeal for generous individuals who wish to have an impact through charitable giving to an array of organizations over an extended period of time, as well as for those who wish to provide an opportunity to involve teens and young adults. This option provides families more control over charitable grant-making.  Talk of foundations often conjures up images of multibillion-dollar philanthropic titans like Microsoft Corp. founder Bill Gates.  But there are more than 84,000 private family foundations in the U.S., many of them small.

A Private Family Foundation is a legal entity, privately funded by you and it must be created with a charitable intent.  The Foundation is managed by a trustee who oversees the investments and distributes the assets.  If you wish to maintain control over the assets, you can appoint a board that consists strictly of family members.  Family members can even receive salaries as trustees, directors or employees of the Foundation, provided they legitimately serve in those roles and their work justifies their salary.  The board of a foundation has ultimate control over its actions.  It can choose an investment manager, grant recipients, hire and fire staff, etc.  Many families set up a foundation specifically to involve their family in their grant making.  However, a family foundation can also be set up with only a single board member.

Since a family foundation is a charitable organization, its income is exempt from federal income tax, although it must pay a 1-to-2 percent excise tax on its net investment income each year.  The gifts made to establish or grow an existing foundation can offer the family income, gift and estate tax advantages.

Donations of appreciated stock to a family foundation can be sold by the foundation without incurring any capital gains taxes.  If the stock has been owned for at least one year, the donor can get an immediate tax deduction equal to the fair market value of the stock.  This deduction can equal as much as 20 percent of the donor’s adjusted gross income.  Any income tax deduction not used in a contribution year may be carried forward over the next five years.  In addition to the income tax deduction for a gift of stock, the donor also avoids paying capital gains tax on any appreciation.

Of course, private family foundations must operate according to tax law, including distributing at least 5 percent of the assets each year to public charities.

A Private Family Foundation must operate like a real business. Separate bank accounts, books, and records must be maintained, including minutes of board of directors meetings, as well as the filing of a separate tax return.  In addition to respecting the foundation’s legal form, strict rules prohibiting self-dealing must be established.

As with any estate planning strategy, there are drawbacks. There are up-front legal costs that make it prohibitive for many estates.  Start up fees can be as high as $5 to $6,000.  A discussion with your estate planning attorney is a must.

Nonetheless, if you are interested in obtaining more information regarding Private Family Foundations please see your Moneta Family CFO.  The following Moneta Blog discusses Donor Advised Funds.

Part III: Donor Advised Funds

A donor advised fund (DAF) can effectively function as a family foundation. It can offer  much of the flexibility and appeal of a private family foundation without many of the regulations, requirements, and overhead expenses.

A donor advised fund is an account established at a sponsoring organization (such as Schwab, Fidelity or Vanguard), which is a public charity.  A DAF offers the opportunity to create an easy-to-establish, low cost, flexible vehicle for charitable giving as an alternative to direct giving or a private family foundation.  Donors enjoy administrative convenience, cost savings and tax advantages by conducting their grant making through the DAF.

Donors get an up-front tax deduction by making an irrevocable contribution of assets into a DAF when it is to their best financial advantage, while retaining the right to use the assets to support the charities of their choice at some future time.  In the meantime, the assets contributed are invested, and have the opportunity to grow tax free.

Contributions to the fund are immediately tax deductible with a five-year carry forward.  For gifts of cash donors can deduct up to 50 percent of adjusted gross income.  Appreciated securities that have been held for more than one year make the most effective contributions.  Donors can avoid capital gains tax on the securities and can deduct the total value of the contribution from federal income taxes, up to 30 percent of adjusted gross income, generally deductible at Fair Market Value.

Since the maximum tax deduction is received by the donor at the time of the gift, the sponsoring organization administering the fund gains full control over the contribution, thus granting the donor advisory status.  As such, the sponsoring organization is not legally bound to the donor, but it makes grants to other public charities upon the donor’s recommendation.  Grants can be made to any IRS-approved public charity.  Approved organizations are U.S. based organizations that qualify as tax-exempt under Section 501(c) (3) of the Internal Revenue Code and are public charities as defined by Section 509(a) of the code.

Differing from family foundations, DAFs require no annual distributions.  The contribution to the donor advised fund itself is considered a charitable gift.

The funds in the DAF account go into an account in the name of the family (i.e.:  Smith Family Donor Advised Fund), and are invested by choosing from a limited menu of sub-accounts such as a stock fund or bond fund.  Only when donations reach certain levels are investors permitted to select outside investments.

DAFs are ideal for those who wish to keep donations private, as there are no tax filings allowing outside entities to find out how much money has been put into the DAF.  You can specifically request that donations from the DAF be anonymous.  That said, if donors prefer that the charity know they are, the DAF can inform the recipient that the money is coming from your DAF account, allowing the appropriate recognition, should that be one of your goals.

The real beauty of the DAF is that the sponsoring organization does all the record keeping and due diligence.   The donor advised fund provides donors a year-end summary for tax records, as well as quarterly account statements tracking contributions, grants, and investment performance.

The donor’s advisory relationship typically lasts the donor’s lifetime and one successor generation.  Most donor advised funds allow you to name a successor who will assume all privileges after your death, or you may recommend a specific charitable organization to receive the remaining account assets as your death.

These are only the basics in regards to the Donor Advised Fund.  If you think you may be interested in learning more about this mechanism for charitable giving, contact your Moneta Family CFO.

Cynthia Barnes, CFP® , MBA, AWMA®

Cynthia is the professional consultant for Chandler Taylor.

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