Fulfilling Your Philanthropic Vision

Financial Planning

Integrating philanthropy with your overall wealth management plan

How do you currently make philanthropic decisions? Do you know how much of your contributions go toward causes you care about versus administration and overhead? Do you incur major tax bills by selling stock or other assets to raise cash for contributions? Are you thinking about establishing a foundation but wondering if there might be simpler alternatives?

Effective philanthropy requires the same carefully constructed strategy as the rest of your finances. And equally important, philanthropic and other financial strategies must be integrated so that your charitable aspirations aren’t fulfilled at the expense of other important objectives and vice-versa.

Making Financially Astute Philanthropic Decisions

Philanthropy can involve considerable sums of money or assets like stock and real estate. As a result, it is as integral to your overall wealth management plan as retirement planning, investing, or estate planning. Let’s start with a simple example of how giving to charities can trigger unforeseen financial consequences: You decide to make a $50,000 gift to your church or synagogue. Where will the money come from? In the example below, you sell $50,000 of your XYZ position that you purchased several years ago for $30,000. If your capital gains tax rate is 15%, you would owe 15% of your $20,000 gain or $3,000.

Sell XYZ stock	$50,000
Capital Gain	$20,000
Capital Gains Tax at 15%	$3,000
Net Proceeds	$47,000

Wouldn’t it have made more sense to simply donate the shares of stock instead? By doing so, you trigger no tax liability. The charity sells the stock, not you, and you face no consequences the following April. What’s more, the charity receives the entire $50,000 contribution, not $47,000 after taxes.

Donating A Life Insurance Policy

A more efficient way to support your favorite charity might be through life insurance. Whether you simply give a policy to the charity of your choice or designate it as beneficiary on a policy you own, you will provide a future benefit that far exceeds the premiums required to maintain the policy.

Designating the charity as a beneficiary is the alternative that provides you with greater flexibility. You will be able to change the beneficiary at some point if you wish, and you will also be able to access any cash value that might be available. On the other hand, the benefit paid by the policy, while income tax-free, is considered part of your estate and is taxable at rates up to 55%.

By simply giving the policy to the charity, you lose flexibility, but you remove the value of the policy from your estate and provide the charity with a benefit uneroded by estate tax.

Should Trusts Play A Role In Your Planning?

Many philanthropists prefer to establish trusts as part of their strategy. Perhaps the best way to illustrate their reasons for doing so is through an example.

Imagine you wanted to leave $1 million to a charitable organization by simply designating them in your will. Depending on the size of your overall estate, assets could be subject to estate tax at rates as high as 55%. For this example, that means your charitable organization to which you had left $1 million would only receive $450,000.

By establishing a Charitable Remainder Trust and designating your charity as its beneficiary, you can place assets in it and achieve the following goals:

Remove the assets from your estate and avoid paying estate tax on them.
Avoid paying capital gains tax on the sale of the assets.
Collect income generated by the assets over your lifetime, if you wish.
Receive a charitable tax deduction in the year you make your gift.
Provide the charity with a tax-free inheritance.

Of course, Charitable Remainder Trusts aren’t the only type of trusts available. Your Financial Advisor will work with you to determine whether trusts have a place in your planning efforts and, if so, which might prove most advantageous.

Establishing A Foundation

Foundations may have a place in your family’s philanthropic strategy if you are committing substantial sums to charities on an annual basis. That’s because:

Foundations offer the ultimate in control over grant-making activities. Grants can be made to any organization that aligns with the Foundation’s mission. What’s more, grants can be made with stipulations on how they are actually used.
Foundations offer the opportunity to instill other family members with philanthropic spirit and involve them in charitable activities. For many founders of Foundations, the ability to ensure their family’s philanthropic involvement will continue in subsequent generations is a big reason for choosing this approach.
Finally, there’s a non-practical reason. Foundations enable individuals and families to honor a friend or family member by naming the Foundation after them.

Setting up and running a Foundation, however, is expensive and time-consuming. In fact, it’s much like setting up and running a corporation, with the additional onus of having to apply for taxexempt status and meet numerous non-profit reporting requirements. As a result, you may want to consider a simpler philanthropic approach.

Contributing To A Donor-Advised Fund

Donor-Advised Funds have replaced Foundations as a philanthropic vehicle for many affluent families over the past few years. That’s because they offer a simple approach that combines investment management, philanthropic advisory services, and administrative services under one convenient roof.

A Donor-Advised Fund is an IRS-approved public charity to which you can give cash, appreciated securities, restricted and closely held stock, real estate, and a variety of other assets.

You recommend charities to which the Donor-Advised Fund will issue grants, subject to the approval of its Board of Directors. Most Donor-Advised Funds, however, will approve grants to any organization that qualifies as a public, taxexempt charity eligible to receive contributions.

The benefits of employing this middle-man approach are considerable:

You gain access to experienced professionals who can help you:
- Identify suitable candidates for grants that align with your philanthropic mission.
- Determine how grants are actually being used by the non-profits that receive them.
- Navigate the complex philanthropic landscape to reach such objectives as endowing a chair at a university, establishing a scholarship program at your alma mater, or even securing naming rights to a new hospital wing or other institutional building expansion.
Your assets are invested professionally in accordance with your objectives, time horizon, and personal preferences.
You free yourself from administrative functions like writing checks and gathering contribution acknowledgments for tax purposes.

Contributions to a Donor-Advised Fund are 100% taxdeductible, and assets invested with a Donor-Advised Fund are allowed to grow tax-free.

Planning Is Key

As you can see, there’s more to philanthropy than writing a check. Your Lenox Advisor can help you develop a plan that looks at your philanthropic aspirations in the context of your overall finances and aspirations for you and your family.

Lenox Advisors, Inc. (Lenox) is a wholly owned subsidiary of NFP Corp. (NFP), a financial services holding company, New York, NY. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC and NFP Corp. Member SIPC. 90 Park Ave, 17th Floor, New York, NY 10016, 212.536.6000. Services will be referred by qualified representatives of MML Investors Services, LLC (MMLIS).

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