We Americans are Generous Folks

IF YOU THINK OF yourself as financially generous, you probably are, particularly if you’re part of the growing number of Americans whose investable net worth is anywhere from $100,000 to $3 million — the so-called mass affluent. This group’s ranks are growing, and so are their charitable donations.

Even if you aren’t buying a new wing for the hospital or endowing your alma mater with a new gym, you don’t need to be Warren Buffett or Bill Gates to make the most of the money you want to give away.

Americans gave away almost $250 billion in 2004, a 4% jump from the year before, according to National Philanthropic Trust, a Philadelphia-area independent public charity. But not all giving is the same. If you define charity as giving at the office for a community organization, snapping up a handful of benefit raffle tickets at your church, temple or mosque, or getting out the checkbook when the holidays roll around, you’re not measuring up to your personal philanthropic potential. There are smarter ways to benefit the charities of your choice.

While many people make charitable donations their whole lives, they give the most money away in the decade or so before they retire — typically between the ages of 50 and 65, accord to consulting group Cerulli Associates. In this segment, donors have enough assets to make gifts and aren’t worried about depleting their retirement funds. If this describes your own financial situation, it’s probably part of your basic value system to direct some of your money to a good cause. Experts in charitable giving say generous, successful investors can direct their money to the rapidly growing ranks of donor-advised funds, charitable remainder trusts and even family foundations, which aren’t limited to the very wealthy. These structures — and a well-considered financial plan — can maximize tax benefits, provide secure long-term grants for chosen charities or provide income to you or your heirs.

“You should think about what’s best from your financial-planning situation and a charitable-giving situation,” says David Giunta, president of the $3.5 billion Fidelity Charitable Gift Fund, one of the largest donor-advised funds, a common charitable-giving structure that lets donors put their money to work over time while reducing the impact to their overall financial liabilities. “It’s about looking at both sides. What’s the right way to give from a tax standpoint, but also from a charitable giving standpoint?”

It’s important to remember that there are two parts to philanthropy, says Eileen Heisman, president and CEO of National Philanthropic Trust. “There’s money going in, and money going out,” she says, and you need to consider both before you start serious giving.

Karen Remmele, a retirement analyst at Cerulli, says no matter what point in your life you decide to take a more sophisticated approach to charitable giving, it’s got to start with some close analysis, preferably in the company of your financial advisor.

“Once you know you can take care of yourself and your family, then you can look realistically at how much you can give to others,” she says.

Heisman calls donor-advised funds the easiest way to stretch out a generous impulse. The idea is simple: You make a grant to a parent charity — and this includes the foundations financial-services firms such as Fidelity set up to support these funds — and make an irrevocable gift. It nets you a tax deduction, and sets you up to make grants out of the fund to the recipients of your choice. Initial contributions to the Fidelity Charitable Gift Fund require a $10,000 commitment, as do many other large funds. Fees charged by these funds are comparable to many mutual funds — Heisman says they range from about 0.6% to as much as 1.2% of your assets, though the average is about 70-80 basis points.

Heisman says her organization and other donor-advised-fund sponsors also offer another kind of savings that’s especially appealing to people in the peak earnings years — time. A good charitable donation administrator will take care of the tough stuff, from liquidating complex asset portfolios to keeping up with tax issues, work that sometimes makes writing an annual check more appealing.

“We do all those things — if you were to do this yourself, you’d have to hire a professional or go through a lot of drudgery,” she says. “We try to let the donor do the easiest part — the part that they like — which is grant making.”

Another common path to philanthropy is the charitable remainder trust, which supplies you with income and a tax deduction based on the principal donation, but commits that money to a specific recipient after a fixed period. It’s less flexible than a donor-advised fund, but can also get other family members involved in your philanthropic efforts when the recipient is selected.

The inverse of this approach is the charitable lead trust, where a recipient gets an income stream for a designated period of time, then the principal reverts to the donor or his or her children.

“A $250,000 to $400,000 charitable lead trust can generate a gift of, say, $50,000 a year to a charity for five years, and is still a way to provide for a gift to the donor’s children,” says Greg Baker, senior vice president at Renaissance, an Indianapolis third-party administrator of charitable trusts, donor-advised funds and other philanthropic vehicles.

The gift annuity works a bit differently, and provides a stream of money to a registered charity, which assumes the role an insurance company would for a regular, fixed-income annuity investment.

This product is less commonly used than donor-advised funds, but has some advantages, Baker says.

“The client who creates a charitable gift annuity today sets up [a structure] where we know for sure what the gift is going to be this year and next year and the year after that,” he says.

If you could part with more money, you can set up a foundation to direct your own grants, Baker says. It’s a serious undertaking that requires a lot more effort, and a lot more of your assets.

“I’ve seen private foundations as small as $15,000 or so, but it really doesn’t make sense to have one unless it’s funded with $1 million or more,” Baker says.

If you take this step, it’s also a commitment that goes beyond money. A foundation sometimes offers a rallying point for a family to unite for a common cause and avoid many of the unintended complications wealth sometimes creates, says Erich Smith, managing director of portfolio management at Mellon Financial.

One client, a retired Ohio doctor, built up a sizable fortune after starting a group of medical clinics, and was concerned about how to pass on his millions to his teen granddaughters and still practice philanthropy.

“Instead of just setting up a foundation, he set up a foundation and put his son and granddaughters on the board,” Smith says. That led them to understand the investment decisions, and led to making better and better grant decisions.”

No matter how you give your wealth away, the options for personal philanthropy can be adapted to fit your goals, in a more sophisticated manner than reaching for the checkbook and saying “How much this time?”

Here in the Research Triangle area of North Carolina, the Triangle Community Foundation offers donor-advised funds and is a great source of information about charitable giving. Advising clients about charitable giving and assisting them in designing a plan that fits their goals is one of the most enjoyable aspects of my work.