You don't have to be rich to set up the equivalent of a charitable foundation — one that can continue making donations even after your death.
One of my clients — I’ll call him Jonathan — came to me recently with concerns about his estate planning. Jonathan was a successful corporate manager who received a big payday when a major firm acquired the company he worked for. With no children of his own, he’d arranged for most of his wealth to be divided between two favorite charities: a local boys club and an organization that helped homeless people train for work and find jobs. Life had been good to Jonathan, and he wanted to give back.
But recently, there had been some management changes at the homeless support agency, and Jonathan was no longer confident that his gift would be well used. He was thinking about removing them from his trust.
We suggested something that sounded to him like a bold plan, but was really quite simple. Amend your trust, we told him, so that upon your death your funds go to a donor-advised fund — a type of investment that manages contributions made by individual donors.
Jonathan knew what a DAF was. He was already using one for his annual charitable giving because it let him donate appreciated securities, thus maximizing his annual tax deduction. Like many people, however, he’d never thought about donating all his wealth to a DAF after his death. He was under the impression that a donor needed to be alive to advise the fund.
Not so. Jonathan just needed to establish clear rules on who the future adviser or advisory team would be and how he would want them to honor his philanthropic wishes. With a DAF, he could arrange for a lasting legacy of continued giving beyond his own life. Another plus: Because no organization’s name is written into trust documents, changing your mind about what charities to give to is quick and simple. With a trust, changing a charitable beneficiary often requires a trip to your lawyer.
People tend to think that leaving an ongoing charitable legacy is exclusively for uber-wealthy people such as Bill and Melinda Gates, whose foundation gave away $3.6 billion in 2013. While there is no defined level under which a foundation is “too small,” Foundation Source, the largest provider of foundation services in the US, serves only foundations with assets of $250,000 and up. While foundations offer trustees greater control over investing and distribution of gifts, they are costly to set up and run, and have strict compliance rules.
DAFs offer an alternative. Their simplicity, relatively low cost, and built-in advisory board make them an ideal instrument for securing a financial legacy. Unlike foundations, there is no cost to set them up. And the tax advantages are better. The IRS allows greater tax deduction for gifts of cash, stock, or property to a DAF, compared with a foundation. Foundations have to give away 5% of their assets annually, but there are no distribution requirements for DAFs.
All DAFs have a board of directors as part of their structure. Many of them are willing to maintain the gifting goals of a donor after their death and insure that the recipient charities are eligible for the grants each year. At my firm, we have been asked to serve as part of clients’ DAF’s adviser team, to which we have agreed. Upon Jonathan’s death, we will continue to monitor his charitable recipients for quality of services, efficiency, and results — all very important goals of Jonathan’s.
You have many options to choose from. DAFs come in many shapes and sizes, from local community foundations to national organizations. Most of the independent brokerage firms have their own funds, with minimum initial contributions as low as $5,000.
With a little research, a family should be able to find a suitable home for their estate and leave a lasting legacy — whether they are rich, Bill-Gates-rich, or not wealthy at all. To learn about finding the DAF that fits you or your loved one’s vision and values, one way to get started is to check out the community foundation locator at the Council on Foundations.
Scott Leonard, CFP, is the owner of Navigoe, a registered investment adviser with offices in Nevada and California. Author of The Liberated CEO, published by Wiley in 2014, Leonard was able to run his business, originally established in 1996, while taking his family on a two-year sailing trip from Florida to New Caledonia in the south Pacific Ocean. He is a speaker on investment and wealth management issues.
An awkward part of estate planning is telling your kids how much — or how little — they'll get. Here's how a financial planner can help.
For clients, one of the most stressful aspects of estate planning — already an emotionally difficult process — is the prospect of telling heirs what they plan to do with their assets. Because conversations about legacy plans can be terribly difficult, clients may avoid them at all costs — and the costs can indeed be substantial.
Financial planners, however, can help clients overcome the challenges of having these important conversations. Here are a few suggestions for how to do it:
- Encourage clients to communicate their values about money in a larger context. Often, clients’ estate plans reflect lifelong values such as a commitment to charitable giving or a wish to provide first for their families. If children are familiar with their parents’ values, chances are they will have a good idea of what to expect from their estates.
- Help clients evaluate their children’s money skills. Just because kids grew up in the same family doesn’t mean they will have the same knowledge and attitudes about money. Especially if children will inherit significant amounts, conversations about estate planning can become part of larger conversations designed to help teach them how to manage and become comfortable with their legacies.
- If a client’s estate plan does not treat children “equally,” for whatever reasons, it’s best to share that information well in advance and to communicate it privately to each child. There are many reasons why treating children differently in an estate plan can be the fairest thing to do, but that doesn’t mean it’s a wise to let them learn the specifics when a will is read. If parents and individual children can discuss these provisions and the reasons for them ahead of time, there is less likelihood of conflict between siblings after the parents are gone.
- Encourage clients not to allow children to assume they are inheriting more than is the case. Not telling them may avoid conflict now, but it will sow seeds for deeper conflict and resentment after your client’s death.
- Help clients prepare children for large or unexpected inheritances. I’ve worked with heirs who were stunned to receive legacies much larger than their parents’ lifestyles had led them to expect. If clients have a substantial net worth that’s under the radar — perhaps in the form of land or business ownership — their children may be totally unprepared for what they will inherit. Planners can suggest ways to help the heirs learn more about both the financial and the emotional aspects of managing inherited wealth. They may also encourage parents to consider options, such as giving more to the children during their lifetime, that might reduce the impact of a sudden inheritance.
- Acknowledge clients’ fears, even indirectly. Although it is seldom expressed, perhaps the strongest reason for not discussing estate plans with family members is fear. Parents may be afraid that children will be angry or disappointed, will build too much on their expectations for an inheritance, or will be resentful of other heirs.
Talking to family members about estate planning and legacies can be difficult and even painful. Those discussions, however, will almost certainly be less painful in the long run than the stories children may make up after parents are gone about why they made the choices they did.
Financial planners can play an important role, not by taking on the task of telling heirs what parents want them to know, but by facilitating the family conversations. In especially difficult circumstances, the help of a financial therapist can be invaluable. Supporting clients as they discuss their wishes with family members can be an important estate planning service that enhances the legacy parents want to pass on to their children.
Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the president of the Financial Therapy Association.