Awake, Oh Ye Planners

The untapped field of charitable planning awaits you.

By Kent E. Irwin, CLU, ChFC, CAP

The charitable-planning sector of estate planning has seen the largest amount of growth during the past decade. One reason for this growth is the shift from government-provided social services to services provided by private organizations. Additionally, the number of not-for-profit organizations has doubled in the past 10 years.

The concern is that there hasn’t been a dramatic increase in the overall amount of charitable dollars that Americans contribute. It’s no surprise, then, that nonprofits are competing for their portion of this slowly increasing dollar more than ever. Nonprofits receive a majority of their revenue from private and corporate donations, and they are anxious for opportunities to partner with the financial services sector to help them increase their fund-raising revenue. Also, the intergenerational transfer of trillions of dollars in wealth has huge implications for financial services providers, nonprofits and the world community.

The financial-services industry has historically served two main purposes: to help people plan for financial goals, and the symbiotic relationship between the investor and the growth of our capitalistic system. The advisor who answers the calling to assist investors bears the responsibility to put the needs of his clients and markets ahead of his own. Those in the insurance industry often consider it a “higher calling” to protect and plan for families, businesses and their communities. Charitable planning is a natural extension of these values.

Renewed attention
Accompanying the privatization of social services has been the increasing emphasis on, or the publicity of, philanthropic activity among the wealthy. The book Wealth and Our Commonwealth, written by William H. Gates Sr., illustrates this, as do wealthy leaders speaking out for the estate tax when President Bush mentions his plans to permanently repeal it.

A similar trend of privatization and philanthropy occurred during the turn of the last century. Many of us still benefit from Andrew Carnegie’s philanthropic philosophy and grants. Carnegie’s 1889 essay, “Wealth,” later known as the gospel of wealth, argued for giving wealth away to benefit society.

Conventional planning: Is it flawed?
For some planners, conventional estate planning is estate-tax planning, but I would argue that this approach is partially flawed. Planning oriented toward death and taxes, although mathematically sound, often fails to motivate clients toward a decision. The present estate-tax uncertainty, coupled with the fear of loss of control, may be contributing to indecision as well.

The other reality clients often fail to express is their concern about leaving too much wealth to their children. Advisors would be surprised that many of their clients agree with Carnegie’s thoughts on this matter: “The parent who leaves his son enormous wealth deadens the talents and energies of (his child), and leads him to a less useful and less worthy life than he otherwise would.”

Social capital planning
When was the last time you talked to your wealthy clients about what they wanted to do with their wealth? Do they want to give it to charity, family or both? Often we assume we know the answer to this question.

The myth that pervades the financial-services industry is that charitable planning is only for clients who are inclined to give, and who already give significantly to charities. A 1992 Gallup Poll revealed that the majority polled felt that “those with more should help those with less.” Surprisingly, one of the least popular reasons for making contributions was to obtain tax deductions. In fact, giving increased in the ’80s during the Reagan administration when estate- and income-tax rates came down compared to the historically high tax rates of the ’70s.

The astute planner in this new age must ask his clients about social capital planning. This holistic approach to planning helps clients consider a new range of possibilities. Clients often become very interested when they learn that you can help them realize new dreams of benefiting society to a greater extent than they previously thought possible.

The tasks of planners and advisors has always been to help clients discover what their needs, desires and wants are and to help them create a plan to achieve them. The field of charitable planning is no different. For the client who has not demonstrated philanthropy, the advisor’s challenge is to help them discover their charitable side. The sale is made in the development of these discussions and not the actual planning itself. Financial advisors often focus too much on the actual plan and the product.

To what types of organizations do wealthy people want to give? Helping clients answer this question will go a long way toward helping them dream about how their wealth can benefit society. Most wealthy people have causes or organizations that they believe in, have been a part of, or have helped them or their family members. These are the types of organizations that they will want to benefit from their charitable planning.

Two modes of planning
Charitable plans can be implemented at death by wills or during life when they can be administered. The benefactor, who actively engages in philanthropic goals while alive, can manage the assets using his experience and judgment in a way that would create the most impact for society. He can also employ trusts and insurance products that would enable him to potentially give more to charities and family than what just bequests would have done.

Planning opportunities
Charitable planning is not just for the elderly. The two major groups of wealthy people who statistically employ planned giving devices are older than 65 and younger than 45.

Charitable remainder trusts (CRTs) are the most common charitable-planning technique used today by moderately wealthy individuals. Some individuals may want to receive income from highly appreciated, nonincome-producing assets. By donating this asset to a CRT, the CRT subsequently sells the assets and reinvests, and this sale doesn’t automatically trigger taxes. The client may be able to receive income from the CRT that exceeds what they normally might be able to achieve had the appreciated asset been sold and the net after-tax amount reinvested. The charity receives the remaining value of the CRT at the end of the term, and the donor receives a tax deduction for part of the initial contribution’s value. This produces a win-win for the client and the charity.

CRTs can be designed to pay income right away, or it can be delayed. CRTs known as flip unitrusts and net income makeup trusts (NIMCRUTs) are designed to pay income in later years. Younger clients may want to consider these types, possibly as supplements to qualified plans for their retirement. Partial tax deductibility, tax-deferred growth and creditor protection appeals to many high-net-worth clients, in addition to being able to easily donate remainder values automatically.

Sales opportunities
Life insurance plays a major role in charitable planning. Key donors to organizations often purchase life insurance for the endowment the death benefit provides. The premiums are usually deductible as long as the charity is the owner and beneficiary. These tax benefits exist for an organization’s donors, since virtually all states have passed legislation that establishes this insurable interest.

Individuals who fund CRTs and make other contributions are often concerned about disinheriting family members, so they purchase life insurance in irrevocable life insurance trusts or ILITs. Creative advisors have coined the phrase “wealth replacement trusts” to communicate this planning technique.

One of the greatest challenges that advisors face is coming up with a source of money to pay large life insurance premiums. Since CRTs can be set up to pay a consistent stream of income, this can easily be earmarked for life insurance.

Illustrative planning software
To illustrate a client’s individual estate plan, we run an analysis demonstrating the following four levels: First we will show asset growth and disposition with the effects of no planning. The next three levels demonstrate how we can increase the amount of transferred wealth as a result of using credit shelters trusts, wealth replacement trusts funded with life insurance, and CRTs.

Kent E. Irwin, CLU, ChFC, CAP, is an advanced markets consultant with Nationwide Financial in Columbus, Ohio. He can be reached at irwink@nationwide.com.