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Charitable Giving With An Exit Strategy

glass with tape labeled Donate, full of coins

It’s the time of year when many of us are thinking a lot about gift-giving – not only to show affection for our loved ones, but often to support institutions and causes we care about.

But deciding to commit to a major or ongoing charitable gift is a different proposition than picking out a cashmere sweater or the newest tech gadget for a parent or a spouse. Becoming a major donor can be more like starting a relationship than making a one-time transaction. And like any other relationship, it can unfortunately go sour.

Just as a prenuptial agreement is often a good idea even though no couple likes to entertain the thought that their commitment won’t work out, smart donors should consider taking precautions to ensure that the organizations they support will remain, at a minimum, courteous and responsive over time. Depending on the type of organization you want to support, the nature of the gift you wish to give and your timeline for giving, a variety of planning methods could fit the bill.

The first method that comes to mind is to make a direct gift with some form of restriction attached. Earlier this week, I described the generosity of Maria Cole, who established a legacy fund to benefit her late husband’s alma mater, the journalism school at the University of Montana. Maria’s recent treatment by the journalism school’s current dean vividly illustrates why even the most generous donor might wish to keep some level of control.

I don’t know any details about how Maria established the Jeff Cole Legacy Fund, but a typical way to make a gift to the journalism school would have been to establish a fund with the University of Montana Foundation, which is the university’s administratively independent charitable arm. Maria could have established a fund with the foundation with the proviso that she could at least nominate the speaker for the annual lecture that the fund would underwrite. The foundation would have the final say but, unlike the newcomer journalism dean (or any current or future university administrator), the foundation’s leadership might remain more sensitive to the desires of this particular donor and to the wisdom of not alienating other prospective supporters.

Permanent gift restrictions can even be legally binding, up to a point, though courts will not enforce restrictions that are illegal, impractical or against public policy. Such restrictions are more commonly associated with bequests, but lifetime gifts can also sometimes come with conditions attached.

Of course, many donors make gifts without permanent restrictions. I am not generally a fan of donors trying to control the use of donated funds, especially from beyond the grave. But there is nothing wrong with a donor expecting to have her wishes considered in the years immediately following a substantial gift. Tax laws prohibit claiming deductions for charitable gifts to the extent the donor receives a benefit in return. However, the privilege of selecting a scholarship beneficiary (at least from among candidates independently nominated by the school) or choosing an annual speaker would not be considered a benefit of monetary value to the donor. This level of control should not create a problem with a properly structured gift.

Another strategy would be to set up a charitable lead trust or a charitable remainder trust; the former option works for current gifts, while the latter is designed for deferred gifts. Either type of trust can offer a way for a donor to express his or her wishes – or alter them. When correctly structured, such trusts can include a provision allowing the grantor or the trustee to change the trust’s designated charity through a simple letter of instruction.

I once had a client who wanted to make a big gift to his alma mater. The client’s child was in high school at the time, and the client hoped his child would be accepted at the donee school. He established a charitable lead annuity trust that made large annual payments for five years, the first two while child was still in high school. Had the child gone to college someplace else, my client could have had the trustee redirect further payments to the child’s chosen school or to some other charity, if he wished. The gift was certainly large enough to get alma mater’s attention. The child ended up attending the same school as the father, and the gift proceeded as originally planned.

You can use an individual retirement account (IRA) or other qualified retirement plan to make charitable bequests by naming a charitable organization as your beneficiary. If you change your mind about which organization you wish to benefit with such a designation, you don’t have to update your entire will or hire a lawyer to draft a codicil. You just need to file a new beneficiary designation with your plan custodian or administrator, making this one of the simplest ways to remain flexible with a planned charitable gift. This method also offers a nice tax benefit, since funds that would otherwise be subject to tax pass to not-for-profit organizations tax-free.

Similarly, naming a charitable organization the beneficiary of a life insurance policy is a relatively simple way to ensure ongoing flexibility if you change your mind about an intended donee. Life insurance benefits do not offer the same tax-planning benefit as retirement plan beneficiary designations, however, because life insurance benefits are generally income tax-free anyway. The same goes for Roth accounts, which are funded with after-tax dollars.

For donors who want to maintain a great deal of control, or who have especially ambitious philanthropic aims, a private foundation may be a sensible way forward. Foundations give the donor or the donor’s family ongoing control over distributions to operating charities. But these entities are expensive to establish and technically demanding to operate, so they aren’t right for everyone.

Instead, many donors would do better to consider a donor-advised fund. Establishing an account with such a fund can often be done for virtually no cost. The donor can then recommend charitable distributions, although he or she will not have the final word. Still, if a donor becomes disenchanted with a particular organization, a donor-advised fund makes it easy to redirect future gifts elsewhere. A donor-advised fund is an even better option if you choose to give appreciated assets. Such a gift provides the same tax deduction as cash, while allowing a donor to avoid capital gains taxes, passing greater value to the charitable recipient.

For even more leverage, you can combine various techniques. For example: You can make a donor-advised fund a beneficiary of your IRA, leaving a family member or other trusted person in charge of choosing the recommended charities to receive distributions after your death. One of my favorite tasks as a financial planner has been working with clients and their attorneys to develop creative approaches for their philanthropy that address charitable and noncharitable goals for the present and the future.

Many schools, places of worship and charities push hard for donors to write them into their wills or irrevocable trusts. Sometimes such gifts are sensible. But these documents are more cumbersome to change than most of the options I’ve mentioned so far, which means they are not always the best choice. Even so, a donor can reserve the right to make or recommend a change to their plans without needing to modify the governing documents. Lawyers should be mindful of such mechanisms, and nonlawyers involved in estate planning should ask their attorneys what will happen if the client wants to change the charitable beneficiary later.

Generously supporting a favored charity can be deeply satisfying in many ways. Institutions will go far out of their way – usually – to accommodate their most significant and loyal supporters, but beyond the perks and the friendships that philanthropy generates, there is always the greater value of the work you are helping to accomplish. As the saying goes, charity is its own reward. Even so, it is still considering whether a large and long-term philanthropic relationship should include safeguards, given the reality that sometimes a recipient organization’s outlook or objectives change. There will never be a shortage of worthy causes that need your support.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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