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Philanthropic Charitable Legacy Planning

 

by Kent E. Irwin

 

 

An increasing number of people today desire to learn about legacy planning, so they can have maximum impact on the world now and after they pass.

The fastest area of growth within financial planning is Philanthropic/Charitable Legacy planning. This will be fueled by the perfect storm convergence of three forces: 1. welfare transfer to states, 2. the largest transfer of wealth of all time, 3. and the changes in societal attitudes and demographics. This article will explore this perfect storm as well as suggest the best method for planning.

This is the third in a series of four articles on legacy planning. Please read all four.

Planning Your Legacy and Estate                                        Philanthropic Charitable Legacy Planning

Legacy and Estate Planning with a High Net Worth        Preparing for Meeting with an Attorney

 

 

 

 

 

Force Number One: Federal Welfare State Transferred to the States

 

·         1600’s to 1900: Formation to Industrialization

Looking back at our country’s European roots, we find that many of the traditions of charitable giving were carried over to our country. Governments, to varying degrees, provided limited assistance to people in need. Instead, neighbors and relatives pitched in. Churches, Widow and Orphan Societies, and Fraternal Organizations were social service organizations that also helped.

·         1900 to 1980’s: Birth of the Welfare State

Last century witnessed an evolutionary transformation in the delivery of social services. During the societal change from agricultural to industrial and white-collar, and from village-centered communities to cities, governments took over the social service role, with institutionalized disability insurance (Social Security {SS} Disability), elder-care income (SS Retirement Benefit), elder health care (Medicare), and institutional confinement (Medicaid). Greater institutionalization of the mentally ill also occurred.

·         1980’s: The Fall of the Welfare State[i]

The European and Japanese economies that were rebuilt after WWII began to become extremely competitive. American companies experienced smaller growth and profit margins. Corporations exerted pressure to reduce corporate taxes, and this reduction in revenue caused the reduction in welfare benefits.

The new federalism emerged from the debate over the appropriate role of the federal government, causing states to create their own social welfare programs. In addition, homelessness increased because of the deinstitutionalization of the mentally ill.

·         2000’s: States and Federal Government Overburdened

The shift from benefits being provided by the Federal Government to the states has placed a tremendous financial burden on each state. The aging of the population, brought about by the large number of people born after WWII, whom are living longer than their parents, are being provided with Social Security, Medicare and Medicaid benefits. Governments struggle to provide these benefits and remain financially stable. Should charities replace welfare? Not-for-profit organizations will not be able to replace all aspects of the welfare system, although they are responding to fill the gaps in coverage in many areas. Consequently, in the last decade we have witnessed a 50% increase in the number of not-for-profit organizations. The number is expected to continue to increase. 

 

 

 

 

 

Force Two: Transfer of Trillions of Dollars

 

 

Over the next 50 years, forecasters in the philanthropic and economic fields predict that more than $100 trillion will be transferred to offspring and charities when older Americans die. This anticipated transfer of wealth is expected to benefit the financial services industry and the not-for-profit world.

 

 

 

 

 

Force Three: Societal Change

 

 

“Social Responsibility” is not a new term, but demographers and futurists predictions are coming true: People are becoming more interested in helping their fellow humans through the involvement of their time and resources. People are discovering too that when they are generous they are the happiest.

Assisting family is usually the first concern that people have, but more high net-worth people today are giving more money (during life and after their death) to charities than to their children. This is because they feel that leaving large sums of money will hinder their child’s personal growth more than it will help them.

 

 

 

 

 

Are Taxes a Force?

 

 

The 1980’s presented the opportunity to analyze the impact on Charitable Donations from Tax Policy[ii],[iii]. Corporate taxes and federal individual income and estate taxes were reduced, halting the escalation to very high rates during the Carter administration. This all started during the Reagan administration and was continued by the G.W. Bush administration—under the theory of trickle-down economics.

President George W. Bush passed tax reform with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRA). EGTRA appealed estate taxes entirely for people dying in the year 2010. EGTRA also increased the amount of wealth that can pass to beneficiaries free of estate tax, and lowered the estate tax rates for people dying before 2010.

Unless Congress acts, in 2011 the Estate Tax provisions of EGTRA ‘sunset’, meaning we return to prior law: $1,000,000 exclusion and a graduated tax rate that tops out over 50%. Most people now believe that Bush will be unsuccessful at passing permanent estate tax repeal.

Estate tax has existed in America in various forms over the past several hundred years, for the purpose of paying for wars and redistributing wealth, among other reasons. Most believe that estate tax in some form will never go away permanently.

Charitable contributions are usually deductible, so some feel that greater tax incentives increase giving. Research done on the habits of wealthy people, however, indicates that tax deductions are a small motivational factor in giving. The overall amount of charitable donations increased during the 1980’s when tax rates decreased.

In summary, research indicates that income tax rates will probably not affect current gifts, or gifts given while alive. Having an estate tax system probably encourages charitable bequeaths (post-death donations).

 

 

 

 

 

 

The Answer: Philanthropic Legacy Planning

 

 

Client-Legacy Planning Desires

Table 1

Maintain some control of giving during and after death

Teach and transfer values to next generation

Have the flexibility to change

Include plans for their personal passions

Provide for philanthropic concerns

Provide for financial, emotional, professional, and legal needs of surviving spouse & children

Maximize and control wealth for long life spans

Gift funds to family members while they are alive, so that they can transfer wealth in a way that helps rather than hinders the individual

Transfer business (possibly to a family member) in a tax- and cost-effective way

Maintain privacy, creditor protection, and ongoing professional management

Transfer funds to family and charity and not to the government

 

 

 

 

 

Professional Advisors may provide the following:

 

 

 

 

Philanthropic Legacy Planning

Table 2

Advice and support in the use of sophisticated techniques such as charitable remainder trusts and family foundations

Sophisticated modeling to maximize the highest amount of money that can be given while they are alive, while continuing to maintain the client’s preferred lifestyle

Family members brought into the gifting and grant-making process, to transfer values to them

Advice and support in the use of sophisticated techniques when transferring their business (possibly to a family member) in a tax- and cost-effective way, possibly with charitable remainder trusts

Client and or family counseling or coaching, including retreats

Consulting and research services in order to find charitable organizations that meet client passions and are fiscally responsible

Family trusts for privacy, creditor protection, and ongoing professional management

Engage the client in an ongoing process to monitor progress, assess the impact being made to society and family, evaluate the overall financial plan, and adjust accordingly

Maximize acceptable techniques to lessen impact of taxes that reduce the amount of money that can be passed to family and charity

 

 

 

 

 

Summary

 

 

The time has arrived for a new era of planning: Philanthropic Legacy Planning. This Golden Age is providing the opportunity for clients to achieve the most that they can with their wealth to leave a lasting positive legacy for their family and society.

 

 

 

 

 

 

Kent E. Irwin is CEO and founder of eFinplan, LLC. He is also a Chartered Financial Consultant (ChFC), a Chartered Advisor in Philanthropy (CAP) and a Chartered Life Underwriter (CLU). He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . For more information about eFinplan, go to the website efinplan.com.

 

 

 

 

 

Copyright © 2007 eFinplan, LLC. All Rights Reserved.

 

 

 

 

 

[1] Thomas, Alexander R., comp. Ronald Reagan and the Commitment of the Mentally Ill:. 1998. Northeastern University. 26 Mar. 2007 <http://www.sociology.org/content/vol003.004/thomas.html

[2] "History of the U.S. Tax System." United States Department of the Treasury. 26 Mar. 2007 <http://www.treas.gov/education/fact-sheets/taxes/ustax.shtml>.

[3] Luckey, John R. A History of Federal Estate, Gift, And. Washington DC: Library of Congress, 2003. 26 Mar. 2007 <http://www.opencrs.com/rpts/95-444_20030409.pdf