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Category Archives: Tactics

The Altruistic vs. Financially Pragmatic Donor

March 25, 2008 – 8:28 am

In December, Bank of America and The Center on Philanthropy at Indiana University published The Bank of America Study of High Net-Worth Philanthropy. In the report is a section which contrasts the giving behavior of Altruistic Donors and Financially Pragmatic Donors. My question, which is an overarching theme of how I work with donors at my firm Ensemble Capital Management, is why must there be a choice between the two approaches? Why shouldn’t highly altruistic donors also be financially pragmatic?

Think of an altruistic donor who decides to give $10,000 to a charity. They are full of passion and write a check to the nonprofit. After taking into account the tax deduction, this gift will cost the donor about $6,000. But what if the donor was more financially pragmatic? What if instead of writing a check, they called their investment advisor and asked for $10,000 worth stock they had bought years ago for $2,000 to be transfered to the charity. The charity would receive the same amount of money, but the gift would only cost the donor about $4,400 because of enhanced tax deductions. If the donor transfered $14,000 worth of the stock, the after tax cost would be about $6,000.

Now if you assume that the altruistic donor was truly moved by the cause in question, then you can also assume that the $10,000 gift was the most they could afford. But it is the $6,000 after tax cost of the gift that is the relevant number when thinking about how much the donor can afford. So simply by transferring $14,000 worth of stock, the altruistic donor would be able to give 40% more support to the nonprofit without the gift costing them any more. The additional $4,000 is paid for in lower taxes.

Imagine your workplace has a corporate matching gift program where they will give $40 for every $100 you give to a nonprofit. I would hope that altruistic donors who cared deeply about a nonprofit would take the time to apply for those matching funds. Being tax smart about your giving is the same concept. But not taking full advantage of the tax incentives available to philanthropists, donors are effectively withholding government funding from the nonprofits they care about.

Being altruistic and financially pragmatic are not mutually exclusive. Being financial savvy does reduce the emotional passion behind a gift. Being smart about your giving only enhances the degree to which you can act on your passion.

If you are a fundraiser reading this, I have a suggestion for you. Next time a donor presents you with a large check, refuse to accept it. Tell the donor that in good conscious, you cannot let them overpay their taxes. Run the calculations and show them how much money they will save by transferring appreciated assets to you instead. The donor will either thank you profusely or better yet, may very well opt to give you a larger gift based on the fact the stock transfer will cost less than they expected. I wrote about this concept a couple years ago in an article titled Turning Major Donors into Philanthropists.

Disclaimer: The calculations in this post are intentionally just estimates. Depending on which state the donor lives in, the actual numbers could be higher or lower.

By Sean Stannard-Stockton | Also posted in Philanthropy | Comments (1)

Time to take a hard-nosed look at giving

January 10, 2008 – 11:33 am

My most recent column for the Financial Times was published last weekend. You can find it on the Financial Times site here.

Time to take a hard-nosed look at giving

By Sean Stannard-Stockton

Published January 5, 2008|Available on FT.com

Every end is a new beginning. Having said goodbye to 2007, now is the time to look forward to 2008 and decide what kind of philanthropist you want to be. Are you satisfied being part of the majority of Americans who rush to fulfil their philanthropic obligations in a flurry of year-end giving? Or will this be the year that you get organised and maximise the impact of your philanthropic capital?

Recently, the Financial Times reported on the growing ranks of “hard-nosed philanthropists”. These donors are “part of a new breed of wealthy charitable donors: strategic philanthropists, passionate about their causes, who want to ensure their philanthropic dollars have the greatest return – and impact – possible”.

How can you become a hard-nosed philanthropist in 2008? The first thing to do is to create a philanthropic vehicle so you can separate the tax implications of your giving from your altruistic motivation. When you fund a philanthropic vehicle such as a private foundation or a donor-advised fund (a kind of “charitable checking account” similar to a private foundation), you receive a tax deduction at the time the money goes into the account. This means you can move money into your philanthropic account on the timeline that fits your tax situation while making gifts to non-profit organisations when it fits your charitable goals. An amazing 50 per cent of all charitable donations are made between Thanksgiving and the new year. By setting up a philanthropic vehicle, you will free yourself from the year-end scramble and maximise the tax benefits of your giving.

Most people simply write cheques to the non-profit organisations that they support. But hard-nosed philanthropists know the first rule of tax-smart giving: always give with your most highly appreciated assets. When you write a cheque, you get an income tax deduction for the value of your donation. When you make a gift of an appreciated asset (such as a stock that has risen in value), you get both an income tax deduction for the full value of the asset and avoid paying capital gains tax on the appreciation.

Unfortunately, if you make multiple donations each year, it can be cumbersome to re-evaluate your asset base to identify your most highly appreciated assets and then complete a transfer to each non-profit you support. By setting up a philanthropic vehicle, you can work with your financial advisers to identify the best assets to use for your giving and transfer them in a single transaction to your philanthropic account.

Your two main choices for a philanthropic vehicle are a private foundation or a donor-advised fund. A donor-advised fund generally makes sense if you give $500 or more to charity each year. A private foundation may be cost effective if you give at least $25,000. Beyond cost considerations, choosing between the two rests on the way you like to give, the type of appreciated assets you plan to give, and the level of your family’s involvement.

Foundations have more flexibility to let you do things such as lend money to non-profit organisations, give internationally or “invest” in philanthropic projects. However, only gifts of cash or common stock to a foundation qualify for a full market value income tax deduction. A donor-advised fund is more tax efficient for donors whose most highly appreciated assets include items other than stocks.

Finally, while a family can be involved in the decision-making process of which non-profits to support from a donor-advised fund, only a private foundation allows for the creation of an official board that family members can join.

Most donors have never taken a “hard-nosed” look at how much they can afford to give. From a tax standpoint, it makes sense to move as much of your total planned lifetime giving into a philanthropic account as you feel comfortable committing to. The benefits of this strategy include realising tax deductions sooner and allowing your assets to increase in the tax-advantaged philanthropic account.

One good resource is Wealthy and Wise by Claude Rosenberg. In this book, Rosenberg gives statistical models that demonstrate most people can afford to give far more to charity without unduly risking their financial security. Another source for donors is a group called Bolder Giving. Founded by Anne and Christopher Ellinger, authors of We Gave Away a Fortune, Bolder Giving seeks to help donors give at their full potential.

This year, make your new year’s resolution a decision to become a hard-nosed philanthropist. Next December, when others are breathlessly writing cheques before the tax year ends, the hard-nosed look you took at your giving earlier in the year will be paying off.

The writer is a principal and director of tactical philanthropy at Ensemble Capital Management and author of the blog TacticalPhilanthropy.com

Edna McConnell Clark Foundation’s Thrilling Move

December 21, 2007 – 12:56 pm

I have a friend who emails me every time I complain that big foundations are not more innovative to say “But Sean, look at the Edna McConnell Clark Foundation!”

He’s right.

I first heard EMCF CEO Nancy Roob speak at a Council on Foundations meeting. She co-presented with Clara Miller of the Nonprofit Finance Fund on why funders need to provide growth capital to nonprofits. I dug the presentation. After I wrote up my thoughts on the session, Nancy stopped by and became the first major foundation CEO to leave a comment on the Tactical Philanthropy blog (probably any blog for that matter).

Now The New York Times’ Stephanie Strom has an excellent article talking about a new fund being launched by EMCF:

A New York foundation that focuses largely on opportunities for low-income youths is creating a fund to help charities become bigger and more efficient.

The institution, the Edna McConnell Clark Foundation, has committed $39 million to the fund and attracted $49 million more from other foundations and individuals, putting it well on its way to achieving its goal of raising $120 million by June…

…The effort by McConnell Clark and its partners “is groundbreaking,” an acknowledgment “by major funders that scale isn’t cheap and that the order of magnitude needed to scale up to make real and lasting changes will take collaboration,” said Kirsten Moy, director of the economic opportunities program at the Aspen Institute…

…[The foundation] has won financing from major foundations like the Robert Wood Johnson Foundation and the Bill and Melinda Gates Foundation, which is highly unusual. Foundations have typically been unwilling to support concepts already developed by others; thus the proliferation of tiny organizations doing similar work.

“So very often there is pressure on foundations to feel like they are the ones discovering something,” said Hilary Pennington, director of special initiatives at the Gates Foundation. “We have said we want to explore ways in which grant makers could work together for greater impact, and we have an obligation to put our money where our mouth is.”

I encourage you to go read the full article here. You can also read a Nancy Roob’s own thoughts on the fund here with more details on the fund here.

EMCF seems to have created a $1 million funding commitment to accept new funders into the pool. I believe that over time, individual donors (who give seven times more than foundations do each year) need to gain access to funds like this. However, even today, nothing should stop community foundations or national donor advised funds from aggregating their donors to make a $1 million commitment. This kind of work is already being done to provide smaller donors access to funds like Good Capital.

By Sean Stannard-Stockton | Also posted in Effective Giving, Foundations, New Philanthropy, Philanthropic Capital Markets, Philanthropy, Venture Philanthropy | Comments (0)

Charitable Lead Trust Trend

October 29, 2007 – 9:12 am

My most recent column in the Financial Times discusses the coming boom in charitable lead trusts and how they can be used to prepare children for responsible oversight of wealth.

I don’t write the headline of my columns, so I laughed out loud when I saw the headline writer had titled my column “Children need not be taxing”. As a father of two young kids, I can tell you that statement is objectively false!

Children need not be taxing
By Sean Stannard-Stockton
October 26, 2007

An old philanthropic planning technique is ready to explode in popularity. Parents have long used charitable lead trusts to make tax-free gifts to their children while using philanthropy as a way to prepare them for wealth. But as life expectancies rise and people become wealthier sooner, this obscure trust is enjoying a renaissance among young millionaires.

Affluent families used to either inherit wealth or earn it over a long career. Today, most wealthy individuals are self-made and an important subset, especially in the technology sector, is making millions before starting a family. Those who inherited wealth in the past often did so while building their own financial security. Now, some do not receive their inheritance until…

By Sean Stannard-Stockton | Also posted in Financial Times Column, Philanthropic Investment Strategy, Philanthropy | Comments (0)

Philanthropic Planning Models

August 24, 2007 – 8:37 am

Phil Cubeta recently had an insightful post about the three types of “advisors” that philanthropic families usually turn to for help:

People use the same terms to describe different things. When I ask those who call themselves philanthropic planners to describe their process they all say,

I meet with clients to set goals.

Then we discuss tools and techniques to achieve those goals.

Then we implement.

Then we monitor.

But what financial advisors mean by goals and what fundraisers mean by goals and what grant-consultants mean by goals are quite different. Likewise the tools and techniques may be different. Typically,

Fundraisers go from goals to gift without going through an analysis of the clients overall estate and financial plan. The gift, from an advisor’s perspective, is out of context, not integrated, an appendage.

Planners generally take goals to be centered on self and family with a glance to a tax reduction strategy called "philanthropy." They may also set and achieve goals around investment strategies, to increase return, reduce risk, and fund specific dollar outflows.

Grant making consultants or gift consultants (like Tracy Gary or The Philanthropic Initiative) start with goals for society or a specific cause, and match that passion with appropriate giving grant making strategies, whether the grant comes from a checkbook, a donor advised fund or a foundation. But they don’t back that gift up into the financial and estate plan of the donor. They deploy the existing giving budget, and maybe nudge the client to increase it, but they do not work at restructuring the client’s finances to increase that giving budget, while also taking into account the donor’s many other non-philanthropic goals.

In other words, fundraisers represent the nonprofit they work for and gift consultants represent the public good and/or the client’s philanthropic urge. Financial advisors represent the client as a consumer. They represent the side of the client that is concerned with financial stability and spending power. But who represents the client as a whole? Why can’t clients be advised as whole people who have personal spending needs, children they would like to pass part of their estate to, and philanthropic interests that they would like to support? Last November I wrote about the need for a comprehensive understanding of the philanthropic family that does not compartmentalize the personal and social uses of their financial assets:

All of the assets that you accumulate during your life can be thought of as falling into two buckets. The assets that you use to finance your own lifestyle or those that you pass on to your heirs are your personal capital. The assets that you give back to society – either by default through the tax system, or proactively through direct transfers to nonprofits – are your social capital.

Most people understand the need to manage your personal capital proactively. There are numerous websites, books, advisors and other resources that encourage the tactical management of personal capital. What is often missing is any kind of strategy for personal capital. Why are you accumulating all of this money in the first place? What are your goals in life? How are you going to use your personal capital to truly benefit yourself and your heirs? There are certainly plenty of philosophical, self-help and spiritual resources to help guide your way. However, people rarely address the strategic goals and the tactical decisions around personal capital collaboratively.

Social capital suffers from the opposite condition. Lots of people and resources encourage us to utilize one strategy over another. The very act of deciding which nonprofit to fund is a strategic act, so every donation solicitation can be understood as an appeal for you to decide on a specific strategic direction. However, few people think of their social capital tactically. When tactics are discussed, they are generally viewed as a way to reduce the distribution of your social capital in favor of your personal capital. Most people think of the tax break from giving as a way to retain personal capital, rather than understanding its ability to redirect social capital away from the tax system and to your favored nonprofits.

My expertise is in tactically managing personal and social capital collaboratively. At the tactical level, personal and social capital are identical – they are fungible financial resources. At the strategic level, personal and social capital may be used quite differently. However, at their root they come from the same pool of financial resources. How you dip into this pool and allocate your capital to personal or social projects is a strategic decision. Tactically, your personal and social capital is one and the same. You must manage all of it as a comprehensive whole.

By Sean Stannard-Stockton | Also posted in Effective Giving, New Philanthropy, Philanthropic Investment Strategy, Philanthropy | Comments (0)

Donor Advised Fund Advice

August 9, 2007 – 8:12 am

The August 5 episode of Fundraising Success, the philanthropy focused radio show of NPR member station WXEL, is now available on their podcast page.

In this episode of my weekly segment, called Tactical Philanthropy, which focuses on the tactics of charitable giving, I explain donor advised funds. Give it a listen, my segment begins at about the 34-minute mark.

Also this week, Peter Panepento of the Chronicle of Philanthropy’s weekly Blog Beat interview talks about the blog Look to the Stars (his segment begins at the 43:30 mark).

You can listen to the podcast here.

By Sean Stannard-Stockton | Also posted in Philanthropy | Comments (0)

Private Foundation Advice

August 8, 2007 – 9:32 am

The July 29 episode of Fundraising Success, the philanthropy focused radio show of NPR member station WXEL, is now available on their podcast page.

This episode marks the first interview I recorded for what is now a weekly segment called Tactical Philanthropy that focuses on the tactics of charitable giving. This week I talk about private foundations. Give it a listen, my segment begins at about the 25:00 mark.

Also this week, Peter Panepento of the Chronicle of Philanthropy’s weekly Blog Beat interview talks about the following blogs (his segment begins at about the 14:00 mark):

You can listen to the podcast here.

By Sean Stannard-Stockton | Also posted in Foundations, Philanthropy | Comments (0)

The Practice of Philanthropy

April 30, 2007 – 8:30 am

This has to be the only philanthropy blog that never discusses any particular cause. It’s not just that I don’t advocate for particular causes, it’s that causes just don’t even make it into the daily discourse. That’s because I’m interested in the practice of philanthropy. Sure, I have causes that I personally care about, but what interests me more than anything is the way that philanthropy works. This might come out of my background as a professional money manager. One of the most interesting things about analyzing stocks is the various approaches to stock picking. There are people who make a living finding inexpensive stocks, finding high growth stories or even looking at patterns in how stocks trade.

The same is true for philanthropy. I’m less interested in the causes I care about then I am the way in which philanthropy works. Because of this bent, I was more than a little worried that I wouldn’t find many COF sessions that interested me. There are four “tracks” to the conference: Poverty, Public Health, Environment and Disaster Preparedness. The issue-based approach to planning the conference makes sense, but it doesn’t coincided with my set of interests. Without any obvious choice for the afternoon slot yesterday, I chose the Combating Poverty session just so I could see William Schambra speak.

I was electrified…

I’m the first to say that we need to focus on root causes, that Band-Aid solutions are nothing more than temporary relief and that as an industry we need to identify the cause of the problem and attack that cause rather than simply repairing the symptoms of the diseases. My focus on root causes isn’t something special. In fact, many people have defined philanthropy as the practice of dealing with root causes rather than the derisively referred to “charity” which is "just about managing symptoms".

Schambra thinks I’m all wrong. And listening to him, I’m tempted to agree. He argued that by focusing on root causes (which he rightly points out we tend to identify and then change our minds about every couple of years) we are missing nonprofits that are actually doing the heavy lifting of making change. He cited the nonprofit Family House, which he says does a tremendous job of caring for seniors in a poverty stricken neighborhood, but which has gotten no funding from large foundations because it is just a “charity”, it’s not focused on curing the root cause. The fact that the staff of Family House has lived with and helped seniors in poor neighborhoods actually works against them because foundations think they are “too emotional and close to the events”, that it would be preferable if they were “coolly removed and appraising the situation” in the way that foundations deem important.

All of this reminded me of the difference on Wall Street between “strategists” who often discuss the market in terms of long-term “themes” and actual money managers, who care most about what works. I’m attracted to academic “themes”. I like the elegance of well thought out theories that explain why certain problems exist and therefore show where we need to focus our efforts if we hope to stamp out those problems. But as an investment professional, I also know that the single most important thing is figuring out what works. Where and how can I make money? Where and how can I reduce social problems or enhance social programs? That’s the question. And the best answers often come from the people on the ground who are actually making the money or solving the problem. Does company X have the end all solution for a certain economic issues? Does nonprofit X have the end all solution for a certain social problem? Maybe we should just focus on whether something works. If so, invest in that company, fund that nonprofit and leave it at that.

PS: I couldn’t leave out one unrelated note. Deepak Bhargava, executive director of Center for Community Change, announced half way through the program that he was going to paraphrase Margaret Mead and got a huge laugh from the audience:

Never underestimate the power of a small group of people… with billions of dollars in their endowments… to change the world.

By Sean Stannard-Stockton | Also posted in 2007COF, Philanthropy | Comments (3)

Spending your way to charitable donations

March 8, 2007 – 8:30 am

There has been a lot of debate about cause related marketing concepts like the RED campaign. Some people question how much money actually goes to charity and whether buying something with the agreement the seller will donate a portion to charity is a model that even makes sense.

I think that donors (and consumers) want to take greater control of the transactions they engage in. For instance, I use the Chase Perfect Card for my daily purchases. Instead of rewarding me with miles or some sort of gift, the Perfect Card simply rebates 1% of my purchase price in cash back to my card. Rather than having to deal with figuring out the various airline mileage schemes, I get pure cash that I can use in any way I want. There are charity branded credit cards but they 1) force me to donate all of my rewards to one charity and 2) often don’t offer very high reward rates.

This brings me to FreePledge.com. For a long time now, internet retailers have willingly paid commissions to members of their “affiliate” program. Anyone can put a link on their webpage to a retailer and if someone clicks on that link and purchases something, the “affiliate” gets a percentage of the sale. The trick of course for the affiliate is getting people to visit their webpage.

FreePledge seems to have developed a rather compelling model. They have aggregated 165 online retailers (including such mainstream stores as Amazon, Staples and Target) and created a shopping portal. All of these stores pay FreePledge a commission on sales generated through their site. The hook is that FreePledge consumers redirect about 70% of the commission to the nonprofit of their choice. This isn’t chump change. Many of the affiliate programs pay commissions of around 5-10%. This means that by buying an item from Amazon through the FreePledge site, 5% of your purchase price goes to the charity of your choice.

What would happen if FreePledge became a dominant online shopping portal? Suddenly retailers who wanted access to the shopping traffic would have to pony up big money to charity. Telling consumers that they would donate a small percentage of their purchase to charity (a charity chosen by the retailer) just wouldn’t cut it. Instead, consumer/donors would have a new benchmark by which to judge cause related marketing efforts. If the retailer wasn’t donating at least 5% and giving the shopper the freedom to choose the cause, their cause related offering simply wouldn’t be attractive.

FreePledge is a for profit company. To me they are an excellent example of a for profit social venture. Sure, they are keeping about 30% of the commissions. But think of it this way. If they have 20% profit margins that means they are earning 6% of the commissions. If they chose a nonprofit structure and did not demand a return on their investment, they could reduce their share of the commissions by 6% and give 76% rather than 70% to the end nonprofit. However, they would lose access to expansion capital, the ability to attract employees who want to work on the for profit side (they’re headquartered in silicon valley) and potentially would not have found the courage to take the risks involved in launching a startup if it was not for the potential monetary rewards.

I signed up today.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropy, nptech | Comments (8)

Socially Responsible Investing

February 12, 2007 – 7:45 am

OnPhilanthropy has an essay posted titled “Socially Responsible Investing: A Foundation’s Duty?”. Personally, I wonder how investing in a generic “socially responsible” fund does anything to further the mission of most foundations. I do see how doing so might make a foundation board feel like they were doing something. But the fact that the essay has 11 comments shows that there is a lot of interest in this concept.

Far more compelling to me than socially responsible “screening”, is the emerging market for “mission aligned investments”. One such vehicle is the Bay Area Equity Fund. I met with one of the fund managers recently (my comments should not be seen as a recommendation to buy or sell any security). The fund is a venture capital fund that invests in private companies in the San Francisco Bay Area that are located in or near low-income communities. The companies they are investing in are for-profit entities that they believe are good financial investments and who measure their results with a double bottom line. Unlike Good Capital, which strives to produce below market rate returns that are augmented with social returns, the Bay Area Equity Fund believes they can achieve full market rate returns. I don’t think there is anything better or worse about shooting for market or below market rate returns (or zero financial returns for that matter). There is likely a market for investments that produce returns all along the spectrum of financial and social returns.

Right now, the philanthropic capital markets are far from mature. But over time I can clearly see how foundations may begin to commit a portion of their capital base to investments that further their mission. To me, this kind of mission aligned investing holds far more interest than simply screening publicly traded stock to avoid investing in “bad” companies.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropic Investment Strategy, Philanthropy | Comments (0)

The Gates Foundation II

January 18, 2007 – 7:55 am

The Gates Foundation released a statement in response to the LA Times articles I discussed last week:

"Bill and Melinda oversee the investment of the foundation’s endowment. In giving guidance to the investment managers, they have chosen not to get involved in ranking companies based upon factors such as their lending policies or environmental record. There are dozens of factors that could be considered, almost all of which are outside the foundation’s areas of expertise. The issues involved are quite complex. Should a company get a failing score if 1 percent of its output is used in cigarette packaging, or if 1 percent of its stores’ sales are in tobacco? How far back in time do you evaluate behavior? If a company disagrees with your assessment, what appeals process is available? Which social and political issues should be on the list?

Many of the companies mentioned in the Los Angeles Times articles, such as Ford, Kraft, Fannie Mae, Nestle, and General Electric, do a lot of work that some people like, as well as work that some people do not like. Some activities might even be viewed positively by some people and negatively by others.

There are many important issues that the foundation does not focus on, such as lending laws and environmental regulation. The organizations that do work on those issues—together with governments and all of their legislative, executive, and judicial resources—play a critical role. We do not want to duplicate that role.

Bill and Melinda have prioritized our program work over ranking companies and issues because it allows us to have the greatest impact for the most people. They also believe there would be much room for error and confusion in such judgments, and that divesting from these companies would not have an effect commensurate with the resources we would divert to this activity. The foundation’s not owning a tiny percentage of a company or selling it to another investor would often go unnoticed, and Bill and Melinda would not be comfortable delegating this kind of judgment."

You can read the entire release here.

Some other bloggers have mocked the Gates’ point of view. But I think that this is a rational decision for a foundation to make. That does not mean that I think that foundations should not engage in socially responsible investing, just that not doing so is rational and each foundation should examine all aspects of their operation and proactively make decisions about how best to achieve their mission.

I’m glad to see the increased media coverage of philanthropy. I think that transparency and accountability are wonderful tools for improving philanthropy.

By Sean Stannard-Stockton | Also posted in Media, Philanthropy | Comments (0)

The Gates Foundations

January 12, 2007 – 8:30 am

The LA Times has run a two part series on the investment policies of the Bill & Melina Gates Foundation (you can read part one here and part two here). The gist of the stories is that the companies that the Gates Foundation has invested in are causing some of the very problems that the Gates Foundation is making grants to try to overcome. The Gates Foundation has already responded to say that they will be reviewing their investment policy.

Some people see this as a story about socially responsible investing. But, I think that this story highlights the key need for private foundations and other philanthropic entities to view the management of their resources (their investment assets) as one of their core responsibilities rather than something apart from the foundation (full disclosure: I am an investment manager who specializes in managing philanthropic assets).

Lucy Bernholz at Philanthropy 2173 says:

“Maybe there is a moment here - a moment for foundation executives and trustees to ask these bigger questions. What can philanthropic resources accomplish? How should they be structured to do so?”

Trent Stamp the president of Charity Navigator says:

“So what’s the real problem here? It’s a case of the foundation’s program officers and investment strategists simply not being on the same page. This is an all-too-common practice in a sector where one side of the organization is charged with saving the world, and the other needs to raise money to support the do-gooders.”

That’s the key, foundations need break down the separation between investment management and grant making and make sure that everyone is working together. This is obviously self-serving, but at Ensemble Capital we talk constantly about the need for philanthropic entities to work with investment managers who understand philanthropy.

Think of the leaders of the grant making programs as the CEO and the leaders of the investment management side as the CFO. Imagine if a business was operated with the CEO and CFO pursuing different objectives and using different strategies. The business would be handicapped and could only achieve limited results. The same is true in philanthropy.

By Sean Stannard-Stockton | Also posted in Philanthropy | Comments (3)

Tactical Analysis: Donor Advised Funds

January 8, 2007 – 8:21 am

So far we’ve gone through the first four steps of the Tactical Philanthropy process. You can click on the links to read about Goal Establishment, Legacy Planning, Asset Analysis, and Tactical Analysis. After giving an overview of the Tactical Analysis step, I gave a case study. Today I am going to talk about the second of the five major giving vehicles

Private Foundations
Donor Advised Funds
Charitable Remainder Trusts
Charitable Lead Trusts
Supporting Organizations

While private foundations have gotten much cheaper and easier to operate than they have been in the past, donor advised funds (DAF) are still the cheapest and easiest giving vehicle. If the majority of your charitable giving is made up of writing checks to nonprofits, then a DAF is likely a great choice.

A DAF is an account, held at a charitable organization, on which a donor is named as advisor. In practice, a DAF acts like a charitable checking account. The donor gets an income tax deduction when assets are placed in the account and can then send checks out of the account to the nonprofits he or she wishes to support. Legally, the donor only has the right to “advise” the charity that controls the account regarding which charities to support. This lack of control is in contrast to a private foundation, which the donor controls absolutely. But in practice, charities deny donors’ “advice” in only the most extreme cases.

While donor advised funds cannot make loans, pay for donors’ charitable expenses, invest in nonprofits or engage in other sophisticated philanthropic strategies in the way that private foundations can, they are incredible easy to use and can be opened with as little as $5,000. Private foundations, while not requiring the $3-$5 million in starting capital that many people assume, still generally require at least $250,000.

Donor advised funds also offer the benefit of offering tax deductibility for assets other than cash or common stock (private foundations can accept any type of asset, but only offer a tax deduction for the cost basis of assets other than cash and common stock).

Some examples:

Real Estate: The great real estate boom seems to have come to a halt. Donors with holdings in investment properties should think about using these assets to fund their giving. Both complete and partial gifts of real estate to nonprofits should be considered. If multiple nonprofits are contemplated as recipients, or if endowing future years’ giving is desired, real estate can be used to fund a donor advised fund.
Privately held business interests: If you are a partner in a privately held business or the owner of a family firm, you can use this asset in your giving. One obvious time to consider this option is when a family seeks to sell a family business that they have built up over the years. The sale of the business will trigger a large tax bill. By gifting a partial interest to a nonprofit or donor advised fund, the family can offset part of the tax from the sale. Recently the rules regarding gifts of assets held inside of an S-Corporation were changed. These assets had been an ineffective choice for giving in the past, but at least until December 31, 2007 these assets can be a tax efficient choice.
Odds & Ends: Artwork, life insurance, coin collections, intellectual property, The Minnesota Vikings… Almost any asset can be gifted to a nonprofit. The structure of the gift and the nonprofit receiving the gift both play into the tax ramifications. The last time the Minnesota Vikings were sold, my friend Bryan Clontz was involved in handling a gift of a partial share of the team into a donor advised fund.

Setting up a donor advised fund also allows donors to separate the tax side of their giving from their charitable intent. Since the tax deduction occurs when assets are placed in the account, this decision can be made with the donors CPA or financial advisors. Making gifts out of the fund to a nonprofit has no tax implications, and so the donor can make these decisions without concerning themselves with the tax impact of the timing or size of the gift.

Donor advised funds are also ideal vehicles for use by giving circles. Assuming the giving circles is started with at least $5,000, the group can start a donor advised fund to hold their assets. The treasurer or other member of the group can be named as the advisor to the fund and each member would receive a tax deduction for their gift to the fund in the same way they would for a gift to any public nonprofit.

One thing to keep in mind is that the choice between a private foundation and donor advised fund is not an either/or situation. While the media has made much of donor advised funds being the “next” privation foundation, in actuality they are distinct strategies that can be employed separately or in combination. Many large private foundations also set up a donor advised fund “side car” to receive gifts or assets other than common stock and cash, as well as to receive a portion of the private foundations 5% minimum distribution in years when the foundation does not find enough nonprofits it wants to fund.

Benefits:

Simple, effective way to organize your giving and maximize tax deductions with limited paperwork.
Fund your giving with any assets (such as real estate or privately held business interests), not just cash or common stock.
No excise tax, such as the 1-2% tax levied on private foundations
No liability or compliance risk since the account is legally controlled by the sponsoring nonprofit.

Drawbacks:

Can only use fund to write checks to nonprofits. Making loans to nonprofits or paying for charitable expenses not allowed.
No formal structure for involving your family members.
Can only make gifts to IRS recognized, US based nonprofits. No emergency grants to individuals, scholarships or international grants allowed.
No legal control over the account. The assets in your fund are legally controlled by the sponsoring nonprofit.

Donor advised funds are offered by individual nonprofits, community foundations and national donor advised funds (such as Schwab Charitable and the Fidelity Charitable Gift Fund). Opening an account with an individual nonprofit might make sense if you give a large portion or your charitable dollars to that organization. Starting one at a community foundation is best if you want to use the foundation’s “strategic advice” (advice on where to give). Community foundations generally charge a fair bit more than national donor advised funds, but provide very good advice on identifying nonprofits you might want to support. If you are generally self-directed and do not need advice on where to give, a national donor advised fund is probably best. These nonprofit entities offer a simple donor advised fund structure and charge low fees.

By Sean Stannard-Stockton | Also posted in Giving Circles, New Philanthropy, Philanthropy, Tactical Philanthropy | Comments (2)

Tactical Analysis: Private Foundations

December 20, 2006 – 10:15 am

So far, we’ve gone through the first four steps of the Tactical Philanthropy process. You can click on the following links to read about Goal Establishment, Legacy Planning, Asset Analysis, and Tactical Analysis. After giving an overview of the Tactical Analysis step, I gave a case study. Now I would like to begin talking about each of the five vehicles that donors can launch on their own.

Private Foundations
Donor Advised Funds
Charitable Remainder Trusts
Charitable Lead Trusts
Supporting Organizations

At this time I am not going to cover the giving vehicles that nonprofits can set up and offer to donors (such as charitable gift annuities). I’ll save an overview of those for a later date.

So today let’s tackle private foundations.

When most people think of private foundations, multi-billion dollar grant-making institutions come to mind. When we think of someone starting their own foundation, we think of people like Gates, Rockefeller, Ford and Carnegie. But over the last few years, private foundations have emerged as a viable tool for a much larger group of people.

A private foundation is a legal entity, either a corporation or a trust, which makes grants to nonprofit entities. Just as many people create a legal entity through which to conduct their business dealings, a private foundation provides a legal framework for conducting philanthropic activities.

Because assets in a private foundation are required to be given to nonprofits, a donor to a foundation receives a tax deduction upon putting assets into the foundation, rather than at the time the foundation passes those asset on to a nonprofit. This separation of the point of tax impact from the point of actual gift is one of the important reasons to structure your giving.

I believe strongly that people do not give to charity because of the tax deduction. At the end of the day, a tax deduction can only reduce the cost of your gift. But since the tax reduction is never as large as the gift, someone who makes a charitable gift always ends up with less financial assets than someone who does not. However, tax deductions do drive the timing of charitable giving. The looming end of the year deadline for a charitable gift to reduce current year taxes is why so much charitable giving is down during the last two months of the year.

By setting up a private foundation (or other philanthropic vehicle), a donor separates the tax implications of giving from the personal charitable intent. A donor’s advisors can help determine when to put assets into the foundation for maximum tax benefit, while the donor can concentrate on making gifts out of the foundation (which has no tax implication) when those gifts best serve the donor’s philanthropic vision.

Private foundations are not the cumbersome, paperwork heavy entities they once were. While many advisors unfamiliar with philanthropy often assume that foundations are only appropriate for people who can put $3-5 million or more into the foundation, the rise of the internet has reduced the cost and administration needed to operate a foundation. While there are a number of firms that offer some sort of private foundation administration service, Foundation Source is clearly the leading company in this area (Full disclosure: My firm has a working relationship with Foundation Source, however we receive no revenue from them and do not benefit in any way from someone engaging their services).

Foundation Source has turned the client experience of operating a private foundation from a paperwork-laden process into a simple internet interface that is reminiscent of an online bill pay portal (you can see a demo of the private foundation web portal here). By centralizing the administration of hundreds of private foundations and delivering services over the internet, Foundation Source has made it cost effective to create private foundations with as little as $250,000 in funding (or as little as $100,000 in some cases). This is still a very large charitable gift for the vast majority of Americans. However, it changes the private foundation from being a vehicle exclusively for the ultra-wealthy (the Gates, Rockefellers, Fords and Carnegies) to a viable vehicle for people with over $3 million in investable assets.

Regardless of whether a donor uses a foundation administration firm, a CPA firm, a law firm or a family office to administer a private foundation, this vehicle offers the following benefits and drawbacks

Benefits:

Involve family members in the giving process by naming them to the board.
Make loans to nonprofits, invest in nonprofit ventures, and pay for the costs of charitable activities.
Make grants to international entities, individuals experiencing emergencies and offer scholarships. None of these are activities that the IRS recognizes as charitable activities when performed by individuals.
Have complete control over your philanthropic giving (as opposed to using a donor advised fund, which lacks donor control).

Drawbacks:

Even after outsourcing administration, foundations still require some paperwork by the donor.
Contribution of assets other than cash and common stock does not receive as favorable tax treatment as the contribution of those assets to a public charity.
In some circumstances, when a donor makes a gift that is very large in comparison to their income, a gift to a private foundation may offer a smaller tax deduction then a gift to a donor advised fund.
Income and capital gains created in a private foundation face an excise tax of 1-2%.
The administration costs for a private foundation, while much lower than they were historically, are still higher than some donor advised funds.

Private foundations are still tools for major donors. However, as of 2004 nearly two-thirds of all private foundations held less than $1 million in assets. Since the operating costs have only begun falling in the last five years, we may see a day in the future when private foundations become accessible to a broad range of donors at much lower giving levels.

Next Up: Donor Advised Funds

By Sean Stannard-Stockton | Also posted in Philanthropy, Tactical Philanthropy, nptech | Comments (0)

Tactical Analysis

December 6, 2006 – 9:50 am

The first three steps in the process of Tactical Philanthropy are Goal Establishment, Legacy Planning and Asset Analysis. Today we move on to Tactical Analysis.

Once we know what a donor’s short and long-term goals are and what assets they have at their disposal, we can begin restructuring their assets to more explicitly reflect their desired allocation of personal and social capital. Most people make charitable gifts in a reactive fashion, giving each year to the nonprofits that catch their attention and not giving much thought to the character of the social vision they are trying to achieve. But, once you have taken the steps to examine your goals and analyze your resources for achieving those goals, a world of new tactics becomes available to you.

The purpose of these tactics is to increase the amount of social capital you have at your disposal, reduce your cost of giving, and provide a platform for the donor to realize the many non-financial benefits of tactical philanthropy. Remember that the initial steps of creating your philanthropic vision and strategy (the creation of your worldview and which organizations you believe are best positioned to further your goals) must already be in place for tactics to have their desired impact. Otherwise, the leverage inherent in tactical giving will be used to enhance missions and values that may not be important to you.

Tactical Analysis is a dynamic process. The end result is a package of philanthropic tactics that interact to achieve the multiple goals of the donor in question. There are often synergies between the various tactics. For instance, setting up a private foundation by itself may not be a good tactic for a particular donor. However, that same donor may benefit from setting up both a private foundation and a charitable remainder trust. I think the best way to describe the process of Tactical Analysis is to delve into a case study that highlights the use of a set of tactics in combination and then to describe each available tactic as a stand alone entity (this second part I will cover in future posts).

So let’s begin with the case study…

Joe and Wendy are very financially successful young parents. They have a 5-year-old son named Andrew and a 3-year-old daughter named Claire. Recently they have been talking to their friends about the challenges of raising their children in an environment of so much affluence. They want to give their children the benefits of having wealth while at the same time teaching them financial discipline and not to take their money for granted.

Joe and Wendy make significant annual gifts to a number of charities. Currently they write checks for most of their gifts and from time to time, they transfer stock. Recently, they have been reading about more effective ways to give and they are eager to put a plan into action.

Joe and Wendy should consider setting up a charitable lead trust (CLT) and naming a donor advised fund (DAF) as the recipient of the lead interest. They will then have an opportunity to make a large, gift-tax free transfer to their children while utilizing philanthropy as a platform for teaching their children financial and family values.

By funding a CLT with $2,000,000 and committing to make annual payments of $164,000 from the trust into a DAF, Joe and Wendy can gift the principal of the trust to their children in 20 years. Assuming an 8.2% rate of return on the investments in the trust, the children will each receive $1,000,000 in 20 years. A higher or lower rate of return could increase or decrease the amount they receive, but regardless of the value, the gift will be completely free of gift-tax. In addition, the trust will receive an income tax deduction for the annual payments of $164,000, these gifts will be excluded from Joe and Wendy’s personal giving and will not face any annual percentage limitations.

Joe and Wendy can involve Andrew and Claire in the operation of the DAF to a greater and greater degree as they get older and use the process as an opportunity to talk to their kids about financial management, investments, taxes and giving back to their community.

In this way, Joe & Wendy set up a structure that will:

Provide them with a tax efficient way to engage in giving.
Allow them to think only about the philanthropic motivations of their giving, since the tax ramifications will be taken care of up front and put on autopilot.
Give them a framework to use their giving as a platform to discuss their most deeply held values and beliefs with their children, learn about their children’s interests and values, and give them a context to teach their children about financial issues.
Transfer approximately $1 million to each child at ages 25 and 23 respectively, but only after the children have spent 20 years discussing and witnessing the value of money and being educated in how to handle it.

You can see from this example how Joe and Wendy have increased their ability to give (by lowering their after-tax cost of giving), increased their family’s personal capital (by transferring assets on a tax-free basis to their children), and incorporated giving into the very fabric of how they raise their children.

This is just one small example of how a family can engage in tactical philanthropy. Going through the process in practice would involve a much more thorough analysis with many more issues being addressed. There are actually multiple solutions that could fit Joe and Wendy’s needs; the CLT/DAF combination is just one possible outcome. At my firm, when we produce a Philanthropic Optimization Process® report for a client, we present a series of options for consideration. Given the trade-offs between various tactics and the way that a particular solution can change family dynamics, there is no “right answer” when it comes to devising a Tactical Philanthropy plan.