I’d like to tell a story about a couple of guys, Steve and Paul. Steve and Paul are law partners, in a two-lawyer practice that is profitable and thriving. Steve and Paul are both 55 years old and earn the same amount of money.
They are good partners because they do just about everything the same way. They spend the same portion of their earnings, and they share the same goals regarding their personal and family legacies.
Steve and Paul each wish for 25 percent of their eventual estates to pass to charity. They estimate their future estate values and come up with a fixed dollar figure that they each wish to leave to charity, with the rest going to their families.
Steve and Paul take a slightly different approach to structuring their charitable gifts. Steve spends some of his income, pays his taxes and saves the rest. He invests wisely and earns good returns. Paul spends the same amount as Steve, and leads a similarly comfortable lifestyle.
Paul, however, contributes about 12.5 percent of his income to a donor advised fund or a family foundation every year. He takes an income tax deduction for the amount gifted to charity. Paul annually directs about 5 percent of the balance of his growing charitable account to his favorite charities.
Steve and Paul, not surprisingly, die on the same day at age 82. Steve’s will provides for a charitable contribution in the dollar amount he and Paul agreed upon years ago. On the other hand, Paul’s donor advised fund or foundation account already has the agreed amount in it, so no additional donation is made at Paul’s death.
At the time of their deaths, Steve’s total estate was much larger than Paul’s, since Paul gave away a lot of money during his lifetime. The question is: Whose heirs get more money?
Paul’s heirs will receive about 20 percent more than Steve’s, even after payment of any estate taxes. Not only was Paul able to enjoy watching his money go to good causes during his lifetime, he was able to match Steve’s total charitable legacy, while providing even more money for his heirs.
These and other benefits are why I implore my clients - and anyone else within readership or earshot - to implement their charitable legacy while they are still alive. In the example above, the two partners had a fixed dollar amount in mind for charity. Paul was able to meet that pledge while at the same time providing even more funds for his heirs.
We can also turn that equation around. Perhaps Steve and Paul wished to leave each of their children a fixed dollar amount. The “fixed amount per child” is a growing trend these days. Paul’s approach would leave more than double the amount to charity.
By arranging to make annual gifts instead of waiting until he is on his deathbed, Paul has both provided a comfortable amount for his heirs, and he has gifted those heirs with a lasting donor advised fund or family foundation to manage that is twice the size of Steve’s.
Americans stand to waste up to $1.6 trillion that could have gone to charity over the next 30 years, according to one study I reviewed recently. This is additional money that could go to charity through intelligent planning, while still leaving targeted amounts for heirs.
I wrote a column a few weeks ago comparing and contrasting donor-advised funds with private family foundations. Both are great tools, and either would prove an excellent funding mechanism for the story I told above.
One point in my earlier column deserves clarification. I had written that the donor to a donor-advised fund could not set up scholarships. While it is true that some donor-advised programs do not allow the donor to undertake a detailed and meticulous review of scholarship applicants, the San Diego Foundation is set up to provide such assistance should a donor so desire. Contact the San Diego Foundation for the details.
There are potentially complex tax differences between a private foundation and a donor-advised fund. I suggest that anyone weighing a choice between the two consult with an independent adviser or attorney to work through these differences. In many cases, families choose to use both vehicles to best meet all of their goals.
Whatever you decide to do, do it soon. Everybody wins if you start your gifting program now, rather than wait until you are gone.
Rick Ashburn manages investments for private clients. Write to him at firstname.lastname@example.org or 1224 Prospect St., Suite 130, La Jolla, 92037.