Using philanthropic-planning investment strategies

The about-to-retire and the already retired have at least two things in common: Both want income they can’t outlive, and both want to leave behind a legacy. By employing philanthropic-planning techniques, a forward-thinking adviser can help clients of any age accomplish both goals — often very successfully.

Here’s an example of a positive philanthropic-planning experience that was shared with me by Johnne Syverson, a Des Moines, Iowa-based wealth coach:

Herb Jones was approaching retirement and wanted to sell his privately held business, of which he owned 25%. His initial investment of $10,000 was now worth about $2 million, representing 40% of his $5 million net worth.

Mr. Jones wanted a comfortable but not lavish retirement and wanted to leave money to family members.
Mr. Syverson advised him to put his $2 million of appreciated company stock into a charitable remainder trust. The corporation then redeemed the stock, ultimately helping to fund the CRT.

By making the donation, Mr. Jones avoided all the capital gains tax that would have been triggered by the sale of his shares. He also received a sizable charitable-tax deduction, and he was able to convert his $2 million into a diversified portfolio generating an annual income stream of 6% of the trust’s value for the rest of his life.

His estate, which had previously been worth $5 million, now was valued at about $3 million, thus reducing his estate-tax exposure by about $1 million.

If Mr. Jones were so inclined, he could use some of his new income stream to fund the purchase of life insurance. This would be owned outside his estate, serving to replace the value in the CRT, which will pass to his private family foundation after he dies.

The foundation will allow his children and grandchildren to continue supporting the causes that are meaningful to Mr. Jones, as well as other causes important to them.

Even without creating trusts, there are many ways to enhance your clients’ retirement income needs through philanthropy. Here’s how I advised a client of mine:

Diane R., an 83-year-old retiree, shared her desire to support an organization she cared about deeply. After doing some research, I found that the charity offered a gift annuity program.

I suggested that she invest $100,000 in the gift annuity the charity sponsored.

Because of her age, she was able to enjoy income of more than $10,000 a year on her gift, about double what she had been earning previously — and she knew she would receive that income for the rest of her life. She also took a large tax deduction, which put even more cash back in her pocket.

Because she was living on a very modest income, the extra cash was very attractive to her. Additionally, because gift annuity income is payable in proportionate principal, interest and capital gain amounts (providing the annuity is funded with an appreciated asset), the income stream she received was also very tax efficient, further enhancing her retirement income.

While charitable giving seems to rise in tandem with net worth, its benefits apply to most people, whether they are megawealthy or what I call “midwealthy” — those with net worth in the $1 million to $5 million range.

Family first

I have found that most midwealthy people tend to have a similar initial reaction to the idea of philanthropy planning: family first, then maybe charity.

But when introduced to the concept that skilled planning techniques can lead to legacies for both family and charity, people tend to warm to the idea. Many have told me that they never knew this best-of-both-worlds solution was possible.

When it comes to infusing retirement planning with philanthropy, start by understanding your clients’ conception of wealth. I suggest telling clients that wealth is more than just money. Yes, money is important, but so are the values that define who they are and represent what their life is about.
Money and values together constitute personal, or social, capital.

Unfortunately, most people allow the Internal Revenue Service to manage the disposition of their social capital. Philanthropists, by contrast, decide themselves how their social capital will be distributed.
By helping your clients become more philanthropic, you are empowering them in ways they may never have considered.

Yale Levey is a founder and principal of Next Generation Wealth Planning, LLC in Roseland, N.J., and a founding member and director of the International Association of Advisors in Philanthropy Inc. in Rocky Hill, Conn.

Related Topics: Retirement Watch