Planned Gift Blogspot

Blog Switch Official

2010-04-14T13:31:00.002-04:00

I have finally switched over to another blog format/website. I will no longer be posting on this site. Rather, all new posts will be on the following site:

http://theplannedgivingblog.wordpress.com/

Please check out the new site and sign up for email updates from that one!

Thank you again for reading!

Best regards,

Jonathan

Wealth transfer stuff

2010-03-09T15:35:00.002-05:00

Please check out this post on my new blog about the alleged Wealth Transfer.

http://theplannedgivingblog.wordpress.com/

I am redirecting readers to this new site because it lets me post documents (like a chart or an outline) and it doesn't cost me anything to run my email subscription.

Just getting everyone ready for the eventual shut down of this site in favor of the new Word Press one.

Best regards,

Jonathan

Planned Giving Lesson of the Week - To Start (or Keep) a CGA Program or Not?

2010-02-19T10:25:00.008-05:00

I struggle often about gift annuities ("CGA") - are they all they are cracked up to be (for nonprofits)?

Even before the market crash last year, various state regulatory struggles have made it more and more difficult to operate widespread, multi-state or national gift annuity programs.

Throw in market volatility and other investment uncertainty, and if you start to understand how pension investment/risk management should be handled, you really have to wonder whether it is worthwhile for charities to start new CGA programs or for smaller ones to continue stagnant ones?

This is coming from a guy who is paid to setup/run/oversee CGA programs and has done the licensing in New York, New Jersey, California, Florida, and lots of other places for multiple jobs and clients.

At the past planned giving group meeting in NYC this week, I was the moderator for a panel on CGAs with 2 panelists being from large established CGA programs and one being from a large investment/administration provider.

The panelists were terrific, exposed the audience to some of the higher levels of planned giving experiences out there. But, my question did not get directly addressed.

The answer to my ongoing question of whether CGA programs are worth it or not for many charities actually started to come to me during the networking, drinking stale diet coke session before the luncheon.

It was a conversation with an old friend, who is at a charity which myself and my firm had lost out to on a bid to provide planned giving consulting. Two years after we lost the bid, and they were already bringing in $1 million plus in CGAs a year. What were they doing? Two direct mail letters a year to an approx. 100,000 database of potential planned giving prospects (this is a well established national emergency aid charity that had just never gone heavily into planned giving but was already receiving a significant percentage of bequest revenue).

Then the panel started. The biggest institution represented was mailing 1.8 million CGA "solicitation" pieces a year. The other institution was marketing CGAs consistently to 137,000 members - no age overlay but likely that most were age appropriate.

I hope you are getting the message. Building a successful CGA program is numbers game. In the scheme of things, as great as your PGCalc/Crescendo illustrations look, most potential planned giving prospects will overwhelmingly not commit to irrevocable gift arrangements - people just don't part easily with their money.

But, if you have the numbers, I mean really large numbers of prospects and you commit to marketing intelligently to those prospects, you will close gifts and more than justify this "pain in the ass" CGA program.

Is there a magic number? No. And, of course it costs plenty of money to market to a 100,000 plus database. You better think about whether this database of prospects are really prospects.

And, what if you are raising a lot of money from a small amount of donors? Let's say a few thousand (like I hear in conversations all the time). Is a CGA program for your institution? Probably not, or at least not until you build large numbers of annual/direct mail donors into your database.

To be continued. Have a great weekend.

Finally - Charitable Insurance Fiasco Makes the NY Times

2010-02-16T19:52:00.004-05:00

Thanks to David Moss who forwarded this story to me from the New York Times.

It is a must read for any fundraising professional who gets approached with any insurance deals that are too good to be true (as 99.9999% of them are):

http://www.nytimes.com/2010/02/13/education/13oklahoma.html?scp=2&sq=pickens&st=cse

This stuff is just rotten - and I remember clearly that the Oklahoma State plan was the poster child for this stuff!

See my older posts under insurance schemes.

Check out my white paper on planned giving

2010-02-09T10:05:00.003-05:00

For my firm (Changing Our World, Inc.), I just finished writing a white paper/introduction pamphlet on planned giving. Here is the link to see and download it (a 12 page booklet)

http://theplannedgivingblog.wordpress.com/the-planned-giving-book/

I thought this would be a good time to start introducing email subscribers to my mirror blog on Wordpress. I called this one The Planned Giving Blog (http://theplannedgivingblog.wordpress.com/). Eventually, I plan to switch completely to the Wordpress site. For now, I post identical pieces on both sites.

Why the change? Wordpress lets me link actual documents (like the white paper I hope you will check out). And, I actually have to pay for the email subscription service that you all have (right now only a few dollars a month but it's free for me on Wordpress).

My main concern though is for readers switching over to the new site and its email subscription. If you try it, make sure you choose daily or weekly updates. Otherwise, you might be subject to multiple emails a day (any time I change the site).

Thanks again for reading and spreading this blog.

Best regards,

Jonathan Gudema

Interesting Articles on Madoff

2010-02-07T13:16:00.004-05:00

For those who are interested in my previous posts regarding Madoff and clawbacks against charities (check out Madoff posts) , here are some interesting articles about this now old story.

This first article is really interesting - about how lawyers on behalf of net-winners from Madoff's scheme are fighting to be treated as victims! It's hard not to feel sorry for them but how could you take away recovered funds from the net-losers of the fraud!

http://dealbook.blogs.nytimes.com/2010/02/03/in-court-challenges-of-madoff-trustees-plans/

What is interesting about this next article, is that it is only in the 5th paragraph that it mentions a side point that Madoff stole $325 million from a friend as executor of his estate.

Who would have thought that a little theft of $325 million wouldn't get much prominence? Well, I guess if you are in the business of stealing billions, what's another few hundred million?

The real irony is that Madoff was only stealing back false profits from his own fraud, presumably to keep the fraud going a little further. Apparently family of the deceased friend didn't disagree (they settled with Picard).

http://online.wsj.com/article/SB10001424052748703410004575029762424298880.html?mod=googlenews_wsj

Too Many People in My Contacts Folder Going To Jail

2010-01-25T10:11:00.003-05:00

Pretty depressing Monday morning when you find out that a very well respected tax lawyer, formerly from Ernst and Young ("E&Y") no less, is off to jail.

This would be the 3rd person in my outlook contacts folder heading off to a federal penitentiary for various white collar crimes this year.

Why a post? I am going to quote from the TaxGirl blog (http://www.taxgirl.com/ernst-young-partners-found-guilty-on-all-counts/) from where I got the story. I clicked through to the story from my email thinking I was going to see interesting stuff about E&Y - not a favorite of mine for various reasons.

Here is the quote from TaxGirl:

As part of their scheme, Coplan, Nissenbaum, Shapiro and Vaughn helped clients manufacture losses within the tax shelters. The four then solicited opinion letters from law firms that claimed that the tax shelter losses or deductions would “more likely than not” survive IRS challenge, or “should” survive IRS challenge. The IRS claimed that the four defendants were aware that the transactions did not meet those standards.

As I read this paragraph closely, it dawned on me that these former E&Y guys, all headed to the big house, relied on the age-old idiocy of the vaunted law firm opinion letter to justify their tax fraud schemes.

In other words, a letter from a law firm backing up some questionable tax avoidance scheme is absolutely worthless.

Why I am reporting this to the nonprofit world is that this is the typical proof of one of those newfangled get rich quick charitable schemes out there. It usually involves insurance, your donors lives, etc.. And, they always have a letter from a law firm explaining that the scheme is fine.

Well, the only letter that counts is a letter from the IRS - a private letter ruling. Period. Never be fooled by any promoter, of any scheme that is any bit questionable or risky, with one of these law firm letters. It doesn't matter which law firm. They are all garbage and if the promoters really feel that they have a worthwhile plan, they should go to the IRS for their opinion.

This is just a pet peeve of mine since I have had to sit through so many garbage meetings and presentations on such ridiculous plans. And, the next time one those idiots shows me an official law firm blessing letter, I am going to pull out this case and shove it down their throats (not literally, of course).

Maybe this week will get better, please G-d!

Pledge Enforcebility: Don't Try This at Home

2010-01-21T10:25:00.002-05:00

I am a major fan of irrevocable bequest pledges (another $1+ million one closed last week for a client:) - with the strong caveat to be careful!

Anyway, the topic is really pledges, enforceable or not. If enforceable, what about when the donor dies?

I just wrote a white paper on this general topic (which I will post soon), and plan to also write on the sub-topic of using pledges for bequest intentions.

But, as a preview for my blog readers, check out this bequest story:

http://www.crainsdetroit.com/article/20100120/FREE/100129999#

In short, a NY charity is "suing" (or, probably more like filing a claim in the probate court and forcing the court to overrule the executor's decision to deny the claim) the estate of late Detroit Pistons owner Bill Davidson on an unpaid "pledge" of $5 million.

There are a bunch of stories in the press on this one but only the linked article got a little further into the facts. If I were the judge, I would want to see the written pledge agreement. I would also want clear proof beyond a piece of paper that the charity put this binding obligation on their books, provided sufficient recognition in exchange for the promise, really relied on these funds to their detriment...

I don't pretend to know the legal standard in Michigan on pledge enforceability. In New York, you better have at least given him naming recognition for the pledge.

Anyway, the Crain's story mentions a contingency to the "pledge" that a number of other families needed to be on board before the pledge would be a real pledge. But, if that contingency is not in the written agreement, and the charity really has a clear, written agreement, I don't blame them for suing. I wish them luck, though.

The point of this piece, and future ones on the topic, is that it is a good idea to think about what a judge someday will want to see to enforce a pledge (in the absence of being in the will or other testamentary device). Partially, it depends on the law of the state in which the donor resides (and where his/her estate will be probated). If the state courts held that you need "consideration", you better make sure you gave the donor something and leave proof of it (pictures, of course) in the file. If the state uses the "detrimental reliance" theory, you better show that you really relied on this gift, to your financial detriment.

The other point you should be getting is that legally enforceable pledges, ones that you might actually go after someday, are not necessarily appropriate for high quantities of gifts. It's the special ones.

Advanced Planned Giving Topic: Lead Trust Options in 2010?

2010-01-12T11:30:00.001-05:00

If you are not a glutton for planned giving technical stuff, you might want to skip this one. Attorney Martin Shenkman, quoted in the Forbes Article, posted a huge commentary on 2010 estate planning questions. Here is a link to it:

http://www.laweasy.com/t/20100107062914/2010-estate-tax-repeal---is-it-real~#_Toc250556915

For charitable planners, here is a very complicated, interesting take on the remote possible use of Lead Trusts for some tax advantages in 2010 from the above Shenkman web piece:

Lead Trust (CLT) Planning Under Repeal

Charitable Lead Trusts (CLTs) could present an interesting opportunity. Maybe! With a CLT you can gift a large sum of money to your children and reserve a periodic payment to a charity for an intervening period. This charitable interest reduces the value of the gift to your children dramatically. Under 2009 law you cannot set up a CLT for grandchildren unless it is structured as a unitrust. This means the charity gets a percentage of the value of the CLT assets each year, instead of a fixed amount. That squeezes some of the “vig” out of the plan. The reason for this had been that you cannot allocate GST exemption to a CLT using annuity payments (called a CLAT). Well, if there is no GST tax can you now do CLATs for grandchildren since there is no GST tax? Some practitioners suggest formula clauses to divide the CLT assets depending on the outcome of future tax legislation. Other advisers suggest using a disclaimer so that if the law becomes clear within 9 months of funding the children can disclaim and the CLT remainder can go to grandchildren if the GST tax is not re-enacted, or if re-enacted is not retroactive. Other advisers are looking for Advil.

More on Estate Tax Repeal

2010-01-12T10:43:00.002-05:00

The media is slowly waking up to the issue I raised in my previous post. There appears to be a major "opportunity" in estate planning by the use of gifting to grandchilden this year.

Here is a good Forbes article - which surprisingly quotes an attorney already guiding clients to take advantage of this loophole:

http://www.forbes.com/2010/01/09/estate-tax-congress-gst-personal-finance-rich-grandma-gifts.html

I am always comforted when others pickup on the same things I am screaming about - it shows that I am not so nuts.

2010 - The Year of Gifting to Grandchildren

2010-01-08T10:00:00.005-05:00

As my readers should have figured out by now, my methods of investigation are pretty simple: I keep digging until I find something.

Between preparing an estate planning update presentation (for clients and whoever else invites me - hint, hint!), and my own obsession with the new state of estate taxes, I finally uncovered the major loophole in the 2010 law.

2010 Estate Planning Loophole: Gifting to grandchildren with or without Dynasty Trusts!

Let's start from the beginning.

Laws, as well written as they might be, tend to always leave an inch of unintended room. This particularly applies to the estate and financial planning sector. Clever planners figure out the gaps in the law, and then rush get as much through with whatever advantages they can grab. Then Congress wises up and closes it down.

Short history of generation skipping taxes. Planners at some point figured out that wealthy families could avoid a ton of estate and gift taxes by skipping a generation (ie...gift to your grandchildren instead of your children). It was such a massive loophole in the wealth transfer tax system that in 1976 Congress started imposing the Generation Skipping Tax ("GST"). They eventually made it so onerous - causing close to an 80% loss to taxes in the worst tax years - that individuals generally would only gift to their grandchildren up to their lifetime GST exemption (generally the same or near the lifetime estate tax exemption - which had been $3.5 million in 2009).

Basically, the GST had been what I call a penalty tax. Congress' goal - prevent this type of end run around the transfer tax system.

Flash forward to 2010. Not only is there not GST, but the maximum gift tax rate this year is 35% (down from 45% in 2009 and going up to 55% in 2011). Remember, the GST tax rate was the same as the gift/estate tax rate.

Here is an easy example (not precise but helpful in understanding the opportunity here): Donor exceeds GST exemption by making a $1 million gift in 2009 to his grandchildren. Assume this taxpayer has used up his lifetime gifting exemption and is already in the highest gift tax bracket. The tax on this gift would have been $697,500! (and this isn't taking into account state estate taxes!) Net gift to grandchildren - $302,500.

What if same scenario happen in 2011? Total gift and GST taxes of $797,500 - and only $202,500 left for the grandchildren. There is your 80% tax!

What about 2010? Total gift tax of $350,000, remaining gift to grandchildren: $650,000.

Compare the three years for this imaginary $1 million gift to grandchildren:

2009 - $302,500 net gift after taxes;
2010 - $650,000 net gift after taxes;
2011 - $202,500 net gift after taxes.

Get the picture.

This is not just one of those little loophole's in the tax code; this is the Lincoln Tunnel.

I mentioned above use of Dynasty trusts. These trusts apparently take advantage of any GST planning to maximize avoidance of estate, gift and GST taxes for future generations. Too complex for this post - but probably the preferred vehicle for taking advantage of this year off in the GST without handing over the keys to the Ferrari to an 18-year-old.

The major question attorneys will need to address is the risk that Congress actually does what it says it planned to do: retroactively reinstate both the estate and GST taxes.

What would be the legal risks involved? Could the IRS impose a retroactive law that would effectively raise a tax from 35% to 80%?

Something tells me that the government has to live with its laws. The law today is a 35% tax on any generational wealth transfers. If you make the gift and pay the tax, how can Congress claim you should have known that we were really meaning to tax you at 80% (but we couldn't get our act together in December).

Still, it's risky and litigation costs could be tremendous.

Estate Tax Chaos: Article on What You Need to Know for 2010

2010-01-06T15:34:00.005-05:00

Check out this good article by Deborah Jacobs on CBS Moneywatch.com. It is a great overview of the personal planning issued individuals may face this year.

http://moneywatch.bnet.com/retirement-planning/article/estate-tax-what-you-need-to-know-for-2010/378294/

It is also a good overview for planned giving professionals wondering how to leverage the current estate tax situation for their planned giving programs.

Planned Giving and Fundraising World in State of Confusion Over Estate Tax Repeal

2010-01-04T11:39:00.004-05:00

We have finally made it to the day everyone said would never come. For nine years – since the passage of EGTRRA in 2001 (whatever that stands for) – every speaker, writer, expert in the area of estate planning told us that Congress would never let this happen.

What day? What’s so dreaded about the estate tax repeal?

Truth be told: it is not the lack of estate taxes in 2010 that is so dreaded. It is the feared return of the Carryover Basis and what that would mean to planning and estates in 2010.

Let’s start over again. Planned giving professionals should always be on the lookout for new tax planning opportunities to encourage giving – during life or in one’s estate.

Are there any opportunities here – with the estate tax repeal of 2010 – for gift planners?

Not an easy question to answer.

Firstly, the repeal is only for one year. Even if there are some charitable planning advantages in 2010’s law, they will be gone before we know it.

Secondly, contrary to the rantings of the so-called Anti-Death Tax lobby, the repealed estate tax is not good for charitable giving. It may not be so bad, especially if bequest donors don’t get to their attorneys in time to change their wills. But, it is definitely not a law that would encourage more charitable bequests. More likely the opposite since it may encourage people to drop charities from their wills.

Thirdly, and the point of this article, charitable tax planning opportunities generally exist when there are tax savings reasons for giving to charity. Are there tax savings opportunities in 2010 as a result of the estate tax repeal?

This takes us back to the beginning of the article: Carryover Basis.

When Congress passed the so-called Estate Tax Repeal, they had to make up the projected loss in revenue from somewhere. So, sneaky Bush administration officials came up with a great idea: Let’s tax capital gains at death in the year of the estate tax repeal to make up for some of the lost revenue on paper from the repeal. Hocus pocus if you ask me.

Up until 2010, the U.S. had not seen in modern times (maybe ever) a tax on capital gains at death except for one year – 1976 – and it was repealed because of the confusion and challenges it caused. The first quote I found on the internet summed it: Legal scholar Lawrence Zelenak called the short unhappy life of carryover basis "one of the greatest legislative fiascoes in the history of the income tax."

Before 2010, all capital gains property in one’s estate would receive a “step-up in basis.” In other words, the code essentially wiped clean any capital gains at death – no surprise since the same asset was facing upwards of a 55% estate tax.

In 2010, there is a step-up in basis for up to $1.3 million in each estate for appreciation on capital assets. Additionally, surviving spouses receive an extra $3 million exemption on appreciation of capital assets, before having to start paying capital gains taxes.

Before 2010, surviving spouses generally never paid any estate tax – there was what we called the marital estate tax exemption. Either the government figured it wouldn’t look good to force widows to sell their mansions to pay estate taxes, or it is just easier to go after an estate when the surviving spouse is dead – less trouble.

Now, surviving spouses might be in for a big surprise once their $3 million of stepped up basis is exceeded. Time for widows to pay some taxes!

There are a lot of potential twists to the 2010 estate tax system. How is the $1.3 million of free capital gains allocated among appreciated assets? How does the surviving spouse allocate his or her $3 million of free capital gains?

My question is: how will people prove that the asset they inherited received some of the free step-up in basis? Will surrogate courts issue certificates indicating how much step up in basis certain properties receive?

Questions for executors of estates: what if we can’t prove the cost basis for this stock that has split and/or merged umpteen times? Ask the IRS and they will tell you that without proof of basis, it is assumed to be zero (i.e. pay capital gains on 100% of the value).

What about estate plans that didn’t anticipate the estate tax repeal? Unintended consequences such as surviving spouses effectively being cut out of their late spouses’ estates because the will or trust called for all assets not affected by estate tax to pass to children or others?

What about Credit Shelter Trusts? These are designed to lock away the federal estate tax exemption amount in a trust, typically income to surviving spouse with limited right of principal invasion, remainder to children. This year, there might be no need for this type of trust – maybe the kids should get the money outright?

The questions go on and on. Congress claims that they want to retroactively undo the estate tax repeal – before the 9 month filing deadline for decedents’ estate tax returns. Watch Congress push off until September 1, 2010, for a last minute attempt at fixing this mess before the estates that pulled the plugs on January 1, 2010 have a chance at zero estate tax. My prediction: 2011 will come and federal estate taxes will return to 2001 levels of $1 million exemption and highest federal estate tax bracket of 55% - and they can blame George Bush for that one.

Charitable Planning

The short answer to my original question (Are there any charitable planning opportunities in the estate tax repeal?) is no. Even if many people will be paying more in taxes via the carryover capital gains tax, I can’t see any logical way to promote gifting to avoid a one year tax – one at a relatively low rate of 15%.

You could try to make the case that Charitable Remainder Trusts should become very popular as devices for avoiding this one year carryover basis capital gains tax. I wouldn’t bother.

Attorneys might tell their clients to designate highly appreciated items in their estate to charities. The challenge would be whether the estate can sell the asset on behalf of the charity or would the charity be forced to accept the item for the capital gains tax to be avoided? This could make for some interesting questions in dealing with valuable tangible property or art – not so fun for nonprofits not equipped for owning these types of things.

What should we be doing?

Educating is the key. Any time we, planned giving professionals, have the opportunity to educate our donors about estate planning; it’s an opportunity to provide a needed service and a soft sell of bequests and other planned gift options.

Plan a seminar with a top estate planning attorney. My guess is that these types of presentations will draw standing room only crowds.

Find an article that is informative about the challenges of estate planning under the current scheme. Include it in your planned giving newsletter. Just make sure you send it out before Congress changes its mind and retroactively changes the 2010 law.

Most planned giving dollars are from bequests – period. So why do we planned giving people spend so much time promoting various complex giving arrangements? The answer is that we need something interesting to put out there – get people’s attention, get their minds thinking. Even if at the end of the day most planned giving prospects will only include you in their will (and probably not tell you), planned giving marketing would go stale quickly if all we ever speak about is bequests.

That’s the business. We market all of the fancy stuff, give people something to think about, and most go with the simple, least challenging option.

And, this new world of estate tax repeal certainly gives us interesting, thought provoking material to communicate with our donors. Even if we don’t have any exciting new charitable tax savings to announce.

Can't Believe 2010 Estate Tax Repeal Happened

2010-01-01T09:31:00.004-05:00

Pretty amazing that for 9 years straight, all of the experts in the estate planning field have been saying and writing that Congress would never let the estate tax repeal really happen.

But we made it to Jan. 1 and now former President Bush can brag to his wealthy friends that he saved them a lot of money and saved their farms and small businesses, too. As long as they die in 2010, of course. Come 2011, those same friends of Mr. Bush might be cursing him - or least their children.

And, the experts were saying all along that Congress would never let "carryover basis" ever come into effect again. Apparently the accounting headaches created by the law over trying to figure out decedents' original purchase prices is an even greater worry than the loss of revenue.

Here is another good overview on the topic for those obsessed with this issue like me:

http://money.cnn.com/2009/12/31/pf/taxes/estate_tax_extension/index.htm?cnn=yes

Have a happy day off from work! (yesterday for those on the email lists)

WSJ article: GETTING PERSONAL: IRA Charitable Rollover Comes With Risks

2009-12-30T13:30:00.001-05:00

For those who don't have subscriptions to the WSJ, here is the article mentioned in my previous post:

* DECEMBER 29, 2009, 2:44 P.M. ET

GETTING PERSONAL: IRA Charitable Rollover Comes With Risks

By Shelly Banjo
A DOW JONES NEWSWIRES COLUMN

NEW YORK (Dow Jones)--Donors who have tapped their individual retirement accounts for charitable donations under a popular temporary tax break may be in for a surprise come tax season.

In some states, distributions from a charitable IRA rollover may not be tax-free, as many charities have indicated in their promotional materials.

While these distributions escape federal taxes, they may be subject to income tax by states that don't allow charitable deductions and count IRA distributions as taxable income. Other states are facing delays in incorporating federal tax rules into state law.

In New Jersey, where taxpayers with an income between $500,000 and $1 million face a 10.25% rate, donors may pay more than $10,000 in state taxes for a $100,000 charitable IRA rollover. Donors who don't factor in extra income from an IRA distribution may mistakenly be bumped into a higher tax bracket.

Pushing for Congress to extend the IRA-giving provision, financial advisers and charities laud the extra tax break for generating an extra $140 million for charity since it was enacted in 2006.

Taxpayers ages 70 1/2 and older are typically required to make annual distributions from their retirement accounts (though distributions for 2009 were suspended). The distributions are included in their federal adjusted gross income and are taxed as such. The charitable IRA rollover lets taxpayers make donations directly to charitable organizations from their IRAs without counting them as income and paying federal taxes on them.

State taxes are a different story, says Eric Abramson, an estate and charitable planning adviser in Paramus, N.J.

"There can be a cost on the state income-tax level, and for a large gift it could mean a substantial income-tax hit. It's important to bring this to the client's attention and make sure the cost is quantified and handled appropriately," he says.

Overlooking state taxes could have wider implications for national charities such as the American Red Cross or United Way, where donations are already suffering from the strained economy.

"The last thing nonprofits need is to face the wrath of an angry donor who wasn't informed," says Jonathan Gudema, a planned giving consultant with Changing Our World Inc., a fund-raising and philanthropy consulting firm.

Many organizations, including The College of New Jersey and Overlook Hospital Foundation in Summit, N.J., state clearly in marketing materials that benefits apply only at the federal level.

"We find many of our donors are willing to pay the small price that this might increase their income taxes to reduce the assets held in a retirement plan," says Kenneth Cole, senior director at Overlook. "In some cases, IRA assets are the only funds they have to make a charitable gift."

Other charities have steered clear of handing out financial advice altogether.

"Legally and ethically we can't put ourselves in the position to dispense financial advice," says Ted Mills, associate director of gift planning at Princeton University. "We tell our donors twice or even three times to review any important decisions with financial advisers."

(Shelly Banjo is a Practice Management and Getting Personal columnist who writes about wealth management and philanthropy; she covers topics including the business of financial advisers, investment strategies and charitable giving. She can be reached at 212-416-2242 or by email at shelly.banjo@dowjones.com.)

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)

Planned Giving in the news - WSJ reports on NJ Taxing of IRA Charitable Rollover Gifts

2009-12-30T11:33:00.003-05:00

I am feeling a bit like the grinch.

I totally missed this issue of New Jersey taxing IRA charitable rollover gifts for 4 years. Then I hear a top attorney mention it in passing, put it on my blog, a conversation with a nice WSJ reporter (thanks for the quote!).... My guess is that there will be people paying taxes that might have just been overlooked - now that the Wall Street Journal reported on it.

Here is the WSJ story:

http://online.wsj.com/article/BT-CO-20091229-706347.html?mg=com-wsj

Just to understand this issue, a NJ accountant confirmed for me that NJ does not defined adjusted gross income (AGI) in the same way the IRS does (Most states do follow the IRS in this regard). And, yes, NJ requires you to add any IRA withdrawals (qualified IRA charitable rollovers or not) to your NJ AGI. NJ state income taxes range from the 5% to 6% for medium to semi-high income earners. 8% to over 10% to higher earners ($150,000 to $500,000 and up).

So we are talking about real dollars out of donor's pockets. The one NJ charity I asked about this (who did promote it but carefully stated that it only avoided federal income tax) said they informed everyone and they had not problems.

I hope that's true - now that the cat is out of the bag. What I mean is that this quirk in New Jersey's tax law, which for all I know could be unique among the states, was relatively unknown. Maybe your accountant would have been aware of it but why would you need to tell him (all accountants are men, right?)? And, if there is not an automatic reporting mechanism from IRA custodians to NJ tax authorities (like there is to the IRS), how would anyone in the NJ taxing authority know to go after the tax if not voluntarily reported.

What I am getting at is that this quirk was ripe for everyone to ignore and not pay any state income tax on IRA charitable rollovers. If was an unknowing donor of such a gift, knowing that I get no new charitable deduction, I wouldn't bother telling my accountant.

But now, me, the grinch, stirs up the pot, the WSJ picks up the story, and now accountants in NJ will be on the look out for these "gifts" to add them to your NJ AGI.

Or maybe not.

Happy holidays!

New York Times - Great Editorial on Estate Tax Shenanigans

2009-12-29T15:18:00.004-05:00

When I read an article or opt ed piece and I agree with every word, it deserves a post:

http://www.nytimes.com/2009/12/28/opinion/28mon1.html

This one is right on point about the impending estate tax repeal in 2010 and the political process. Nothing further needs to be said.

Planned Giving Articles - Et tu, New York Times?

2009-12-28T12:34:00.005-05:00

I better start reading the New York Times because I am almost missed this one by about two months.

The link is below but here is my introduction:

It's about the National Heritage Foundation (NHF) bankruptcy situation. The article starts out bemoaning the fact that NHF had to take $25 million of its Donor Advised Fund (DAF) money to settle with its 107 gift annuitants. Then the article moves into a loose discussion about gift annuities. Check it out if it interests you but please see my after-article comments below

http://www.nytimes.com/2009/11/12/giving/12FUND.html?_r=1&scp=1&sq=national%20heritage%20foundation%20gift%20annuities&st=cse

I was asked by a friend today about a line in this article that made a board member nervous.

I am going to try and keep my comments ask kind as possible. The article's beginning leaves out one crucial legal fact: DAF money is considered from a legal point of view to be TOTALLY and COMPLETELY UNRESTRICTED. That's the deal - sorry DAF donors. If the charity runs into financial trouble (like NHF did), DAF money is TOTALLY AND COMPLETELY AVAILABLE. Period. If the DAF donor doesn't like it, then start a private foundation.

That is why the legal cases of most of NHF's DAF donors were thrown out of court. It doesn't excuse any fraud committed by NHF in obtaining those donations.

Secondly, my problem with this article is that it seems to be pitting DAFs as the good guy and CGAs (gift annuities) as the bad guy. Or maybe not. I actually know the author, and I think she is a great writer, but something tells me that the editors messed this one up. I really couldn't respond to the question I received this morning because I had no idea where the article was going.

Third point - this is a quote from the article:

Faced with shrunken endowments, charities are seeking to bolster giving by heavily marketing gift annuities, emphasizing the income stream they offer.

The article offers no proof of this statement and if you asked me, I would say the opposite. I think charities have slowed their CGA marketing out of fear of the liabilities they are dealing with. Getting new annuities is actually a good idea for a basically healthy program but it has nothing to do with NHF or the initial part of the story.

There was an interesting story there - it just never came out. It is interesting to note that DAF money was used to pay off CGA donors of a charity going into bankruptcy. What was also interesting was the fact the CGA donor mentioned actually received back $131,239 from his initial CGA gifts of $235,000.

Considering what Madoff investors, as well as other ponzi scheme investors, will receive, I think the NHF CGA donors did pretty well. I am guessing that this donor got to keep his initial charitable deductions. He was barely out of pocket if you think about it. The story should have been how CGA donors had a right to receive something in the bankruptcy - and obviously were in a decent place in the line.

Something about the whole article bothers me - is it only me? Isn't there lack of focus? No wonder a board member is pulling a quote from the piece to cause some trouble. It took me a few minutes to figure out what it was talking about.

Holiday Greetings - December 31, 2009

2009-12-24T16:38:00.003-05:00

With all of the focus on health care, Congress will apparently let the estate tax lapse.

They also let the standard end of year tax extender fall off the radar, too. There goes the IRA charitable rollover, for now.

Oh well.

RE: the estate tax. Some victory against the death tax. What the idiots crying about the so-called death tax never say is this:

#1 - in 2010, estates will start paying capital gains tax on capital gains over $1.3 million (we had an unlimited step-up in basis at death until now). Who knows, maybe this will generate more money for the government than the dreaded death tax (at least it will tax less wealthier decedents). The government tried taxing capital gains at death in 1976, apparently it was a disaster from record a keeping point of view and was quickly repealed. The big problem is determine the basis (ie..the starting point for starting the cap gains tax on so-called profits). The rule is that if you can't determine the basis, you are supposed to assume a zero basis (ie...apply the tax to 100% of the value of the asset).

#2 - Impact on charitable bequests: Most charities receive their bequests these days from non-estate tax paying estates (ie..estates under the $3.5 million exemption). Sounds like the repeal of the estate tax won't affect charitable bequests. The only problem I see is that when you break down the estate tax filing numbers reported by the IRS, you find a very high percentage of annual bequest dollars coming from the larger, higher estate taxed estates. My theory: the $5 million+ estates do use attorneys in efforts to avoid estate tax; a lot of lawyers might advise their clients to not bother with their charitable bequests without the incentive to avoid estate taxes (at least for 2010). It will be interesting to see if there is an impact or not on the overall numbers for U.S. bequests.

#3 - At the rate Congress moves on this issue, January 1, 2011 will be here quicker than you think. Probably without an adjustment to the estate tax laws, and the law will revert back to 2001 law: $1 million exemption and highest bracket of 55%. In other words, with inaction, Congress will bring us back to the good old days where my dad might start worrying about estate taxes again. Not so bad for charities if you ask me - might fuel another growth period in planned giving.

I guess we are headed for bedlam in estate tax issues for a year or more.

To think I was able to write this while my 4 kids are all over me is a mystery! Please forgive the typos and enjoy the holiday break.

Jonathan

Planned Giving Legal Tidbits - Bequest Pledges

2009-12-23T14:16:00.008-05:00

This post is one that I've been itching to write since last week. Please read it carefully and think it over (even if you are not a New York fundraiser - these discussions are always relevant and they at least give you something to ask counsel in your own state)

I mentioned in the previous Legal Tidbits post that pledge agreements in New York that involve naming recognition are legally enforceable, binding commitments. Technically binding out of one's estate, too. And, naming recognition would include a named scholarship in addition to an actual name on a plaque somewhere.

The follow-up question I had as a direct result of hearing this info is what about bequest pledges where the naming only takes place upon the receipt of the pledged funds at death?

Surprisingly, top notch counsel said that case law in New York supported what he termed a contract to make a will as also being a binding obligation upon the parties (namely the estate to pay the pledge).

In legal terms, we are looking for consideration (more simply understood as value exchanged) in a contract context. New York courts not only agree that receiving a named honor in exchange for a pledged gift is consideration to create a binding contract, but the courts agree that a pledge to include a charity in your will that creates an agreed upon naming honor when the bequest matures (gotta love planned giving talk) is also a binding agreement (albeit contingent on both sides fulfilling their promises).

What I am getting at is that in New York, a pledge agreement whereby the donor agrees in writing to include a charity in his or her estate plan in some form or another to receive a naming honor at the time funds reach the charity is ENFORCEABLE as a binding pledge (whether you are included in the estate documents or not).

Long sentences, I know, but you have to say wow.

Sign on the dotted line and it's a gift? One of my clients - closing this fall alone over $5 million of these - said they didn't plan to actually list these commitments on their books. Funny thing - from both the accounting and legal points of view, they should be on the books.

OK, I would advocate some substantiation - like are we really in the will or does this donor really have these assets or is there an estate fight brewing. I would keep these for older donors generally. But, they are not only good planned gifts, but they are bookable (at least at present value).

Stay tuned for part 2 about bequest pledges entitled Don't try these at home. Just a word of caution before you go out and have hundreds of folks sign up.

Planned Giving Legal Tidbits - Pledges and State Tax Implications for IRA Rollover Gifts

2009-12-16T15:17:00.004-05:00

I just returned from the annual planned giving quiz given by one of my favorite planned giving lawyer/guru in the field (He doesn't use the internet so I'll leave his name out but it should be pretty easy to figure out).

I learned two ideas - really important ones.

1. New Jersey will tax your New Jersey donors for making IRA charitable rollover gifts! Income tax, that is, on the IRA withdrawal.

That's what I heard. It's really too late to do anything about it if you have been encouraging donors from this state. It has to do with the fact that New Jersey doesn't offer a charitable income tax deduction... New York and Connecticut are fine.

I am wondering if there is a mechanism for New Jersey tax authorities to be notified when someone makes an IRA rollover gift?

My suggestion: cross your fingers regarding the past; confirm for the future (if it gets extended again) and put a caveat on all of your marketing materials that mention this option (especially if you are a NJ charity or have a lot of NJ prospects).

2. My favorite planned gift this year is the irrevocable bequest pledge. Why? Well, let's say that with life income gift business down, I can still look to many millions of closed gifts with these arrangement this past year.

Yes, the person sitting to my right today was from an Ivy League school which has a policy to do no binding pledges - fine if you are in the Ivy League. And, yes, they are tricky - and quite often very problematic when they mature.

Here is what I learned: in New York, all "naming pledges" are legally binding, including named scholarships. That might seem like an obvious point but hearing it from a top attorney puts it on another level for me. You don't need particularly special language - just something in writing where the charity says that it will name something in exchange for this gift.

Of course, the repercussions of this point can be negative. The problem that occurs is when a donor agrees to give the money for some naming opportunity, most often no one has the chutzpah to ask about the source of those funds. Technically, once the pledge is made, the donor (in theory) can't have his or her private foundation pay off that pledge.

The other long standing issue with all pledges, particularly one's that are likely to be fulfilled from someone's estate, is their enforceability. It's a nightmare if you are not actually named in the estate.

A topic for future posts.

Underwater Endowments Training in New York

2009-12-10T13:10:00.000-05:00

I have to admit that I am a bit of a cynic when it comes to educational programs. Usually, the speakers are going over things I know already and frankly, I am part of the ADD generation with about a 3 second attention span.

So, when I got ready to attend the NYC bar's 3hr presentation on Underwater Endowments (held last week), I packed plenty of snacks and extra reading material.

I've written on the topic, organized several presentations on it. What else can I learn except: when is New York going to pass UPMIFA!?!

I was wrong. I am going to use this opportunity to list some very important facts that I picked up (please go to previous posts on UPMIFA for background). All of these points are specific to New York (especially since New York still maintains the old UMIFA) but I still recommend that non-New Yorkers look over these tidbits because they are definitely food for thought.

1. When does an organization have an affirmative duty to literally restore an underwater endowment to its historic gift value (ie..put real money into the endowment account)?

I used to think this was an accounting canard. Wrong I was - at least partially. In New York, the AG says that if a permanent endowment goes below its historic gift value due to application of the org's spending-rate policy, then it does have an affirmative duty to replenish the endowment! On the flip side, if you can attribute the drop to market depreciation, you don't have an affirmative duty.

Wait a second. This doesn't make sense. You apply your spending rate, there is nothing wrong with that when you are not underwater. Then the market tanks and the fund goes negative. When is it the fault of the spending rate and not the market? A question I should have asked. It seems that the AG takes the position that if the market appreciation generally lagged behind the spending rate, the board should have adjusted the spending rate down to prevent the fund from going underwater. In other words, it's pretty murky in New York when to blame the spending rate vs. the market decline.

Advice for all boards (in UMIFA or UPMIFA states): watch the funds, know the original funding amounts of each fund, be aware of long term goals of each fund, spend less to extend life of fund of each fund when need be.

2. Have you ever had auditors or accountants claiming that you have bring back the permanent endowments to their historical gift value on your financials (aside from the NY AG's approach mentioned about but from an accounting point of view)? To me, this was part of the accountant's canard mentioned above. It turns out that there is some truth to this (and this may or may not apply to apply to UPMIFA states, too).

The accounting principals require that on your books, any underwater permanent endowments must make up the deficit from other assets on your books (ie..unrestricted assets).

Practically, this does not mean transferring funds from unrestricted accounts to the permanent endowment accounts. It means that the books have to allocate unrestricted assets towards the negative balances, all on paper though.

So if its only on paper, what's the big deal? The big deal is that underwater endowments drag down your bottom line net assets which might violate debt covenants (agreements with lenders to ensure that the organization maintains a certain level of assets).

Two solutions to this problem are: 1. try to make sure debt covenants are drafted to exclude the negative impact of underwater endowments; and 2. your financials should show negative underwater balances as separate and explained items.

3. I know New York is peculiar but the current proposed form of UPMIFA is a real doozy. There was some excitement that NY might include a presumption that greater than 7% spending rates are presumed to be imprudent. Not such a big deal to me but charities should rather do without it (still, my advice is to take the new law regardless of this provision).

The doozy though (for the proposed NY version) is a 90 day check the box provision. What's this??? UPMIFA, if passed as currently proposed in NY, would require all charities with living permanent endowment donors to send a letter to those donors giving the donors 90 days to decide whether the donor wants his or her fund to follow UPMIFA or to stay with the old UMIFA law. Actually, the wording is really screwy and assuming the law requires charities to use the law's language in the letter, it will give donors the impression that their choice is between the charity spending their entire fund (new law) vs. maintaining their fund (old law). Yikes for New York charities.

4. Incorporating in Delaware (or wherever) may actually help avoid NY's insane laws regarding endowments. When I heard this, I made them repeat it. According to the big shot attorneys on the panel at the bar conference, for these purposes only, the state of incorporation would control. This is a good question for your general counsel but some New York charities may already be off the hook in this area if they were incorporated in other states.

5. NY's proposed law, and included in other state versions, has an escape clause for older, smaller endowments. The uniform version of UPMIFA included a provision for less than $25,000 and older than 20 years permanent funds. It permits charities upon notice to their AG (90 days to protest) to release or modify restrictions if the purposes are unlawful, impracticable, impossible or wasteful. NY's version increased this old endowment escape clause to $250,000! I know NJ included a $250,000 version of this clause, too! NY's proposed version requires notice to living donors - not sure if this applies to other state versions.

I would say that if this law gets passed in NY, and certainly the 42 other state that have passed a form of UPMIFA, it would be time to clean up all of those old, out dated endowments.

For non-New Yorkers, check your UPMIFA (if you have it).

Happy Thanksgiving, New York Style

2009-11-25T16:03:00.002-05:00

Happy thanksgiving from Andrew Cuomo, NY Attorney General, that is.

I've been home with some sort of flu for two days and I wanted to wish everyone a happy thanksgiving. I couldn't resist sharing the following ethical quandary facing Cuomo - a story New Yorkers know all too well:

http://www.youtube.com/watch?v=x2vlARdBGzY

For years, these guys (the UHO tables through NYC) raising money for the "homeless" have been aggressively after everyone walking by. They are collecting for the homeless - themselves, that is. Problem is that they have official sanction as a legitimate charity and they are not quite what we expected.

Basically, a guy figured out a way to professionalize begging in NY. I actually like it better than the non-professional beggars who can sometimes come across as threatening.

In NY, everything like this is about politics. Cuomo might have picked the wrong target this holiday season as it makes him look like a scrooge.

Planned Giving Ethics - Merrill Lynch Case Part 1

2009-11-23T14:52:00.003-05:00

As mentioned last week (see http://plannedgift.blogspot.com/2009/11/planned-giving-nightmare-crt-case.html), there was a recent court ruling out of the State of Delaware regarding a really botched charitable remainder trust situation.

Rather than trying to review the entire case in one post, I plan on writing short posts related to the many ethics issues raised in the case. In other words, I think the case itself is great for training purposes - getting accustomed to the nuances that we planned giving officers should be aware of, but the ruling itself should have little or no impact on the field.

If you try reading the case (http://courts.delaware.gov/opinions/%28jt5l5vngapjgmyzobwkq5ejj%29/download.aspx?ID=126540), you'll see some nice biographical info on the victims but here is my short version (at least the relevant facts):

Husband and wife (she is 75 and he is 10 years or more older) save over $800,000 in Esso/Exxon stock from his career, their nest egg. At some point, the husband comes to rely on a Merrill Lynch broker and instructs his wife (not typically involved in the family finances) to stick with this guy's advice when his health starts to deteriorate. Sadly for this family, the wife listened to her husband on this issue and followed the advice of the Merrill broker to put their entire Exxon stock nest egg into a 10% Charitable Remainder Unitrust, income for lives of husband and wife, and then to their 3 children, before eventually distributing remainder funds to 5 charities in approximately 50 years. This was finalized in 1996, before the 10% remainder rule came into effect - their deduction on this $840,000 CRUT was less than $10,000.

The first lesson: A Merrill Lynch stock broker, or any other stock broker or insurance salesman or financial planner, is NOT YOUR ESTATE PLANNING ATTORNEY. Even if he has a law degree or even practiced estate planning law. He (or she, too) is a salesman who is selling products or investments. Your attorney is someone who represents only YOUR interests, not the interests of the commissions to be had from selling various products to you.

In other words, beware of Merrill Lynch guy's estate planning advice.

In truth, this also applies to planned giving officers.

The take way for planned giving officers is to remember and communicate that donors need independent counsel, their own attorneys, to review various plans that have any impact on a donor's estate. Educate your donors not to rely on you or their Merrill Lynch stock broker for estate planning, especially significant parts of an estate.

To be continued.

Welcome to New Readers and Thanks for Your Feedback

2009-11-20T13:13:00.004-05:00

New readers - thank you for joining the email update list!

And, thank you to those who have sent me feedback, which has been mostly very positive. I am trying to make this a useful program for training, info sharing, insider perspectives and your feedback is always welcome (positive or not!), and I am appreciative of everyone who sticks with it.

I am reorganizing the blog as a Wordpress site as it will help me better organize old posts, under the name The Planned Giving Blog - here is the "beta" site if you are interested: http://theplannedgivingblog.wordpress.com/ For now, I will be posting on both locations but will eventually move over the email update list to the new site.

Thanks again for keeping up with the blog and have a great weekend!

Planned Giving Nightmare CRT Case

2009-11-20T12:19:00.004-05:00

This new legal ruling is for the die hard planned giving folk out there:

http://courts.delaware.gov/opinions/%28jt5l5vngapjgmyzobwkq5ejj%29/download.aspx?ID=126540

I haven't spent enough time on it to give readers my summary and my uptake but from my first glance, it's a real doozy of a fact pattern.

Here is a glimpse and a quote from the introduction of the opinion: A Merrill Lynch broker

"advised an elderly woman to place most of her life savings in a charitable remainder unitrust with a 10 percent annual payout, lifetime gifts to her children as successor-beneficiaries, and the remainder to go to five charities, an event expected to occur almost half a century later -- objectives that all now seem to agree and understand were unrealistic and likely unattainable. In the spirit of cross-selling, a trust company sister entity of the brokerage firm was designated trustee. Legal advice was provided by an attorney selected by the brokerage firm; the attorney never even spoke with her client, the trustor."

I think this case will be a spring board for a series of blog posts on ethics in the planned giving area!

Planned Giving Challenges - Source for CGAs in IRS Code

2009-11-18T22:56:00.004-05:00

One of the most annoying challenges you may face as a planned giving professional is an attorney or an accountant of a donor who is requesting the source in the IRS code for charitable gift annuities.

What makes this such a difficult question (besides the fact that an entire industry uses these things - they work and are accepted!!) is that CGAs were not a one time creation under the IRS Code like charitable remainder trusts. So, we can not point to one CGA section in the Code.

Anyway, I got this question this week and I wanted to go through the roof. At first, I scanned and emailed the entire chapter on CGAs from Tax Economics of Charitable Giving (lots of sources to look up quoted by them). But, I also called a top planned giving attorney to see if he had the info handy. Sure enough, the question was common enough that he went right through the 4 primary sources in the IRS Code and Regulations for CGAs. Here they are:

Section 642(C)(5) – the definition and basic rules for CGAs

Section 501 (M) – Exempts CGAs from being treated as commercial insurance products (as long as the charitable deduction is greater than 10% of the gross gift amount)

Section 72 – This section really deals with commercial annuities but is also the source for how the “tax-free” portion of CGA payments are determined. (note: even though 501(M) says CGAs are not commercial annuities, the code has no problem using section 71 on commercial annuities to help define income issues with CGAs even though they are not supposed to be commercial annuities!)

Regulation 1.1011-2(b), example 8 – This example in the regulations has been an important source for 40 years or more for how CGAs work and how the code treats them as Bargain Sales and this in turn helps us determine the charitable deduction.

I would bookmark this page or print it. Someday you'll need it.

Planned Giving Risk Management

2009-11-17T09:59:00.008-05:00

As I mentioned a few days ago, I had a conversation last week with Bryan Clontz, who I now consider the leading CGA risk expert in the country. If you followed my previous discussion on this topic, you should know that I've had doomsday concerns over the whole CGA business for some time.

You have to do some risk analysis on your CGA program! Especially if your entire CGA pool/reserve fund is just meeting New York's reserve requirement. According to Bryan, who confirmed my own guess-work, the New York reserve requirement is essentially the funds needed to cover the payments to the annuitants. The gravy to the charity are the funds above the reserve. (If you are not licensed in New York, and don't have such requirements, find out what it would be if you were licensed)

In other words, if you are struggling to meet New York's reserve requirement (going up again this year!), you potentially have an even bigger problem: your program might start losing money!

Maybe it's time to rethink your policies visa-vi how much you pull when a donor dies or whether you should issue annuities for related institutions or whether you should allow donors to designate the remainders of their CGAs?

Here is a link again to Bryan's site: http://www.charitablesolutionsllc.com/index.html I don't know if there is anyone else out there who can do a full fledged, professional risk analysis. Yes, he sells reinsurance - but contrary to popular planned giving thinking, reinsurance is an important option for gift annuity programs dealing with risk issues. I do my own "risk analysis" for clients but if my simplistic charts show too much red, I am sending you to Bryan.

Bryan gave me another great piece of "news" (at least news for me). Met Life very recently obtained an approved New York State reinsurance treaty.

Why is this important?

Up until now, only The Hartford was known for having the proper "treaty" in New York that would allow a charity to re-insure and not need to reserve on the re-insured portions of CGAs. Not that I don't love The Hartford, but it's always good to have price competition.

Interesting Planned Giving Marketing Research

2009-11-17T09:13:00.003-05:00

If you haven't seen my friend Phyllis Freedman's blog, the Planned Giving Blogger, here is a link to her most recent post about a study by the Indiana U. Center on Philanthropy:

http://plannedgivingblogger.wordpress.com/2009/11/16/no-gender-differences-in-legacy-giving/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ThePlannedGivingBlogger+%28The+Planned+Giving+Blogger%29

I highly recommend her site as it focuses on the marketing side of planned giving, arguably more important than the legal side (which I get into).

Interesting PGDC Article on Gift Restriction Law Suits

2009-11-13T12:53:00.004-05:00

I highly recommend this piece from the Planned Giving Design Center for some background and perspective on donor restricted gifts. I heard one of the authors (Winston Smith) speak on this topic at a previous NCPG conference.

http://www.pgdc.com/pgdc/the-unraveling-donor-intent-lawsuits-and-lessons

My rough guess is that 99.999% of the time, charities that veer from their donors' intent on restricted gifts are never held accountable. Of course, it is really painful when your organization gets embroiled in one of this problems. Trust me, charities never win these things.

My advice: Fundraisers and non-profit executives need to be cognizant of these issues when accepting restricted gifts. You might actually enjoy the article, too!

New Planned Giving Option (for me, at least)

2009-11-12T14:17:00.005-05:00

A few weeks ago, an old friend emailed me a chart comparing a charitable gift annuity versus the donor buying a single premium immediate annuity (i.e. commercial annuity) and donating the savings to your organization.

The chart was startling. It compared a $1 million CGA for a 74 year old, 6.1% ACGA rate, against the same donor buying an immediate lifetime annuity to obtain the same $61,000 annuity. It said that the donor could buy the $61,000 annuity for $435,000, leaving over $565,000 for an immediate gift to the charity.

On its face, everything seemed to make sense and in fact, it made me wonder if the ACGA rates were so low that it didn't pay for donors do CGAs anymore!!!!! (just do this deal).

This was another one of those moments when I am wondering if planned giving will be a viable career in the future for me!

My response to the friend was that it seemed legitimate but let me obtain some independent quotes to verify the numbers they were talking about.

And, today, I just happened to receive the quote on this scenario and was also speaking to Bryan Clontz (http://www.charitablesolutionsllc.com/index.html), probably the top expert in CGA risk and reinsurance. Both the independent quote and Bryan confirmed that the chart was flat-out wrong in the quote it was using.

The cost buying a $61,000 lifetime annuity for a 74 year old was not $435,000, it was more like $565,000 or more. There goes the dream gift scenario.

Couple lessons learned.

#1 - Something that is too good to be true, is really too good to be true (i.e. it's false!). Keep digging and you'll figure it out what the catch is.

#2 - Always, always get quotes from independent sources.

#3 - Despite the false quote and misleading chart, the option of having a donor purchase a commercial annuity directly from a commercial annuity provider and then the donor gifting the difference (between what the donor might have given for the CGA and the actual cost of the commercial annuity) is a REAL GIFT PLANNING OPTION!

I like to say that I have worked on almost every possible gift arrangement out there but apparently not this one!

When would this be appropriate? According to Bryan Clontz, this option is used in limited circumstances like when the donor is from a state where the charity does not want to deal with their licensing requirement (like California or New York). Maybe when reinsurance is not an option and the gift is very large.

Bryan mentioned one important point - which tipped me off that the chart I had was just wrong. He said that the swapping of a commercial annuity instead of a CGA generally gave the donor a slightly less deduction. On the chart given to me, the donor's deduction was over $100,000 greater with the commercial annuity option. That is how I figured out that whoever created the chart I was looking at had probably switched the cost of the commercial annuity with the left over charitable gift amount.

But, the good news is that there is another option out there to look at depending on the situation. I would only use this option very sparingly since it could leave the charity out in the cold if the donor loves the deal he/she is getting from the commercial annuity, so much so that he/she forgets the charitable gift part!

Here is link to Bryan Clontz's article on the Planned Giving Design Center which includes discussion of this "new" gift planning option (option #4 in the article):

http://www.pgdc.com/pgdc/charitable-gift-annuity-reinsurance-part-ii-the-top-10-creative-solutions-turbulent-times

The article is very good but if you follow the link to Bryan Clontz's website (see above) and check out his library of articles, you will find even more in-depth material on this gift option and more.

Jeffry Picower Will

2009-11-11T10:34:00.002-05:00

Ever look over the will of a billionaire? Someone facing claims of billions of dollars by a trustee in bankruptcy. Click this link (thanks to the New York Times):

http://graphics8.nytimes.com/packages/pdf/business/20091110picowerwill.pdf

What a strange story. Jeffry Picower was facing gargantuan claims (with a pretty good defense for withdrawals older than 6 years).

He signed a new will on October 15, 2009.

He died of a heart attack in his swimming pool on October 25, 2009.

What is most fascinating to me about this will is how many employees were set to receive bequests, as long as they were still employed by Mr. Picower at the time of his death.

The whole story sounds too incredible to be true. It seems too planned. It can't be life insurance motives - doesn't make that much sense to me since he was really rich. Or, maybe life insurance proceeds from irrevocable life insurance trusts would be the only funds completely free from potential clawback?

If he did have any big life insurance policies, and I was the investigator for the insurance company, I would be looking into this! Maybe he signed his new will, cleaned up his affairs, and stopped taking his heart medication. Who is to say that the trustee wouldn't be able to go beyond the 6 year limit since Picower was as close to a co-conspirator as you get.

UPMIFA in New York

2009-11-10T16:27:00.002-05:00

For New York charities with permanent endowments, this week might be a time to call your New York State legislators and plead for action on UPMIFA (see below older posts for more info).

I received an email yesterday looking for guidance on UPMIFA in case the New York State Legislature actually has a regular session next week. The original email came from the Commission on Independent Colleges and Universities in Albany, NY. It was pleasure see that at least one organization was on top of the issue and pushing for this law to fix lingering endowment issues from the market crash.

43 states have already enacted UPMIFA. Hard to believe New York lawmakers would ignore the plight of many of their top universities and major institutions still dealing with frozen endowments.

http://plannedgift.blogspot.com/2009/06/underwater-endowments-in-new-york-and.html

http://plannedgift.blogspot.com/2009/07/harvard-not-going-under-massachusetts.html

All's Well That Ends Well

2009-11-10T13:03:00.005-05:00

According to the New York Times, Jeffrey Picower's will is "expected to be filed" today (Tuesday). The legal wrangling around the late Mr. Picower's estate should provide us with plenty of insight into clawbacks and how they may effect charities and others.

Here is a link to the New York Times piece:

http://dealbook.blogs.nytimes.com/2009/11/09/trustee-may-win-billions-for-investors-in-madoff/

From reading this story, it sounds All's Well That Ends Well. Madoff is off brawling with drug dealers in jail for the next 150 years and the Picower estate is already negotiating with trustee Picard (hard to believe Picower only passed away a little over two weeks ago). If the estate can successfully negotiate a settlement with Picard - which they appear likely to do, then any speculation about third party beneficiaries of Picower's philanthropy would be mute.

My hunch is that Picard's clawback lawsuits will only go after direct beneficiaries of Madoff's operations, and only for large amounts (hundreds of millions and up).

The Great Fall of Gift Annuities

2009-11-05T11:52:00.009-05:00

Say it ain't so!

The sky might be falling (on gift annuities), or it might not be.

I think it is reasonable to say that planned giving and fundraising professionals see gift annuities as the primary planned gift we are "selling" these days and its been that way for over 10 years (regardless of the never changing fact that bequest dollars generally overwhelm all other planned gift dollars by far).

But it wasn't always the case and it probably will not be the case in the future. The question is only when will the shift take place? A change in the field away from gift annuities may be sooner than you think.

Background

Pooled income funds were the planned giving chic of the 1980s. Why? Interest rates were sky high - over 10% much of the time. A good friend of mine even wrote a manual about setting up and running pool income fund programs (I found multiple copies of it lying around the UJC offices, written on a typewriter, pages melded together after a decade or more of sitting unused on the shelves or in boxes, gathering dust).

Their downfall: interest rates eventually dropped and other vehicles offered donors higher fixed rate or annuity returns.

Charitable remainder trusts (CRTs) were chic of the 1990s. Why? In addition to offering donors fixed rate/annuity payments, capital gains avoidance coupled with financial adviser self interest in retaining investment management control over their clients' assets caused CRTs to rule the planned giving world.

Their downfall: big slowdown in capital gains avoidance (i.e. stock market crashes) coupled with the discovery of easier, cheaper, fixed income, better tax-treatment CGAs.

So CGAs rule the roost, for now. But, where are the cracks in their lead position in the planned giving world? This blog has already touched on some of the potential for underwater gift annuity programs (http://plannedgift.blogspot.com/2009/06/gift-annuity-risk.html) and other serious issues with gift annuity pools and the challenge of finding good administrative services (http://plannedgift.blogspot.com/2009/07/gift-administration-revolving-door.html). And, as a consultant working with a few national charities, I can say that CGA licensing across the country is a bear! These facts alone should probably scare off most medium and smaller charities from getting in or staying in the CGA business.

And, how can we forget the recent Warfield case (Robert Dillie ponzi scheme) from the U.S. Court of appeals, with a new specter of investment/SEC regulation hanging over the head of CGAs again. (see http://plannedgift.blogspot.com/2009/08/important-legal-ruling-impacting.html)

Why this post and why I am announcing that the heyday of CGA programs may really be over?

In a conversation with one of the most prominent planned giving attorneys in the field this morning, my eyes were further opened to additional colossal problems that CGAs are facing as a result of the Warfield case.

I personally had sent a copy of the Warfield case to this attorney early in the summer, when I was claiming that the sky was falling on CGAs. He didn't read it carefully until a few weeks ago and his reaction was what I feared.

Here is the colossal problem. The Philanthropy Protection Act (PPA) of 1995 provides exemptions from various securities regulations for all types of charitable funds/investment pools (including CGAs, of course). One caveat was that CGA funds/pools in particular would not be exempt if they were sold with commissions.

What I couldn't figure out about the Warfield case was why didn't the court just cite the PPA, note that the parties in that case were selling CGAs with commissions, and just conclude that they no longer had the exemptions of the PPA. Why the analysis of CGA marketing and other practices to determine that CGA agreements were investment contracts? And, as one critic to my posts on the topic noted - since charities sell CGAs WITHOUT commissions, wouldn't the Warfield case have no impact on the good guys anyway?

I heard the answer to my question this morning from one of the best attorney in this area. It is a very subtle point, easy to miss. The PPA exempts charitable FUNDS, pools of investments, from various SEC regulations if you follow the disclosure rules found in the PPA itself. The PPA did not address, or exempt, CGAs from being considered investment contracts. That actual decision is one that generally falls under state law jurisdiction over contracts (even though the real scary investment laws are the federal ones).

This needs repeating so that readers won't miss it: CGA contracts are not exempt by the PPA from being considered investment contracts by any court, the IRS or Congress. And, the U.S. Court of Appeals (second only to the U.S. Supreme Court) very easily determined that CGAs were investment contracts (regardless of whether they are sold with commissions or not).

The ramifications: In theory, CGA contracts need to follow all of the disclosure requirement of investments. In theory, there could be investment licensing issues for charities and/or planned giving/fundraising professionals who sell these investment products. In theory, CGAs could really be sitting ducks for disgruntled families once your CGA donors pass away - assuming they pick a sharp attorney.

And, to top it all off, the word out there in the planned giving legal universe is that the IRS is sitting on a letter ruling request addressing whether CGA programs can offer CGAs in which the contract specifies another charity (related or not) as the ultimate remainder beneficiary (common among community foundations, Jewish federations and large university/hospital systems).

Not that this narrow question of issuing CGAs for other organizations is that big - but it opens the door for some serious thought by the IRS, and maybe others in the government, as to this whole CGA business.

Honestly, CGAs have been under the radar of regulators for a long time. Except for a short time in the mid-90s with a class action price fixing suit against the ACGA that partially resulted in the PPA's enactment, gift planners have been somewhat free from serious regulations (besides annoying departments of insurance in NY, NJ, California and a few other states).

Yet, running a CGA program is harder than ever before (based on investment, administration and licensing issues). How about after the IRS finally puts some thought into this area and issues a letter ruling that may not be so favorable to current practices?

Put all of these factors together: tougher state licensing issues, concerns over investments and administration, faltering investment performance, and throw in the new investment contract issues. It is a recipe for the end of the CGA generation and on to the next chic planned gift vehicle.

I think it is just a matter of time before we start seeing another planned giving options as the favored child of the planned giving world. Maybe it will be the good old bequest - not like it ever really went out of style.

The Planned Giving Moment, Part 2

2009-11-02T10:36:00.004-05:00

One of our blog readers remarked about the previous blog post:

"made me realize that we keep doing ______ seminars because they work: he attracts about 100 older supporters--including some known planned giving donors--each and every time he comes. It's like fishing in a barrel and one of our most reliable sources of prospects and new donors. And the way it is conducted, also educational (no hard pitch), so entirely consistent with our mission."

I think the point is not actually about which seminar (that's why I left out the name of the speaker), but finding a venue at your institution that makes sense for your organization and happens to draw a planned giving crowd. I am not sure that the actual time of day of these events but he did tell me that they were doing another one tomorrow early evening. In Manhattan, I usually stay away from night time planned giving events but this one worked for them (maybe based on location, type of institution, etc..)

Part two of this concept of seeing the "planned giving moment" was inspired by another community college event I attended last week.

Working with different community college, I had my doubts as to whether this one could really step up their planned giving efforts past what that they had already accomplished.

Here is summary of their last 5-10 years of planned giving activity of the community college: a planned giving committee of board members with a few active members; launched a gift annuity program with limited success; and got off track during the last 5 years or so with focus on a building campaign.

When the development person (who spends probably less than 10% of her time focused on planned giving) told me that she was planning their first legacy society event, I felt the need to give her a bunch of my secrets to a successful legacy event (i.e. to avoid an embarrassing non-success - a subject for an upcoming post).

Actually, with not much help from me, the fundraiser did all of the right things for a first time legacy society event with a small society (around 10 living members). She created a very classy invitation, invited board members, faculty, and long term consistent givers. Picked a nice location (historic building on campus) and a good time for their location (2 to 4 pm) - easier without a full lunch - just coffee/tea and a few snacks.

To their credit, they also picked a beloved, long time professor (also a new member of the society) as a speaker on a topic that had nothing to do with planned giving or fundraising - just an interesting speaker on a topic of interest related to her teaching at the campus.

And, they "hit it on the nail" (i.e. they got everything right about the event). About 30 attendees (just right for the space), many knew each other for many years, really friendly, fun atmosphere, lots of good rah rah stuff from the President. Everyone got an award (for being a member of the society or long term giving).

The speaker also happened to be one of the funniest people speakers I have ever seen and was a walking advertisement for the campus.

Lastly, even though the president's campus update and the speech were the principal parts of the event, the planned giving message was broadcasted very clearly throughout and people really understood the importance of including the college in their estate plans.

It was definitely an event which those who attended will want to come back for more and the real start of their planned giving program.

And, amazingly, they had immediate "results." I hate to focus on immediate results because there are so many intangibles that are important about legacy society events (if done well). But, they were able to report an unexpected $5,000 check on the spot, a seven figure bequest revealed, and a few non-society attendees asking for meetings with development staff about becoming members.

And, it hit me again, the "planned giving" moment. This community college had a significant group of older supporters, professors, neighbors, etc.. who were ripe for this message and would come back regularly (if invited) and tell their friends. It has probably been there for many years but this was the first time they were taking steps past creating a committee and placing a few advertisements.

Find your "sweet spot" when working on a planned giving plan. Ask yourself about the relationships older individuals have with your organization. Figure out where you org serves an older crowd. Or, even devise a plan to get older individuals involved with your institution of it makes sense (mission-wise).

Years ago, I told a cutting edge outreach/educational organization in Manhattan to consider offering classes during the day (morning or mid-day) to see if they can develop a constituency of older attendees. The typical lectures they offered were of interest to retirees and seniors, too, so why not have a special program serving the elders in their community? They wouldn't listen to me - it didn't have enough ROI and they claimed that they needed to focus on younger adults. Too bad for that organization because they had a "product" of interest that they could easily have brought to an older crowd - all well within their mission - and start a planned giving program.

And, they would have provided a great service to the individuals attending the lectures for the planned giving prospects.

The Planned Giving Moment

2009-10-30T10:43:00.005-04:00

Not every organization has an obvious or natural planned giving constituency. We see it all the time in consulting. That is not to say “forget about planned giving.” Before making a conclusion as to your planned giving viability or not, you have to literally look around to see if there are places and segments within the framework of your organization that connect to potential planned giving segments of supporters and friends.

For example, while visiting an upstate New York, community college and after having discussed the various ways this campus could somehow infuse some planned giving into their fundraising program (not an easy task on a tight budget, tiny staff, pretty small and relatively young graduate base), our last stop was a special dining room run by their culinary arts program (just part of the campus tour).

As we approached the dining room, I noticed four planned giving prospects leaving the dining room for the elevator (i.e...four senior ladies who happened to look like they were really enjoying themselves). And, then we entered the dining room – passing very tastefully designed windows where spectators could watch some of the cooking and baking of the students.

Sure enough, the room was full of planned giving prospects enjoying their tasty meals in a great atmosphere (the dining room had been the dining room from a grand old hotel that was given to the school and now tastefully decorated and hanging various art works on loan on the walls). The staff told me that getting reservations for the once or twice a week lunch times was extremely difficult – it was a first call, first serve reservation system and it booked up almost immediately every week. It turned out that this dining room was a major sensation in the area for people of the right age, who get a wonderful dose of good feelings at the campus on a regular basis, and probably feel like the campus is a second home.

I turned to the chief fundraiser who I had been meeting with and told her that this is where her planned giving events needed to be and these are the people she needs to invite (in addition to older graduates, longtime donors, board, etc…).

This was my planning giving moment: when I saw clearly that this college had a special relationship and platform for connecting with their mostly older local residents.

You never know – you have literally look around at the happenings of your organization. You may have a natural planned giving group right in front of you.

At my first full-time job in planned giving at the Anti-Defamation League, I had a similar planned giving moment when attending a New York regional lunch/current affairs update – just another run of the mill ADL guest speaker talking about civil rights or whatever. For reasons unbeknownst to the planned giving staff, they started scheduling these for lunch (not the usual 8 am slot for busy execs). I walked in the door to the first one and lo and behold, a room full not only of planned giving prospects, but many of our actual planned giving donors in the room.

It turns out that the general fundraising staff lost patience pretty quickly with these “cultivation” events – all they saw was rooms full of older people, many taking home sandwiches but no new major gift donors.

My thought at the time: Excuse me short term thinkers – where do you think your 100+ new bequests a year and $4-$5 million+ in actual bequest dollars annually come from?

They discontinued these luncheon update events pretty quickly from what I remember. What a shame. For virtually no cost, and little staff effort, they could fill a room with up to 100 older residents of New York, mostly from Manhattan itself, on a monthly basis.

Were these people ever going to be major gift donors, if they weren’t already so? No.

Were they going to become annual donors? Maybe yes, maybe no.

But, were they candidates for 6 and 7 figure bequests? Definitely.

Beware of Dilettante Attorneys

2009-10-27T15:42:00.004-04:00

dilettante - noun: 1. An amateur or dabbler; especially, one who follows an art or a branch of knowledge sporadically, superficially, or for amusement only.

I just couldn't resist a post on one of the more ludicrous pieces of legal advice I heard about last week.

Art/tangible property gift - will be displayed (for three years, no less) but since it wasn't a museum and the piece had nothing to do with the institution, there were concerns whether this could qualify for related use and provide the donor with a full fair market value deduction (see other posts under Art and Tangible Property).

Initially, when this came up, I recommended - as I typically do for these types of situations - to get an opinion from outside legal counsel. Somehow, they ended up getting an opinion from one of the in-house lawyers from one of the planned giving marketing providers out there.

What was the opinion? The "lawyer" told this institution that since they planned to put the art work on the walls (ie..display it), it should be exempt as a furnishing.

OK, here is the reg section on related use which does exempt furnishings from this rule:

Reg. 1.170A-4(b)(3)(i)...If furnishings contributed to a charitable organization are used by it in its offices and buildings in the course of carrying out its functions, the use of the property is not an unrelated use.

I am not going to even bother to research if we can interpret this sentence in the IRS regulations to mean this - it's a waste of time because there is no way in ... that you can classify a work of art as a furnishing by virtue of hanging it on the wall (and rendering the entire related use question mute).

So here is the lesson. There are a lot of dilettante attorneys in the planned giving universe (some of whom have no clue what they are really doing). I am talking about people who have legal degrees but may never have practiced law, let alone anything remotely associated with estate planning or gift planning. They could be financial salesmen, consultants, in-house experts, etc... And, they could actually be providing very useful information and guidance.

But, when it comes down to a real legal opinion or drafting of a real legal document, the litmus test is whether this attorney is in the practice of law and has his/her malpractice insurance to back-up his/her work.

Using a lawyer, in the actual practice of law, is an insurance policy in case anything goes wrong. I used to draft all CRTs for the first in-house planned giving job I had. Then, as a legal consultant to Jewish federations across the country, I witnessed some very disastrous situations and the question always came down to: who drafted the trust? That is when I realized that trust documents and other truly legal things are best left to attorneys in the practice of law.

So, I am admitting - at least for now - you should put me in that category too since I don't currently practice law in a law firm. Pretty hard for me to write this but it has to be said. Be careful about your sources of information. Guys like me provide very useful educational information and we might even walk practicing attorneys through creating various gift plans. But, at the end of the day, I don't have the level of legal responsibility a lawyer in a law firm has.

The trick is to know when you need an actual practicing attorney and when you can rely on us "consultants." And, the other trick is to figure out when the advice is completely bogus. If it is too good to be true...

Madoff, Clawbacks and Charities

2009-10-22T15:15:00.015-04:00

For those in the philanthropic world, seeing stories in the press about the bankruptcy trustee in the Madoff mess and his attempts to recover assets has to make us wonder what will be with charities potentially involved in clawback suits. The Forward and Bloomberg have already started to mention this issue in recent articles (see below for links).

What about charities that withdrew funds in the normal course of business and happened to exceed their initial investment in Madoff? Or, what about non-profits that divested their Madoff or Madoff feeder fund investments well before the discovery of the massive fraud? Or, what about charitable beneficiaries of Jeffry Picower's Foundation during the last few years? (Note: Jeffry Picower passed away yesterday, another sad chapter in Madoff tragedy.)

Thanks to the law firm of Drinker Biddle, I now have some idea how claw back suits work (see below link to their article on the topic). Here is a summary of the rules based on the Drinker Biddle memo:

1. Charities have to be treated like any investor - there is no point in discussing the ethics of clawbacks against charities. The trustee has an obligation to recover funds for those defrauded, starting with the biggest and closest who benefited. Where is the logic or ethics in agreeing to allow a charity to benefit at the cost of other defrauded investors?

2. All withdrawals made within 90 days of a bankruptcy petition are subject to full recovery by the trustee, whether or not the money taken was from "principal" or "earnings." Insiders under some circumstances may be required to return any withdrawals within a year.

3. Next comes withdrawals of "fictitious" profits made within 6 years of the filing (for Madoff, the date is 12/16/2008). Federal bankruptcy law actually proscribes 2 years but New York fraudulent conveyance law extends the clawback period to 6 years. Not being an expert in this area, I am guessing that attorneys may fight to get out of applying New York's law on jurisdictional grounds - possibly a way to save clients some money but for sure a serious legal battle.

4. How do we define "fictitious" profits? Very simple. Any penny withdrawn in excess of your original investment is fictitious profit. From reading the Drinker Biddle memo, it seems clear that if it can be established that you had already withdrawn your full investment in Madoff prior to December 16, 2002, then you would be obligated to return every penny withdrawn during the period of December 16, 2002 to December 16, 2008. That is pretty frightening for a place like Hadassah which all but admitted that they had long recovered their initial investments.

5. If you never reached the fictitious profit level, and you didn't withdraw any funds within 90 days (assuming you are not an insider), you should not have any clawback concerns. If you received a letter from Picard demanding return of funds, it would be time to seek legal counsel as soon as possible.

6. One last point for those who knew or should have known of the fraud taking place - the trustee in theory can seek to recover for even non-fictitious principal withdrawals in these cases. These will be a totally different kind of legal case and probably very weak if the trustee can't place you as a co-conspirator. If the SEC and the rest of the world didn't notice, how can the government claim that a non-conspirator should have known? My guess is that the trustee will not pursue these but for clear insiders who most likely knew something was wrong (ie..family).

With the sad passing of Jeffrey Picower, a huge philanthropist, I am wondering about indirect charitable beneficiaries of the Madoff scheme. Bloomberg.com reported that Picower made a $50 million donation in 2002 to fund a brain-research center at MIT. Was it early in 2002 or after December 16? Can these funds somehow be traced to Madoff profits?

What about charities that had invested with Madoff indirectly (through one of the "feeder" funds)? And, what if they had wisely chosen to send their investments to other managers and taking along fictitious profits, too?

In the end, Picard the trustee will have to pick his battles carefully based on size and likelihood of success. Big targets, charities or not, watch out.

http://www.theworldlawgroup.com/docs%5CUnited%20States-Clawbacks%20in%20the%20Aftermath%20of%20Madoff.pdf

http://www.forward.com/articles/116262/

http://www.forward.com/articles/112466/

http://www.bloomberg.com/apps/news?pid=20601103&sid=azCKA1yuc6sg

Schervish Still Touting Ridiculous Wealth Transfer Claims

2009-10-12T09:43:00.006-04:00

If you haven't seen the latest Wealth Transfer lunacy from Paul Schervish, here is an article in Forbes about how Schervish and his partner still claim that some trillion something or other will be changing hands over the next 20+ years:

http://www.forbes.com/2009/10/02/estate-tax-bill-gates-boston-college-personal-finance-bc.html?partner=artctrlinboxmain

I am bit negative on the subject for two reasons: 1. The numbers for charities are already impossible - never going to happen (I'll have to do the math again soon); and 2. Especially after I just wrote a 16 page paper for the upcoming NCPG (now PPP) conference presentation that two of my colleagues at Changing Our World are presenting this week looking at various demographic projections (life expectancies, changing family structures, impact of this past year's drop in retirement savings, etc..). Looking at the big picture future for America in general and philanthropy in particular is pretty sobering.

I am working on getting the paper linked to this blog as a PDF (or you can download it if you attending NCPG).

Planned Giving Made Simple for Smaller Institutions

2009-10-08T12:48:00.002-04:00

One of the readers of this blog reminded me today of what I considered the best small charity planned giving effort story. It is simple and worth thinking about if you are trying to get a planned giving program going at a smaller place.

Early in my consulting work for United Jewish Communities, I visited with a group of smaller Jewish charities in the Catskills area for an open discussion about starting planned giving programs.

I was the guest speaker and didn't expect to be impressed by the planned giving efforts they were discussing.

But, one of the participants was from a synagogue that had made a consistent effort and to my surprise, it dawned on me how successful they were.

What was this great program? It was a simple "Tree of Life" effort that focused on estate commitments. What is so special about that?

Well, their board went through the pains of developing a plan to seek deferred commitments. They gave those who made bequest/estate plan commitments significant recognition in their lobby (on the brass leaves to the tree). They created an annual event with promotion within their community celebrating the new members to their Tree of Life campaign.

Bottom line: they created an ongoing program to seek these types of commitments (nothing complex) that worked year in and year out. Their volunteer accountants had some idea of the potential sizes of many of the gifts so their board had an idea of what the pipeline might be. They added charitable bequest planning to the culture and activities of the institution and their participation rate was very high.

That is all you need. Almost every synagogue I have seen has a Tree of Life but they never have anything to do with encouraging bequest commitments (except this one, of course). Sadly, I have watched as older members of various synagogues pass away in my community and never hear about bequests.

It takes more foresight than you think for a small, older institution make a long term commitment to encouraging estate plan commitments. That one in the Catskills told me that they had about half a million in expectancies and an unknown dollar amount, probably greater than the known amounts. They basically ensured their future by giving up a bit of today.

It is just a matter of getting it on the agenda and sticking to it.

Endowments and Naming Opps Written in Stone?

2009-10-07T10:57:00.005-04:00

A really good question came to me through a client situation. It involved a big naming opportunity on an existing building. The donor was solicited for close to a 7 figure gift, and he was ready to make the commitment. Problem came up - the board started having second thoughts about permanently naming this building for the price asked (make sure your board officially approves your naming opps list BEFORE making the asks). My colleague's job was to help save the gift - if you go back to the donor, after the ask was already done, what do think he is going to do? Not a good scenario.

My role was to finesse some language that could give the board the confidence that they could change the name on this building at some point in the future without disrupting the donor and the gift.

The answer came to me pretty quickly. Variance Power. This is the important clause that community foundations in particular use in their permanent gift agreements. It gives the non-profit the ability to change purposes of a fund or other donor agreement should circumstances change. Otherwise, technically you might be required to seek attorney general approval and/or a Cy Pres action in court to make the change. Of course, if a donor is still alive, it always makes sense to ask the donor to consent to a change.

Here the are samples I came up with (based on old samples I had in my old files from my days working with Jewish Federations):

Variance Provision (long version)

While it is absolute aim and obligation of the Board of XYZ to fulfill the intentions of all written pledges and designated gifts to the ABC campaign, in the event of changed conditions, laws or other circumstances in the future, whereby any gift’s purpose may no longer exist or may be impossible to continue or perform, the Board of XYZ requires that this Variance Provision be included in every gift agreement. This provision permits the Board of Trustees to vary, when necessary, from the donor’s original stated purpose or naming opportunity to a similar new purpose or naming opportunity. Any new purpose or naming opportunity shall be as closely aligned to the donor’s original intent as possible. The Board of XYZ will notify any donors and/or surviving family members of the donor if this provision is ever exercised.

Shortened Version for Pledge Agreements

All pledges and commitments to the campaign are subject to the Variance Policy of the Board of Directors. This policy allows the Board to vary, when required to due to changed circumstances, from the original stated purpose from a gift or pledge agreement to one that is as closely aligned to the donor’s original intent as possible.

Shortest Version for Pledge Agreements

Should the purposes and/or intent of this pledge be impossible or impractical to perform/maintain, the Board of XYZ reserves the power to vary the use or naming opportunity created by this pledge to one as closely aligned to the donor’s original intent as possible.

After going through this exercise, it dawned on me that use of this type of clause in all gift agreements, especially ones that involve permanent naming opportunities, is a really good idea.

Message To Readers

2009-10-06T09:28:00.005-04:00

Thank you for reading my blog! As more people visit and sign up for email updates, the more inspired I get to stick with it (and I have fun anyway). The posts on this site are a combination of planned giving related news, training and background pieces, and commentary on various planned giving issues. And, I promise never to over blog!

This effort is still a work in progress but my goals are coming together. I have trained, advised and coached easily over 200 fundraisers in planned giving over the years. Goal number one: get as many of my previous trainees to be linked in (thank you those who have already signed up!). Ultimately, I hope to somehow make this an ongoing training module and a way to stay connected to my planned giving friends. Goal number two: to those who don't know me personally, my approach to guiding people since law school has always been to share info and/or give it away free (within reasonable limits, of course). So take advantage of it, read the blog, submit questions.

Lastly, you will see that my articles are based on pretty broad experiences throughout the non-profit world. But, there is also an approach behind the musings. I learned it not in law school, but rather from several years of in-depth Talmud study (not intended of course to be applied for non-religious purposes but very useful for lawyers nevertheless).

I can still remember the phone call I received from my first legal opponent - a middle aged BMV driving couch potato lawyer. He had just read my brief and was somewhat stunned about what I wrote and he called to ask me something like "what the heck is this?" Well, he found out the answer when the judge told him to sit down and be quiet and proceeded to read directly from my brief (a sign I quickly learned that meant we win) and granted our client our motion for summary judgement. The secret I learned from my Talmudic training is pretty simple - keep digging, keep questioning, keep trying to understand how legal issues work, and understand the concepts behind the rules. I have been talking with the best attorneys in the planned giving area for years and I can confidently say that they all have this in common - they make sure to understand how particular laws and rules came into being and what the drafters were trying to accomplish; they understand the concepts behinds the laws. No good attorney memorizes rules - they understand the rules to the point where they can apply them.

So, after all of these years in planned giving, I am still trying to better understand why these gifts work the way they do. And, while you (the readers) don't necessarily need to become tax experts, the more you understand the various legal issues involved in planned giving, the more confident you will feel when speaking with donors, the more planned gifts you will be able to close. All of us, myself included, need to be able to tell a prospect that we have to check with others before answering a question. But, you may never get to that point if you avoid the conversation or can't confidently lead the direction of the conversation towards a potential planned gift.

So, there you have it. Please stick with this site - I promise to get better organized (I plan to compile relevant posts into a book on planned giving some day). And, forward posts around!

Second Thoughts on Forbes Article

2009-10-02T10:55:00.005-04:00

Like most articles in the mainstream press about planned giving, attempts to create a catchy/interesting story end up doing a real chop job on the truth.

The Forbes article is no different.

http://www.forbes.com/2009/09/29/charitable-gift-annuity-crescendo-personal-finance-marketing.html

Basically, the accusation is that by using canned planned donor stories, you are guilty of making a "Dubious Annuity Pitch" or "Canned come-ons cite yields unavailable to most buyers."

Come on writers!!! The only crime or misdeed involved is shoddy marketing!!! It doesn't take a genius to figure out that real stories, with pictures of real donors, will go a lot further than some obviously canned stuff (spot-table a mile away).

But, as this article is in a major publication, we have to give it some due and think about the issue it is hitting on (however skewed and misapplied it is).

It actually reminds me about the Wall Street Journal article this past spring talking about how CGA programs are going under and how it was so bad for donors (when in reality, it was just one CGA program going under and the donors should have known better than to do a CGA with that so-called organization).

Why? That notorious Wall Street Journal article actually did hint to a larger problem of potentially faltering CGA programs due to investment losses (which seems to have turned around).

The Forbes article also hits on a topic often discussed in this blog: fodder for plaintiffs' attorneys. A good friend and attorney made this point to me as I complained about the article and on second thought, I agree.

The chances of a charity being sued over a CGA arrangement are low, very low. But, they aren't so low that it will never happen. Any marketing that your charity engages in while promoting CGA programs in particular can come back to haunt you. Attorneys representing disgruntled donors or family members will look at any means to challenge a gift, especially your own marketing efforts. Fraud in the inducement is pretty powerful. And, even if you can fight off that particular legal challenge, the attorney has just biased the judge or jury against your organization for being sleazy.

I am not trying to be overly nuts on this issue - go ahead and market planned gifts. The point is that as your institution proceeds into the public realm with various promotional materials, it is a good idea to think about whether you are stepping over boundaries that could later haunt you. I tell clients to stay away from using canned donor stories. I also tell anyone willing to listen to avoid use of investment terminology when promoting CGAs.

Have a great weekend and thanks for sticking with my blog!! (please forward stories to friends!)

Interesting Forbes Article Attacking Typical CGA Marketing

2009-10-01T10:18:00.003-04:00

This story is making the rounds in the planned giving world:

http://www.forbes.com/2009/09/29/charitable-gift-annuity-crescendo-personal-finance-marketing.html

In short, Forbes has taken up the cause of attacking generic planned giving marketing (using fake donor stories) - particularly focusing on canned Crescendo web pieces. They have a point. What they described is deceptive but I am not sure it so deceptive to actually have any legal or even ethical significance.

I just wonder why they picked this topic. There are much greater issues in CGA marketing like their potential classification as investment products in litigation or by the SEC.

And, it seems like they are unfairly picking on Crescendo, a very honest and ethical company as far as I know.

FASB Liability vs. Required Reserves

2009-09-30T09:46:00.008-04:00

The issue of FASB Liability and Required Reserves for CGA programs is an advanced one but I encourage newcomers to the field to read this post anyway (I will try to explain it well and this will give you solid background info that will help you further understand gift annuity programs).

The question hit me last week. One of my client's requested a FASB liability report for their auditors and something struck me as wrong in the report given by the investment/administration provider.

Firstly, what is FASB and what is this liability report?

FASB stands for Financial Accounting Standards Board. Basically, auditors and finance/accounting staff of all types of entities try to follow their standards (they are not actually legal standards - a discussion for another post - but we try to play nice with them anyway).

The FASB liability report? In regards to charitable gift annuities, FASB has standards for institutions to determine the value of the "liability" of each gift annuity contract. In other words, the estimated amount needed to pay the donors for the rest of their life expectancies.

This needs explanation because it is a crucial point in understanding gift annuities and the various calculations involved (charitable deduction, booking value, reserves, etc...).

Ask yourself (out loud and slowly) this question: How much money do I need today to pay this annuitant his/her gift annuity for the rest of his/her life (assuming the money is invested and growing at a fixed rate)? We know how much has to be paid: the fixed annuity payment. We know for how long: the rest of his/her life expectancy. The only question is how much investment growth will their be?

Let's make this very practical. 72-year-old donates $10,000 today (Sept. 2009) for a one-life, immediate payment gift annuity of 5.9% (according to the ACGA recommended rate) for his/her life. This imaginary donor will be entitled to receive $590 a year for the rest his/her life - 14.5 years according to the life expectancy table. Without any investment return in the picture, we will pay this donor $8,555. (Don't get side tracked with questions like what if this person gets sick or alternatively eats lots of yogurt - all the accountants want is a projection of what the cost may be TODAY of this gift - who knows what will really happen)

Ask yourself this next question: Do I really need the full $8,555 in the bank to pay this annuity over 14.5 years? Well, if we can assume an investment rate of return - a fixed rate, of course, because anything else would be too difficult to deal with - we really don't need the full $8,555 in our investment account.

If we assume a fixed rate of investment return of, let's say, 3.4%, you would only need $5,671.60 in the bank today (earning 3.4% per year) to pay our annuitant his $8,555 over the next 14 years.

I chose 3.4% because it happens to be the current "Discount Rate" of the month (otherwise known as the Applicable Federal Rate - AFR - issued monthly which charities use for these calculations/assumptions). So, $5,671.60 is the actual FASB liability of this gift, as of today.

As an aside, your planned giving software simply subtracts the liability from the gross gift amount to give you the charitable deduction. In other words, the charitable deduction is the gross gift amount minus the money needed to cover the payments to the donor (based on the assumptions we discussed). Additionally, you should note that the lower the Discount Rate, the more money you need to cover the payments since your you are, in theory, earning less on the investments needed to pay the annuitant.

Now that we have these concepts done, back to my issue.

My question on the FASB liability report, that came from standard planned giving administration software, was this: the report showed that it used the AFR/Discount Rate/assumed rate of investment return of the month that each gift was originally created (not the current rate of assumed returns).

This confused me. I had assumed that a FASB liability report would want to show us what the liability is TODAY (using today's life expectancies and using today's investment assumptions). It turns out, FASB itself apparently lets auditors choose whether they want to calculate the total liability using the original AFRs of the gift annuities or the current AFR, at least this what people tell me.

Problem #1: the liability will be very different between the two "options." Today's rates are very low - 3.4% to be precise. But many gifts in the pools I work with were created when the AFRs were 6% or higher. My thought is this: if you want to make a projection into the future, knowing what we all now know (but didn't dream of a few years ago), I would say the lower expectation of 3.4% makes sense. And, the lower expectation would mean a greater amount of money is needed in the bank to ensure that you have the funds needed to make these payments.

Problem #2: I had assumed that the standard required reserve (for New York in particular) was the FASB liability plus a percentage above it as a further cushion required by New York. Could it be true that we have a choice on how we calculate the FASB liability when we do our New York annual report?

A quick call to the New York State Department of Insurance's head actuary solved this quandary pretty quickly. The answer to the question of whether New York requires you to calculate your reserve by using either the AFR of the original gift date or the current AFR was....NEITHER.

New York State actually has their own assumed rate of return depending on the year of the gift. It has ranged between 5.25% and 5.5% for the past few years. Why? The actuary told me the logic: they are assuming that you (the charity) are purchasing long-term treasury type assets (20 year treasuries), therefore the assumed rate of return should really be based on the typical type of long term bonds you should have purchased in the year of the gift.

This actually made a lot sense a few years ago when New York basically required that the required reserves be invested strictly in things like treasuries. The problem is this: the New York legislature actually changed the investment requirements to a prudent investor standard a few years ago. Now, it is up to the investment manager to invest as they feel appropriate. (for a time in 2008 and 2009, 20 year treasuries dropped below 4% - not great for CGAs - but they are now back over 4% since April and do make sense). See my post on CGA risk for further discussions on investments and risks to CGA programs: http://plannedgift.blogspot.com/2009/06/gift-annuity-risk.html

If New York didn't require an additional percentage of reserves, I would be saying that charities following New York's reserve requirements were under-reserved! They are requiring charities to use relatively high assumed rates of return for their reserve requirements (and artificially lowering the amounts of funds needed to cover the payments - assuming more realistic returns).

Back to FASB and to bring this discussion to a close. Apparently the accounting board doesn't really have an opinion on whether one should base their liability calculations on the assumed rates of investment returns when the CGAs were created or on current rates of return. My thought is that since we use the new life expectancy of the donor, why not use the new investment return assumptions (seems more realistic to me).

In any case, I have been providing accountants and auditors with various reports and calculations for years upon years, and I have no memory of any of them ever coming back to me with a question. In other words, I don't believe the auditors really understand this stuff so they just take what we give them and move on. And, maybe FASB has an opinion on the topic but no one seems to know it.

Comments on ponzi scheming CGA promoter case

2009-09-17T10:32:00.003-04:00

I am somewhat surprised that the recent federal appeals court running that I reported on about Robert Dillie (http://plannedgift.blogspot.com/2009/08/important-legal-ruling-impacting.html) hasn't been discussed (besides the republishing of my post on OnPhilanthropy.com and the Planned Giving Design Center).

One of the comments I heard from a colleague was that "it was an old case." Of course, I wanted to scream.

True, the actual facts of the case were old news but the facts have nothing to do with the problems that might be caused by the ruling (published just this summer). It is the ruling that matters; the level of the court (just below the Supreme Court) and their approach to analyzing whether gift annuities are investments or not. It is not even whether the court was correct in its approach or not(it may very well have been wrong).

You have to put yourself into the mind of a plaintiff's attorney. I should know - I was one and I spent several years making people feel miserable (especially older attorneys resting on their laurels). I didn't always need the law or logic on my side - all I needed was an inch. Something to give us standing to start the case, negotiations, etc.. Admittedly, we bluffed our way into many situations. Sometimes we "won" on air - sometimes we got crushed, but we always caused trouble for someone.

One thing that I have learned since joining the non-profit world full time in 1998, charities sit in an extremely weak legal position. Law suits (or even threats of law suits) never go well for them - even with top pro-bono counsel. I can't tell you how many litigation situations I have been involved with where the charity had the better case but opted to settle or not pursue a rightful claim. Maybe it was the potential public relations fallout, maybe charitable executives who didn't want the entanglement, maybe it was fear over costs or staff time.

No matter the reason, charities are sitting ducks in general when faced with potential litigation. Here comes a U.S. Court of Appeals which flat out says that most of the standard gift annuity marketing is our proof that gift annuities are investment products. It is just nice and dry firewood for attorneys of unhappy CGA donors, or worse yet, unhappy children or other beneficiaries of CGA donors.

Commissions for "selling" planned gifts?

2009-09-14T10:51:00.007-04:00

A reader of this blog submitted a question to me looking for "examples of compensation agreements that are based on other factors besides the amounts contributed, but still reward success and provide incentives for competence and performance?" In other words, he is looking for one of the shangri la's of planned giving - gazillions of motivated and aggressive professional financial salesmen "selling" planned gifts for your organization (albeit with commissions).

The questioner also mentioned that he represented a non profit that issued charitable gift annuities ("CGA") and paid small commissions based on the amounts contributed. It wasn't clear if his question only involved CGAs or all types of fundraising (for this post - I am focusing only on CGAs and planned gifts).

The email was missing another important fact, which we can make an educated guess at: Who are the "salesmen" of CGAs for the non-profit? If the "salesmen" are in-house fundraisers, the answer could be a bonus system (regardless of the general ethical problems inherent with any bonus system in fundraising). We are forced to assume that the "salesmen" are non-employees - most likely financial advisors.

Instead of vilifying the questioner or the org he represents (which many in the planned giving world might do), let's think about it.

Firstly, if you read my pieces on Robert Dillie - the Ponzi schemer CGA issuer (click here http://plannedgift.blogspot.com/search/label/ponzi%20schemes), one thing you should have noticed is that this guy (through his Mid-America Foundation) issued over $55 million in CGAs to over 400 donors over 5 years. Few charities can come anywhere near that production - and the gifts were to a new foundation with no history of anything!

On the flip side, the Pension Protection Act (PPA) of 2005 very specifically states that for CGAs issuers to be free from SEC regulations, CGAs can not be issued with commissions to salesmen (The practical legal implications of the PPA will be the topic of an upcoming blog post. My wonder while reading the Dillie case was why didn't the court just look at the PPA to determine that the CGAs in question - all sold with commissions - weren't afforded PPA exemptions and were automatically considered investment products? Why the whole analysis in the case when the answer was in a statute?)

Ok, I have to admit, as a consultant, it has crossed my mind that should I ever find myself on my own (I work for a large fundraising consulting firm and previous worked in-house in planned giving after leaving law practice), is there any way I could be compensated based on the gifts closed? This is not about greed on my part, more out of a practical consideration: many charities have actually approached me and wondered if I could help them (but they couldn't afford to pay out of existing cash flow). In other words, charities looking for a "contingency fee agreement" in lieu of standard planned giving consulting fees.

Putting aside the PPA (which basically forbids commissions with CGAs and possibly with other planned giving vehicles), is there any way for someone to get paid for closing planned gifts for an institution on some sort of contingency?

When it comes to planned gifts (CGAs and CRTS in particular), there are options outside of "dreaded" commissions.

CGAs: There are two ways a third party can be paid for helping an organization receive CGAs.

1. Administrative/investment management fees - if a third party provides administrative and/or investment management services for a CGA program, it is perfectly reasonable for the issuing charity to pay a fee out of the CGA pool for those services. Mind you, there needs to be legitimate "services" provided (not just uncovering CGA prospects) and fees for administrative services can not be based on the size of the gifts (rather the fee should be commensurate with the services provided). Not being an expert in SEC regs or investment law, I would throw out a word of caution to those non-investment managers trying to get a piece of the annual basis point fees traditionally taken by investment firms. What I have seen is third party administrators providing real administrative services and charging flat fees per annuities. I have also seen licensed stock brokers providing "free" planned giving consulting services in exchange for investment management fees they will receive when funds come in that the broker manages. As an aside, this is one of the knocks I have on those investment providers that claim to offer free planned giving consulting services: they have no interest in future bequests (no investment management fees from future bequests) but that is where 80% or more of planned giving revenue lies.

2. Reinsurance - If you read my earlier post about CGA risk (http://plannedgift.blogspot.com/2009/06/gift-annuity-risk.html ), you should understand that I loathe the idea of taking any principal out of a CGA pool because I believe charities generally don't understand the long term investment risks and they need to have as much cushion as possible in their CGA pools. That being said, I have become much more attuned to reinsurance. I actually think it should work for most charities, especially smaller and less sophisticated ones. And, reinsurance does open the possibility for commissions on the purchase of the reinsurance contract to a salesman. What the Hartford told me (and they are the only ones that I have found that handle New York CGA reinsurance properly) was that a "consultant" who has a valid life insurance license could receive a commission from the sale of the reinsurance contract. They said there was a percentage range (I can't remember the percentages), not so high, that the charity would see tacked on top of Hartford's own standard sales commission. In the case of reinsurance, at least the long term risk has been mitigated so giving a piece of the pie to a "salesman" isn't that bad.

CRTs: As for charitable remainder trusts ("CRT"), investment management fees are much easier to arrange. CRTs are stand alone vehicles so your charity can choose to let the investment advisor who "sold" the idea to the donor of a CRT manage the investments of the CRT. A word of caution - I have seen many cases where the donor's investment manager kept control over the newly created CRT assets and botched it royally. So again, your investment manager can still receive fees for managing a CRT, whether the charity is trustee or someone else.

Outside of investment management fees, trusteeship is the last refuge for potential fees for a "salesman." Individuals can be appointed trustee of a CRT and most states allow for a trustee to receive a fee for his or her services (usually subject to state law limitations). What if your "salesman" is appointed trustee? Depending on the size of the CRT and state law, that could be a great deal of annual "trailing commissions" for the salesman/trustee.

But the challenges of being CRT trustee are several-fold: 1. A trustee has a fiduciary duty to both the charitable remaindermen and the income beneficiaries - a legal standard of care/responsibility which sane individuals usually would want to avoid except for close relatives; 2. Managing the administration (payouts, tax returns, etc...) for CRTs are not everyday tasks, even for accountants and other financial people, and typically those not specializing in them mess them up miserably (with potential personal liability due to problem #1 in this paragraph); and 3. Overseeing the investment of CRTs, which may sound easy for financial salesmen, is in actuality not so easy and can also land the trustee a big fat law suit. Of course, as trustee, you can do what most charities do when they trustee CRTs - have a bank or trust company do all of the lifting (admin. and investing) for their fees and you sit back and take your fee - but as trustee, you are still legally responsible at the end of the day if there are problems.

In truth, the idea of an individual "salesman" serving as a CRT trustee is plain old nuts - not a good idea unless you are a bank or trust company or a charity with financial expertize in-house.

Back to the questioner's original point - how about rewarding your "salesmen" for the amounts they can bring in. I have no answer because I don't think it works (outside of the investment management fees, administrative fees or reinsurance commissions). Unfortunately for the charitable world, they are missing out on the financial industry's sales-force - which Robert Dillie tapped into and made a mint(and then went to jail). On that thought, maybe it's better to stay away from the whole "financial incentive" push that would come along with a "professional" sales-force.

If you realize that Robert Dillie received $55 million in "gifts" to his fraudulent foundation, you have to wonder how this happened. My guess: hundreds of financial salesmen - with commission incentives in hand - unknowingly pushed a bogus foundation on their clients. It makes me wonder if those salesmen had any duty to their clients to do any due diligence before recommending the "investment"/"gift" to the Mid-America Foundation? Charities are obligated to provide whoever asks a copy of their most recent 990 tax return - so finding out information about the foundation should not have been very difficult. Did these salesmen think to double-check the solvency of the "company" behind the "product" they were selling? If I were someone who lost my gift annuity in the Dillie fraud, I would be looking closely at those salesmen who probably did no due diligence before pushing a fraud on their clients. Of course, the Mid-American Foundation was probably the only one offering commissions to outside sellers of their gift annuities.

The point I am making from the previous paragraph is this: despite the "good" (i.e. dollars) a professional sales-force could do for generating more CGAs and other planned gifts, the "bad" (i.e. unethical practices that lead to law suits) far outweighs the idea. Planned gifts are already ripe for law suits from disgruntled donors - and that is where you have a generally highly ethical "sales-force" in your in-house fundraisers. I can only imagine the problems caused by having the "snake-oil" insurance sales-guy world out there hawking your planned gifts.

Sorry questioner - the commission idea is not a good one for planned giving. There is no magic answer for selling planned gifts with incentives for financial sales professionals.

Bigger the gift - bigger the scrutiny

2009-09-11T09:53:00.008-04:00

Not every attorney will agree with my approach. Here is the theory: the bigger the gift, the more precautions you take. (The question you are supposed to ask is: aren't the precautions the same for all size gifts - at least ones over $500 or $5,000?)

Hear this story and you'll understand.

I received a call from a colleague the other day about accepting a work of art. A university but one that does not have a museum or an art program or even art classes. But, it does have places where it displays art and has regularly accepted works of art as donations in the past (presumably professing a "related use" program so that the donors were entitled to full fair market value deductions for their gifts).

Sounds like they are good to go as far as "related use" (will be discussed below), the first hurdle in accepting a work of art. One fact I left out though: the proposed art donation involves very, very valuable works of art - relatively famous, too. I don't want to give any more details because this one is still in the works. Let's just say a real value of multiple millions - we'll just call it a "Picasso" to give us some perspective.

When the conversation started, I knew enough about the institution to assume that related use would not be a problem and that they could move on towards other complications in dealing with a proposed art gift of any magnitude (which are many).

But, when he said it was a Picasso, I started churning in my mind. And, of course, he also had an art museum expert telling him that it wasn't related use to this institution. (Topic for another blog post - non-lawyers playing lawyer and reaching the wrong conclusions.)

Well, here are some of the IRS private letter rulings on related use mentioned in Tax Economics of Charitable Giving:

Porcelain art related to retirement home's exempt purpose because the objects enhanced the residents' living environment. PLRs 8143029 and 8247062.

Wildlife etchings on public display in state office buildings, ok, too. PLR 8301056.

Displayed stamp collection in University's art gallery plus use in school's art program, ok, too. PLR 8208059

This university in question has some sort of art appreciation or therapeutic thing (not a formal program but something).

Of course, the IRS tells us to rely on private letter rulings at your own risk (like beaches without lifeguards) - the IRS always has the option of ruling any which way they want when they get to your case.

If this had been a run of the mill gift of less than a million, I might have made a different suggestion. But, since this was a "Picasso", I couldn't shake the thought of the IRS art panel reviewing the deduction and somehow this issue of related use coming up.

My suggestion was to hire the best attorney in the area of art contributions you can find before moving forward with the donor. Besides, related use is only an initial issue. Even more daunting is the qualified appraisal (subject of an upcoming blog post). Anything less than having the best counsel reviewing the entire proposed gift would be foolish in this case. Not with a multi-million dollar donor involved and several sticky issues that really could come back to haunt everyone (especially the charity).

The point of this post is this: size and magnitude of a gift makes a big difference in how I advise someone. This institution clearly never ran into issues with accepting art in the past but they also have never had anything of this magnitude. Millions of dollars are at stake in charitable deductions and even though the IRS has never taken issue with art contributions to this institution in the past, nothing is stopping them from taking a hard line this time - especially since it can easily be described as a stretch to claim related use. The private letter rulings seem to point towards this stretch being within reason but you better have an attorney on your side who has been through this before guiding you.

I hope to post updates on this one as it moves forward if my colleague reports back on how it is proceeding.

Just a reminder about what the "related use" rule is (according to the IRS):

A donor is only entitled to a deduction of the "cost basis" (usually the original purchase price) for gifts of "tangible personal property" (i.e. art or collectibles) when "use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501." IRS Code Sec. 170(e)(1)(B)(i).

And, let's not forget IRS Code Sec. 170(e)(7) which effectively says that if the charity sells the "related use" tangible personal property gift within three years of the contribution, the gift is retroactively presumed to be "unrelated use" and your donor retroactively loses his or her deduction over the cost basis.

Here are the relevant IRS Regulations on related use, Reg. 1.170A-4(b)(3)(i)and (ii):

(3) Unrelated use--(i) In general. The term unrelated use means a use which is unrelated to the purpose or function constituting the basis of the charitable organization's exemption under section 501 or, in the case of a contribution of property to a governmental unit, the use of such property by such unit for other than exclusively public purposes. For example, if a painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and study by art students, the use is not an unrelated use; but if the painting is sold and the proceeds used by the organization for educational purposes, the use of the property is an unrelated use. If furnishings contributed to a charitable organization are used by it in its offices and buildings in the course of carrying out its functions, the use of the property is not an unrelated use. If a set or collection of items of tangible personal property is contributed to a charitable organization or governmental unit, the use of the set or collection is not an unrelated use if the donee sells or otherwise disposes of only an insubstantial portion of the set or collection. The use by a trust of tangible personal property contributed to it for the benefit of a charitable organization is an unrelated use if the use by the trust is one which would have been unrelated if made by the charitable organization.

(ii) Proof of use. For purposes of applying subparagraph (2)(ii) of this paragraph, a taxpayer who makes a charitable contribution of tangible personal property to or for the use of a charitable organization or governmental unit may treat such property as not being put to an unrelated use by the donee if:

(a) He establishes that the property is not in fact put to an unrelated use by the donee, or

(b) At the time of the contribution or at the time the contribution is treated as made, it is reasonable to anticipate that the property will not be put to an unrelated use by the donee. In the case of a contribution of tangible personal property to or for the use of a museum, if the object donated is of a general type normally retained by such museum or other museums for museum purposes, it will be reasonable for the donor to anticipate, unless he has actual knowledge to the contrary, that the object will not be put to an unrelated use by the donee, whether or not the object is later sold or exchanged by the donee.

Editorial on Barry Kaye

2009-09-09T12:01:00.004-04:00

I missed this editorial in the Palm Beach Post on the Barry Kaye story while on vacation:

http://www.palmbeachpost.com/opinion/content/opinion/epaper/2009/08/24/a12a_fau_edit_0825.html

It is a short piece but it really hits at the heart of the problem with Mr. Kaye and others like him. Just another reason to be cautious when the next "can't miss" deal is presented to your charity.

Another gift planning quandry: real estate, the 3 year rule and donor control

2009-09-09T09:47:00.006-04:00

As my friends in the planned giving world are finding out, the cost of sharing your "war stories" with me to see a post about your story. This one reminds us about the current post-gift reporting rules but more importantly, finding out the "donor's" real intentions and whether there really is a "gift" here.

This story involves an offer of vacant land where the potential donor says he already has an appraisal for over $500,000. This is a straight gift (no retained income or retained life estate or split interest). Sounds good barring any unforeseen environmental or title issues (not the subject of this post because we are still far away from those issues on this one).

What's the catch?

The "donor" (mind you, this "donor" has actually never given anything to this organization but does profess some admiration) told the development officer that he wants some sort of guarantee that the charity will not undersell the property. In fact, this was why he came to this organization (a message that he will go to another if need be). In my mind, new donors generally don't make first time gifts for $500,000 or more - so this is the catch.

Rule number 1: donor wants a deduction, donor needs to give up control of the property.

My first question is: why does he want a guarantee?

We only speculated but our thoughts turned to the post-gift reporting requirements. For a gift like this (real estate over $5,000), the donor will need a qualified appraisal (a subject for future posts) and the charity will have to sign form 8283 acknowledging receipt of the property and the appraised value.

What is the charity's responsibility when it sells the gifted property? If it is sold within 3 years (yes, 3 years not 2 years - extended in the Pension Protection Act of 06), here is the rule (as quoted directly from "Planned Giving Answers Online" a plug for my friends at EDS):

"Charitable organizations must file Form 8282 (the so-called "tattletale" form) to report to the IRS any sale or other disposition of donated property (other than publicly traded securities) within three years after the contribution if the property was valued at $5,000 or more. When required, Form 8282 must be filed with the IRS within 125 days of the disposition, and there are penalties on charities who fail to comply (up to an annual maximum of $250,000). Charities also must provide a copy of Form 8282 to donors, and additional penalties apply to charities who fail to do so."

Maybe this donor is concerned about his deduction being questioned?

At this point in the conversation, I started getting confused with the special rule for tangible property sold within in 3 years of a gift (an automatic loss of related use and retroactive deduction reduced to cost basis - see http://plannedgift.blogspot.com/2009/07/art-and-other-tangible-property-gifts.html).

Chalk it up to end of day sugar lows. This morning, I scoured my sources and confirmed that real estate gifts do not require "related use" and a sale within 3 years only means that form 8282 has to be filed by the charity - a possible red flag with extreme discrepancies in the valuation verses the actual sale price.

Lastly, we did the obvious and most easily overlooked step: we googled the "donor" and found that he was in the business of real estate. Makes me think he might just have a business motive to see that the property doesn't sell for too low - maybe he's involved in developing the land and doesn't want to see his "gift" undercut the value of the other vacant lots in the area.

At this point, my advice was to get some local volunteers (in the real estate business in the area of the property) to scout the property, do some independent research, and give an informal report as to its marketability.

In the meantime, I would want to meet this donor face to face to get a better feel for the donor. If he really wants to benefit organization, he will have to understand that the charity has to play by the rules (and no legal guarantees of the sale price can be made in writing or otherwise). Business reasons for not seeing the property sell too low can be addressed with split interests or CRTs or other creative arrangements but intent on taking an excessive deduction from a compliant charity is probably not fixable. If the informal real estate committee comes back with a resounding report that the property is worth taking and its likely sale price range makes sense, maybe this goes to the next level (environmental, qualified appraisal, title, etc.).

Stay tuned for part II!

Through the eyes of the gift planner (part 2)

2009-09-08T16:27:00.000-04:00

If you didn't see my previous post about a typical gift planning situation click here: http://plannedgift.blogspot.com/2009/07/through-eyes-of-gift-planner.html

Part 2 of the story. Where we left off, we had an attorney asking me to help his client set up both a $1 mil+ CRT and an ILIT (Irrevocable Life Insurance Trust), and there was confusion between who would trustee the gift and so on.

For those experienced in planned giving, the next part should sound familiar. Donor in his mid-60s can not do a charitable remainder annuity trust for much more than 5% due to the low AFR (applicable federal rate). Problem is, the donor wants more (not sure how much more but definitely more than what an annuity trust could offer). And, the donor doesn't want to do a charitable remainder unitrust either. Somewhere in this story, I suspect an insurance salesman (behind the ILIT part) was promising a wonderful plan based on a 6% or higher annuity trust.

So, I ran a calculation to see what a charitable gift annuity would give the donor. Maybe a slightly higher rate and some guaranteed tax free income would help close this $1 million+ gift. The attorney responded to this proposal and was interested. Now my work was cut out for me. I had to somehow get this small organization to agree that it would be better off if its bigger parent org would accept a large CGA on its behalf. Then, I had to somehow get the big org to really understand what it means to accept a $1 million+ CGA and to consider reinsurance over a certain amount. After several calls, emails and memos, I finally thought we had everything set up to go until the last phone call with the CFO (of the smaller charity).

I thought the CFO should know that the larger, parent org would accept the CGA, take on the liability, maybe reinsure part of the gift, and that they should just know what's going on. Then he tells me that he needs to have his own board approve this plan (even though legally there is no liability on their part as they would not be the issuer of the gift annuity). Oh boy. Now I am waiting for the donor's attorney to get back to me and let us know if the donor wants to make the gift and I have a CFO of a related org (and ultimate beneficiary) saying he needs board approval for us to do this gift.

This story just shows you some of the challenges planned giving professionals can face in getting gifts closed. You might need multiple CFOs, Executives, VPs of Development on board and understanding a complex gift - but wavering all along the way. In the meantime, you have a donor and/or the advisor also wavering. And, I wonder what happens when the donor finally says that he/she is ready to make the gift and the intended beneficiary says they still need board approval.

Stay tuned for part 3, if the advisor ever gets back to me.

More on Charitable Insurance Fiascos

2009-09-01T10:04:00.005-04:00

As early readers of this blog have seen, I have a vendetta against the whole scheming charitable-insurance world (for more on this topic, check out posts under Insurance Schemes).

Here is a blog post from from anther site going through how one of the older "can't miss" fads in charitable planning blew up (about 10 years late) on a sorry university:

http://taxprof.typepad.com/taxprof_blog/2009/08/charitable-splitdollar.html

Final Chapter in the Alabama Hall of Fame Case

2009-08-27T13:24:00.002-04:00

This Alabama case and a subsequent real situation has morphed into a classic planned giving ethical quandary discussion. See previous posts under the label Alabama Ethical Dilemma for discussion of when to think twice about accepting a CGA when it is being created on behalf of an incapacitated person.

When we last left off, a friend had read my blog (about the Alabama case involving a CGA created by a son/guardian where a court later took back the funds because the CGA didn’t make sense in his mother’s overall estate plans) and called me about their own quandary. With a check for multiple hundreds of thousands of dollars in hand and a “power of attorney” cousin wanting to create a CGA for her 90+ incapacitated relative with no history (giving or otherwise) with the organization in question, we were trying to figure out how much due diligence should be done before completing the gift (thinking positively). And, based our discussion, they called the “power of attorney” to see if there were any children or siblings who should be notified of this big gift.

Well, they confirmed that there were no children or grandchildren. So, they finalized the gift.

Why this postmortem post? They admitted to me that the “power of attorney” didn’t sound too pleased to answer the questions so they cut off the questioning – not to jeopardize the gift. My problem is: why should the “power of attorney” be concerned about answering questions? She is taking hundreds of thousands of dollars out of this incapacitated relative’s estate. I would think that some caution and transparency would be what everyone expects.

To the organization's credit, this was not the only charity that the “power of attorney” was creating CGAs for, so if it ever becomes an issue in a surrogates court, at least the story in the NY Post or Daily News will have several charities to mention.

Something though has me thinking that this is probably a case of an underlying family dispute and the emptying of the elder great aunt’s estate at the expense of others. Will it stay off the radar of the eventual estate and executor, if the CGA is being used to cut out inheritances to more direct relatives?

This is another example of where a carefully drafted gift acceptance policy could have solved this quandary for us. The policy should say that the organization does not accept CGAs created by representatives/guardians/power of attorneys unless….

You fill in the blanks. How about a form signed by the guardian or power of attorney? How about a requirement that the institution confirm from an objective, third party that the gift makes sense and is agreeable to all living next of kin of the donor’s estate?

If you are a trustee of an organization that manages a gift annuity program, wouldn’t it make sense that out of the ordinary, sticky situations be brought at least to a gift acceptance committee or an executive committee to assess the risks involved? Isn’t there a risk that a guardian or power of attorney is overstepping their bounds – even if on paper they are allowed to make a gift – and that the there could be negative consequences down the road?

Better yet, is accepting a gift like this the right thing to do?

Follow-up to Alabama Hall of Fame CGA

2009-08-20T09:14:00.004-04:00

This should make an important chapter in my online book in the section on sticky ethical issues. As a follow-up to the Alabama case reported in my previous post (http://plannedgift.blogspot.com/2009/08/hall-of-fame-cga-interesting-alabama.html), one of my friends/blog readers called the day after that post with a ripe quite question right on point and one many planned giving folk deal with periodically.

Here is the story (facts altered, of course). Charity already has in hand a check (for hundreds of thousands of dollars), a copy of the durable power of attorney (reviewed - let's assume completely legal), and the agent/attorney-in-fact (a supporter of the org.) ready, wanting and able to sign off on a CGA for her 90+ relative (not parent or sibling).

Legally, there is no question whether this gift is acceptable - at least right now.

What are the questions we should be thinking about based on the reading of the Alabama case?

My first question: does the 90+, obviously incapacitated "donor" have any giving history or other inclination towards the organization? The agent/attorney-in-fact does, yes. The "donor" in this question does not (if she had been, I would have been less concerned about the next questions but would have still asked them).

Next question: do we know anything about the donor's overall estate? Is this a small part of her estate? Is this a large part of her estate? The point I am getting at is whether this "gift" makes sense at all in her overall financial and estate plans.

Most important question: Are there other living beneficiaries (i.e. children - or anyone else who would stand to inherit from the donor besides the agent/attorney-in-fact)?

This is a really tricky situation. My initial response was that they should contact a known financial adviser of the donor (revealed in the power of attorney paperwork) and see what he/she thinks. Problem is that the agent, who is the real donor here of a really major gift, didn't tell them to call this person. Do they start meddling around this person's back - possibly causing the agent to withdraw the offer?

I have to admit that I personally have taken gifts like this through agents. I have even helped a charity orchestrate a "death bed" CGA. But, as far as I can recall, these were always gifts being made by next of kin - those who would have inherited the money anyway. So, even where the donor didn't have a history with the charity, no one was getting "cheated." Here, we weren't sure if the agent was the next of kin or not. And, if there are next of kin, maybe they should be consulted as this "gift" will have a direct impact on assets they would likely have received.

To top this all off, in this year, when numbers are down, this is a really important gift. No one at the organization will be thrilled if it doesn't happen. Problem is: we know that some more due diligence needs to be done or else there may be a surrogate's court taking the money back and possibly a non-flattering story in the New York Post (and not so far off in the future).

Regardless, our job as gift planners - from an ethics point of view - is to do the right thing and not just take suspicious gifts without investigation. And, not to be clouded by the fact that we will take the credit for the gift today. Someone else may have to clean up the mess in years to come and it won't be pretty. This gets back to another of my ethics posts (http://plannedgift.blogspot.com/2009/08/planned-giving-buck-stops-with-us.html), the ends can't justify the means. We have to take the high rode even when it means passing up on oodles money.

In the end, the consensus was to confirm from the agent if there are other next of kin of the "donor," and if there are, to ensure that they are informed of the gift. And, to put a memo in the file detailing this information and writing a letter to the "family" in appreciation for the gift (and put it in the file). If they can't do that - I really doubt this is a proper gift. A tougher attorney may have even required the next of kin to sign off that they are informed and happy with this gift.

Hall of Fame CGA - Interesting Alabama CGA Case

2009-08-17T14:54:00.008-04:00

This recent case doesn't have wide-spread legal significance as it is from Alabama and the facts are rather unique. But, the facts provide some worthwhile ethical guidance when dealing with similar cases.

http://coa.courts.mi.gov/documents/OPINIONS/FINAL/COA/20090709_C282979_61_282979.OPN.PDF

Let me sum up the case: Mentally incapacitated elderly mom, son looking to enrich himself at the expense of his deceased brother's children. Son donates $300,000 of mom's funds, in his role as conservator/guardian, to the Alabama Sports Hall of Fame for a charitable gift annuity. 8%, two-life, mom first income beneficiary, son the second income beneficiary. It wasn't so clear if he really had a right to do this or not. Lots of various arguments proffered, as lawyers will do.

Listen to the court's reason in deflecting the son's argument that he could make such a "gift" of 67% of his mother's assets: "Furthermore, there is no evidence that Roosen (the mom) might have been expected to make a charitable gift in the amount of $300,000 to the Alabama Sports Hall of Fame."

In other words, in situations where a conservator/guardian wants to make a significant charitable gift such as a gift annuity, there better be a history between the "donor" and the institution. And, the size of the gift has to make sense within the entire estate of the older person.

Getting back to basic ethics, should the Alabama Sports Hall of Fame have accepted this gift in the first place? This one should have not passed the "smell" test - son creates really big CGA with mom's money to benefit his mom AND HIMSELF. Maybe the institution didn't know that his brother had died 4 years earlier, had left a few children, mom wasn't there mentally anymore and that the son's right to do this was in question (even if he was officially the conservator/guardian at the time). The Hall for sure had to return any funds left of the CGA - maybe the entire $300,000 (that wasn't clear from the ruling).

Another tidbit. Even if the Mom loved the Alabama Sports Hall of Fame, gift planners should always be on the look out for future litigation. Here is the general rule: if children or other relatives would receive funds from an estate if the decedent didn't have a will, that person has standing to sue. Standing is everything in these cases. It could also be established by a preceding will (if it's found). Once someone has standing to contest a will or other things in an estate, out of the ordinary charitable gifts will be ripe for scrutiny. I think if they had known of the general facts surrounding this donor, they should have stayed away.

I had a situation a few years back with a client and FORMER planned giving director. The former planned giving director was pushing a donor in her 80s to do an irrevocable life estate gift to the charity (multi-millions in value). The FORMER employee's reasoning: the daughter might challenge the estate and it puts the charity in a better position. The FORMER employee actually admitted that she suggested that the donor name the charity as executor of the estate - also to help against litigation. My response: what a disaster the FORMER employee was creating and she was even limiting their chances of receiving a bequest. I told the client - good thing it was a former employee and to take the high road as to everything they were doing with this donor. In other words, I advised them to strengthen their legal position vis-à-vis this donor (give proper public recognition, back off pushing anything that could be seen as overly aggressive, reach out to the child in friendly terms, etc.) because the entire giving was a risk by the overly aggressive actions of their previous planned giving director.

Once you realize that a child in particular may not be interested in the gifting of the elderly parent, you better think twice before pushing large, irrecoverable gift arrangements. And, a child making a gift for an incapacitated parent should also raise a red flag. Maybe all children or other beneficiaries should be consulted prior to considering such a gift?

Charitable Bequest Headlines

2009-08-13T14:16:00.003-04:00

New York papers like the NY Post and the NY Daily News always seem to have interesting takes on charitable bequests.

One of today's Daily News headlines focused on the "megabucks" of a woman who passed away with around a $300,000 estate.

http://www.nydailynews.com/money/2009/08/13/2009-08-13_eccentric_hippie_had_megabucks_to_match_a_huge_heart_.html

In a previous story about this bequest on Monday, the Daily News reported "Israel's Hebrew University gets $100K from NY homeless Holocaust survivor." Today's story was about how she really wasn't homeless. In that first story, they described the bequest as a "whopping gift to the Jewish college."

I think $100,000 is a significant bequest but for anyone who has worked inside larger non-profit organizations, this is by no means "whopping" or "megabucks." It's actually a typical sized bequest and a typical story, an unexpected gift from an unexpected donor. It goes to show that even those people who have modest wealth - and $300,000 is certainly modest these days - often leave significant charitable legacies.

Running Charities Ethically - Behind the Tabloid Stories

2009-08-13T13:08:00.003-04:00

I couldn't resist this one and my apologies to my friends at Hadassah.

Did anyone notice the headline "Ex-Hadassah CFO says she had affair with Madoff?"

Yes, the affair part is probably why people are looking at this story. But, when I read these pieces, I am always left wondering: "Are they out of their minds?"

I saw the story on the JTA (Jewish Telegraphic Agency) website. I figured they would report fairly without much embellishment on the lurid parts.

Here is the link to their coverage: http://jta.org/news/article/2009/08/13/1007227/ex-hadassah-cfo-says-she-had-affair-with-madoff

I was looking to see how much Hadassah might have lost when I stumbled on to a few tidbits. Yes, they are reported to have lost $40 million in funds invested with Madoff. They thought those funds had grown to $90 million.

Here is what shocked me into writing this blog post. "Hadassah believed the value of the portfolio had grown to $90 million, not including $130 million that it had pulled out over the years."

Not including the $130 million it had pulled out over the years?? That doesn't make sense to me. Maybe they had invested more than $40 million but had taken back some principal? That number can't be correct.

But the article goes on to say: "Both Weinstein and Hadassah have said that the first $7 million the organization invested with Madoff in 1988 came from a donor who insisted the money be handled that way. Hadassah invested another $33 million with Madoff by 1996, the year after Weinstein left the organization."

The point I saw was that Hadassah admitted publicly that they followed a donor's requirement to invest money with Madoff. That is incredible. Yes, I am sure it happens all the time but it isn't allowed! It puts into question whether the gift was really a completed gift since Hadassah allowed the donor to control the investment after the gift. If I were someone in the IRS tax-exempt section, with time on my hands, I would start wondering about their practices.

Additionally, if Hadassah really withdrew $130 million from initial investments of $40 million, if I were the receiver over the Madoff disaster, I would want some of that money back.

Lastly, the article ends by saying: "Hadassah is "moving on" from Madoff, the spokesperson said, noting that the organization recently received a $1 million gift and is close to securing two more." Something doesn't sound right with that last statement. I would hope that three $1 million dollar gifts to Hadassah are not so rare as to really console them over their Madoff losses. Well, according to the article, they made off like bandits with Madoff.

Repeat of CGA story

2009-08-06T12:35:00.003-04:00

For my dedicated readers, the last post was a re-write of a previous one on the Court ruling involving CGAs that came out in June, in a more serious tone. I am trying to take this story and get it into other publications. If you want to add a quote, email me your thoughts and I will see if I can include them. (Include your name, title and organization)

Best regards!

Important Legal Ruling Impacting Planned Giving Marketing

2009-08-06T12:22:00.004-04:00

Charitable gift annuity marketing scrutinized

The U.S. Court of Appeals for the 9th Circuit issued an opinion in a case involving Robert Dillie, this past June. Mr. Dillie operated a fraudulent foundation between 1996 and 2001. This foundation was in actuality a ponzi scheme which issued $55 million in gift annuities to over 400 donors, sold through investment advisers who were receiving commissions on the sales of new gift annuities. He is now serving 121 months in prison for his crimes but the legal fallout from his nefarious operation lives on.

The receiver assigned to recover any remaining funds to repay defrauded donors sued the investment advisers for the return of their commissions. The Federal Court of Appeals, the highest level court below the U.S. Supreme Court, rejected the various arguments by counsel for the investment advisers and concurred with lower court rulings requiring the return of the commissions.

While the underlying facts of this case were truly unique, the significance of this ruling is how the Court viewed gift annuities in light of the marketing techniques used. This can be best exemplified in the first few sentences of the opinion:

This appeal presents the question, inter alia, of whether the charitable gift annuities sold in this case were investment contracts under federal securities law. We conclude they were, and we affirm the judgment of the district court.

Not only did Robert Dillie promise his investors “a gift for your lifetime and beyond,” he pledged “preservation of the American way of life,” “preservation of your assets,” and “preservation of the American family.”

The Court looked at the various gift annuity promotional advertisements used by Mr. Dillie, all of which are very similar to those used in the marketing of gift annuities throughout the non-profit community. And, the Court had no difficulty at all in concluding that gift annuities were in fact an investment contract under federal securities law, despite specific exemption from such laws under the Philanthropy Protection Act of 1995 (“PPA”).

While Mr. Dillie’s scheme specifically violated the PPA by offering commissions, this point was not used as a reason for its conclusions and the case certainly raises the specter of potential Securities and Exchange Commission regulations for charitable gift annuities. Even more troublesome for charitable entities is the potential for a disgruntled gift annuity donor to use legal standards from the area of investments and securities in any legal conflict with a charitable institution over a gift annuity.

The “take home” conclusion of this case is that charities should be very careful in their marketing of gift annuities and other life income vehicles. A court will certainly look at advertisements and direct mail pieces in any potential litigation. Therefore, it is extremely important to emphasize that charitable gift annuities and other life income vehicles are first and foremost gifts.

A copy of the opinion can be viewed at:

http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf

Planned Giving - The "buck" stops with us

2009-08-04T11:46:00.009-04:00

In light of the recent scandal in New Jersey, and my dedication to warning against risky/questionable insurance deals for charities (as seen in my coverage of Barry Kaye's reported troubles in the press), its as good a time as any for the fundraising world to do our own soul searching and remind ourselves of some basic values that we need to live by.

Did anyone notice that part of the scandal involved the use of non-profit entities for money laundering? Personally knowing about this particular community, I can guarantee 100% that the "profits" from the alleged money laundering through those charities was for the charities - not someone's pockets.

Doesn't make it right. In fact, it was the worst thing they could have been doing with their charitable entities - the consequences destroying precisely what their missions are supposed to accomplish.

While I wouldn't jump to classify the various charitable insurance schemes and other "pushing the envelope" plans out there as criminal activities (as money laundering certainly is), there is a common denominator between them all. The question is how far should your non-profit organization go to raise money for your worthwhile cause?

Do you help your donors commit tax fraud by accepting donations that are really to pay private/religious school tuition? Or, do you "pay" your private/religious school teachers by reducing their tuition bills? Or, do you get involved in one of these impossible to understand insurance arrangements that might magically bring in a big wind fall for your charity? Or, do you join a multi-organization raffle that is clearly violating numerous federal and state regulations? I could go on all day - these are real situations that I come across all the time.

Planned giving, as a field in particular, has always been about doing the right thing for your charity and for your donors, within the boundaries of the law and with ethics. Numerous times, I have had to explain to donors or advisers that I only work within the boundaries law. Gift planners play by the rules, that's our game.

We take pains to inform donors of the consequences of their gifts, even if it means the gift won't happen. We sit through countless classes given by lawyers reviewing all of the various legalities involved in giving. We have a code of ethics promulgated by the national planned giving organization and they even ask you to attest to them before attending their conference.

The planned giving community screamed out against flim-flamsy split interest insurance deals (donors get charitable deductions on life insurance premiums but family gets most of the death benefits). We self regulated the donor advised fund business for 30 years (without scandal until the IRS idiotically gave the Fidelity Gift Fund its 501(c)(3) status). The field voluntarily adopted various codes of ethics and always comes out against the latest "can't be beat" plans that are legally questionable .

Bottom line for charitable institutions is that these no easy way out of good, old fashioned fundraising. Asking for money - that is how over 200 billion dollars a year in this country is raised. Various schemes, selling of products, other business entanglements, just don't compare to tried and true ways of raising money (major gifts, annual fund, direct mail, events, etc...).

Just think twice before you step outside of the traditional fundraising realm to raise funds for your charitable institution. Is it legal? Are you really running a business out of your charity? What are the potential consequences of government scrutiny? What are the potential consequences of this getting into the press? Does this make sense for your charity to be involved?

To quote one of my former clients who refused to be involved in one the insurance schemes discussed recently in this blog: "thank goodness we passed on this one."

Another blow to the "unbeatable" life insurance viatical shemes

2009-07-30T13:14:00.004-04:00

Kim Miller, writer for the Palm Beach Post, deserves credit for keeping on top of the unfolding Barry Kaye situation (which in turn should send really strong messages to the philanthropic community to stay away from various insurance schemes, particularly ones involving viatical settlements).

Here is the most recent story on Mr. Kaye:

http://www.palmbeachpost.com/localnews/content/local_news/epaper/2009/07/29/0729barrykaye.html

Apparently, he is being sued by an 81-year-old who bought a $5 million life insurance policy in 2006 on the promise from Mr. Kaye that they would be able to sell that policy for profit after two years.

This suit isn't directly about charities but the type of plan that the suit involves is very similar to ones that Mr. Kaye and many, many others have been promoting over the past few years. Can't lose propositions? Yea, right. Imagine if your institution "invested" a few hundred thousand in premiums on the expectation of healthy profits after two years, only to find that there is no market for these policies anymore. Finally, we have some evidence that these viatical schemes might be "dead in the water" because nobody is buying anymore (the big buyers of these policies was supposedly places like AIG - solid company...).

Anyway, for those interested in the time-line of Barry Kaye's giving to FAU, check out this link to the Palm Beach Post:

http://www.palmbeachpost.com/localnews/content/local_news/epaper/2009/06/12/0612kayetimeline.html

I don't think this story is over by a long shot.

Really funny tax blog

2009-07-29T15:55:00.003-04:00

For those who think taxes and a good laugh can go together, check out this blog post by the Tax Girl blog:

http://www.taxgirl.com/joan-rivers-cher-in-trouble-congress-to-tax-plastic-surgery/

Her blog was an inspiration for mine and I actually read almost all of her posts (which are a lot). Her site helped me find an answer to avoid income taxes on $67,000 of debt forgiveness that my accountant was having trouble with. I would at least bookmark her page just in case you are researching a tax question. The blog is a treasure trove of answers to various tax questions.

OK, I am really a tax nerd at heart, too, just nobody would hire me as a tax attorney out of law school because I didn't have an accounting or tax background. So I ended up in planned giving, which gives me the opportunity to dabble in sticky tax issues without ever having to take an accounting class.

Grandiose Insurance Plans - Think Again

2009-07-29T14:24:00.003-04:00

For those following a few of my previous posts on charitable insurance schemes (click on the "insurance schemes" label in the left column), and particularly the apparent "slipping" of Barry Kaye's insurance empire, here is the latest out of Palm Beach on Mr. Kaye:

http://www.sun-sentinel.com/news/palm-beach/boca-raton/sfl-barry-kaye-fau-072809,0,7411472.story

Actually, the story isn't so damning in regards to Mr. Kaye. Basically, he is paying one more million towards his $16 million pledge to FAU - bringing his total giving to $5 million and they are writing off the rest of the pledge, and his name is coming off school of business. In this regard, Mr. Kaye has shown that he is trying to do the right thing.

Why the article is important is how it touches on the conflicts of interest created by Mr. Kaye's insistence on promoting his insurance programs at the university after he made his pledges. The story also confirms that the grandiose plans that many of us heard directly from Barry weren't as guaranteed as he made them out to be.

In my mind, he is one of the good guys in the whole charitable insurance scheming world. He actually gave significant money to charity (albeit with some strings). My concern is for the not-so-good insurance guys out there - who really have only one thing in mind when they sell their "too good to be true" schemes: money in their pockets. And, when these things implode, as they always do, the charity or the donor will be left "holding the bag."

Sorry insurance sales guys of the world - I am not convinced that your convoluted plans makes sense for any charity to get involved. I don't even need to see your power point presentation or read your half inch think binder of crossword puzzles. I know its risky, a waste of time, a waste of resources, a waste of relationships, and so on. There is no replacement to good old fundraising, for sure not coming from the insurance industry.

Almost quoted in the Wall Street Journal!

2009-07-28T10:20:00.003-04:00

Well, this blog is getting around. A reporter from the Wall Street Journal contacted me after seeing one of my previous posts: Gift Administration Revolving Door (http://plannedgift.blogspot.com/2009/07/gift-administration-revolving-door.html )

Here is a link to the story she wrote: http://online.wsj.com/article/SB10001424052970204563304574314882717782344.html?mod=googlenews_wsj

Last night, she emailed the same story, but with a quote from me in the last line of the piece. Not there this morning. Oh well - there will be other times to get my name in print.

Check out the story. Interestingly, in speaking with a provider yesterday about this same topic, I was reminded that State Street Bank also had a "house cleaning" a few years ago, too.

This whole area of banks dropping clients or even dropping out of the business altogether makes the case for a charity to maintain its own level of expertise in-house or at least through a consultant. Self serving, yes, but true. You can't rely on banks to run your planned giving program. They can take most of the administrative/investment burden off your shoulders - a must for bigger programs - but it is still your program. I am always wary of banks that sell themselves providing planned giving consulting services along with the administration and investment. As I have said before, banks have no interest in the primary area of planned giving revenue - bequests - so what kind of program advice are they going to give you?

Art and other tangible property gifts

2009-07-27T11:17:00.006-04:00

My day started with a call about a donated work of art, already in possession of the charity (not a good sign), at significant moving expense (another not good sign), from a donor with no previous giving history (a 3rd not good sign!) who is demanding that the charity provide a dollar figure for deduction purposes in the acknowledgment letter and refused to get his own appraisal (but wants a deduction - the worst of all signs). This is a really common situation and it would be easy for me to suggest that they just go with their standing gift acceptance policy - no valuations provided for gifts of art.

Problem with that advice is that in the real world, development professionals are in the business of keeping donors happy, making friends (not enemies), and exploring development opportunities when they arise (and not everyone has many of those today).

My first question - is it worth $5,000 or less? Answer: donor thinks its worth up to a $100,000; development officer has no idea what it is worth. (read part II below to see why that is important)

Second question: what are you planning to do with it? Answer: permanently place it in a new building - no intentions of selling. (read part I below to why that is important)

In case you are wondering if I am going to discuss the related use rule - the answer is no (this case doesn't involve the related-use rule - they have a museum, the piece completely fits in with theme of the institution)

The question here is about acknowledging art and other tangible personal property when the donor is not cooperating the way we would always like. Seeing that the development officer was in a bind, we came up with the following:

Let's find out about adding this piece of art to the institution's insurance policy - maybe they require some sort of appraisal. Find out the cost of obtaining an appraisal for insurance purposes. And then make a decision. If the cost is relatively low and the institution would get one anyway - to insure the piece - then get the appraisal. Then we draft a letter that carefully states the facts very accurately so that it is clear in the letter that the appraisal and value we came up with is for our own purposes and that he should seek his own counsel to determine the deductibility of the gift.

Or, the decision is not to spend anything on the appraisal and stick with the gift acceptance policies "come hell or high-water" (i.e. live with the consequences that not every donor can be made happy).

The lawyers and lawyer-ly minded people reading this blog are probably screaming in their heads - how can I even suggest putting any dollar amount in the letter? Well, firstly, anyone reading this blog needs to seek their own legal counsel - my own caveat. Besides being a lawyer myself, I seek legal counsel too and the advice I got was that if forced, just describe where you got the valuation from and put in the CYA caveats in the letter. It is not ideal and I told the caller that they may just want to hold their ground and accept the consequences.

This situation probably would not have reached me if the charity knew of the donor's demands BEFORE accepting the gift. It shows you how important it is to have a gift acceptance policy that "ties your hands" before accepting such gifts.

Anyway, I am including two short pieces below I wrote earlier this year about tangible property gift rules. These will all be chapters in my book! My blog book that I am writing and will somehow compile as a guide to planned giving.

And, don't forget to forward links of these blog posts around! I am still in the proving phase of this blog and the more readers, the better chance it will survive and get better.

Part I - Selling Donated Art and Other Tangible Property Gifts

In light of recent stories in the press about some universities selling donated works of art to replenish endowments, we thought this would be a good opportunity to revisit this thorny question. Many of us may have missed an important change to charitable giving laws in the 2006 Pension Protection Act (“PPA”) regarding gifts of tangible personal property like artwork or even equipment.

Generally, donors receive a fair market value deduction if their tangible property gifts have a “related” use to your institution – otherwise the deduction is limited to the donor’s adjusted cost basis (in other words – the original purchase price of the item). Many of us recall that a separate rule requires a charitable recipient of such gifts to file a form (Form 8282) with the IRS when your institution sells or otherwise disposes of the property within 2 years (the IRS’ way of red flagging overvaluations or improper related use gifts).

That was generally the law prior to the PPA. But, the PPA significantly changed both rules, in effect melding both the related use rule and the Form 8282 requirement together. Now, the rule is that any gifted tangible property that is sold or otherwise disposed of within 3 years of the date of gift requires the filing of Form 8282 AND creates a presumption that the donor’s gift was NOT for a related use. In fact, the statute calls for the donor to retroactively lose their deduction taken above their original purchase price.

Part II – Gift Acknowledgment Letters and Qualified Appraisals

Acknowledging gifts of tangible property, including art and in-kind gifts (excluding automobiles which have special rules), can be very challenging and some of the rules are easily forgotten or misunderstood.

There are two general categories: those tangible property gifts valued at or less than $5,000 and those above $5,000. (All gifts less than $250, cash or otherwise, technically do not require even a receipt.)

Tangible property gifts valued at or below $5,000 will require a receipt from your foundation but the donor is not required to obtain a qualified appraisal outside of describing the method used to determine value on his or her tax return.

The second category of tangible property gifts is for gifts valued over $5,000. The donor in these cases is required to obtain a qualified appraisal to claim a charitable deduction for. The appraiser must "hold himself or herself out to the public as an appraiser." The qualifications of the appraiser also must include the ability to appraise the specific type of property involved, and he or she must be independent. The appraiser must not be a party to the gift, and may not be the charitable donee or an employee of either the donor or donee. The appraisal must specifically address the physical condition of the property and the factors appropriate for valuing that type of asset. These are just a summary of the rules involved with qualified appraisals which you can provide to your donor as long as you also include written language urging your donors to seek legal or tax counsel to determine the legal effectiveness of any appraisal obtained for deduction purposes.

As most should know, the qualified appraisal requirement is the responsibility of the donor. You should not attempt to obtain one on behalf of the donor. If pressed, you may need to help your donor find an appropriate appraiser. In such cases, try to provide three appraisers and always include caveat language in writing stating that your donor’s legal or tax counsel should assist the donor in making a final determination as to the qualifications of an appraiser.

Another challenge fundraisers face is when donors request a specific dollar amount in their gift acknowledgment letters, whether for gifts above or below $5,000. In no way should your institution be seen as providing gift valuations. There are potentially serious consequences for your donor and your institution should a fraudulent gift valuation be found by the IRS. Rather, your institution should consider adopting a policy of never providing a dollar amount value in the gift acknowledgment letters of tangible personal property. A full, non-monetary description of the property should suffice.

If your donors are adamant that a dollar amount should be in the letter, then your gift acknowledgment letter can describe the property and then state a value “as provided by your own valuation” or something to that effect. Stating in the letter that the valuation was provided by the donor is an option several attorneys have suggested in these situations – your own charity’s legal counsel should be consulted on this question. Additionally, it is always important to include language in your gift acknowledgment letters that strongly urges donors to seek “independent legal or tax counsel in determining the amount deductible for federal tax purposes.”

You have been warned! Finally, a legal decision that hits directly at gift annuity promotion

2009-07-20T12:11:00.007-04:00

Gift planning lawyers are starving for case law because people don't seem to take our warnings very seriously. How many times have you heard lawyers at planned giving conferences warn about how we are promoting charitable gift annuities? About avoiding investment language, how we should be emphasizing the charitable gift in the gift annuity, how we really shouldn't mix up CGAs with anything related to securities (and their SEC regulations).

And, how often do we see gift annuity advertisements extolling "attractive rates." Or, how about "a gift that offers lifetime income ... and beyond." Or, "your annuity payment is determined by your age and the amount you deposit. The older you are, the more you'll receive." Or, language like "current average net-yield."

The thing is, these quotes could be right out of our CGA promotions. But, they were actually taken directly from a U.S. Court of Appeals (Ninth Circuit) opinion in a case just published.

I'll sum up the case for you: there was once a CGA program that was a true ponzi scheme. A guy named Robert Dillie (now serving 121 months in jail) pushed CGAs through investment advisers - giving the investment advisers commissions (big time "no no" under the Philanthropy Protection Act (PPA) of 1995). They raked in $55 million from more than 400 CGAs between 1996 and 2001, and then went belly up. Receiver gets appointed to save what he can to pay back those defrauded. Sues to get back commissions from the investment advisers. Investment advisers claim every thing under the sky, including PPA of 95 protection (interesting to note that the PPA specifically does not exempt CGAs where commissions are involved). Bottom line - court says CGAs are securities and the advisers need to return the commissions they collected.

It is an interesting read for those interested:

http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf

What startled me was the ease at which a court found CGAs to be securities! And the proof - see the quotes above and read the case - that could be any of our charities promoting CGAs.

A couple more Heritage Foundations or real CGA ponzi schemes, and the world of CGAs could easily be headed to SEC regulations. Pretty scary stuff considering we in the charitable world can barely handle insurance department licensing in California, New York and New Jersey. I would venture to say that SEC regulations would be generally be a deathblow to CGAs as a viable planned giving vehicle. It wouldn't be worth it anymore to be in the business.

This case hits home that we in the planned giving business need to be vigilant to avoid promoting CGAs as financial investments. Who knows what the consequences could be? Maybe a disgruntled donor will demand his/her money back, hire a smart lawyer, and use the investment product/securities issue against your organization. There are legal risks involved in all planned gifts. Leaving our CGA programs open to be lumped into regulated securities is just plain foolish.

The behind the scenes talk I have had with prominent attorneys in this field, since this most recent financial collapse, is how vulnerable planned giving program are to potential law suits. And, this case exemplifies how close CGAs in particular are to be dragged into a whole new realm of legal disasters for charities.

Through the eyes of the gift planner

2009-07-17T10:17:00.005-04:00

The job of the gift planner may seem relatively easy sometimes. An "off the radar" donor leaves your organization a whopping bequest - how hard is that? Sign the release and receive the money!

Or, like the call I received this week from an estate planning attorney going to set up a $1 mil+ CRT for his client - sounds easy enough. Think again.

Then the conversation starts with the attorney. He wants our sample form CRT doc's - Harvard gave him some for the previous CRT his did for this donor. Easy enough - I get two vetted samples from a bank - the bank we could use if need be to manage the trust.

Who is going to be trustee? The charity involved doesn't manage any planned gifts, yet. At first, the attorney says he'll take care of it - but in the second conversation, it becomes clear that they (donor and attorney) expect the charity to really do most of the lifting. OK - does this charity kick off its own planned giving program or does it bring the CRT to its system parent (which has a program for its constituents and the bank ready to manage)?

Then the conversation continues. The donor is going to be purchasing wealth replacement life insurance through an Irrevocable Life Insurance Trust (ILIT). The attorney asks me if I have any samples of these? I start to wonder?

I check with the bank that would end up trustee'ing the CRT if they choose to bring it to the system parent. They have personal trust services that do it. What is "it" that needs to be done with an ILIT? Actually, what is an ILIT? In short, it is a device for keeping life insurance death proceeds outside of one's taxable estate by making the ILIT the irrevocable owner of a life insurance policy. Gift transfers happen when the insured contributes annually to the ILIT for the policy premiums - potentially taxable gifts if over various limits. In theory, you could put $1 mil into a CRT, give the income from the CRT to your ILIT which owns a policy for $1 mil - add it up, kids get $1 mil with no estate taxes, charity hopefully gets its $1 mil, donor rec'd an immediate income tax deduction, avoided cap gains on funding stock, maybe gets some extra income in later years, lowered his taxable estate by $1 mil. But, these have to be done right or the whole point could be lost. Annual "crummy" (the legal term from a case by a guy named Crummy) notices letting kids know that they received a gift need to be sent and saved, etc...the IRS loves to knock off these in estates, easy money for them. No charity should ever be involved - it is a personal estate planning tool and risky if not handled right.

This started as "easy as pie" and all of a sudden, it is really complex. You see, we have an attorney that might not be able to do everything his client needs. We have a donor who wants to see this done without big legal bills and fast (even though it has been many years in the making). We have a charity that might have a finance person with the idea that they can kick off a planned giving program with a snap. And, we have an established parent system program with a bank ready to handle everything (wink, wink), even the ILIT for the donor.

The challenge for me is to guide the client and the attorney/donor to a successfully closed gift that makes sense for everyone. From my experience, everything is telling me that we should bring this donor to the parent system's bank and they will do everything - and at reasonable fees. But, it isn't my decision to make (especially since I am only a consultant - a stand-in planned giving director).

On top of everything, the attorney wasn't set on which type of CRT. CRAT or CRUT? In my head, everything is telling me CRAT. I call this "seeing the future." I know what usually happens - CRUTs sound great at first but donors get aggravated when the income fluctuates from year to year, especially when it goes down. And, I am imagining this charity trying to run a CRUT themselves in-house. I don't even want to go there. Yes, these situations are why I am in business but it is still my job help avoid foreseeable problems.

To be in continued next week!

Have a great weekend!

Welcome and feedback request

2009-07-16T16:17:00.002-04:00

I wanted to thank Phyllis Freedman from the http://plannedgivingblogger.wordpress.com/ for posting some of my material on her blog and also thank the new people who have signed up for email updates!

As this is a new endeavor, I am hoping for feedback and questions from readers. This is a work in progress - my goal is to bring planning giving info sharing into the digital age, particularly on the legal/technical side of gift planning.

Let me know what you think. Offer suggestions. Use the "contact me" gadget on the left!

For now, I am going to try and report important/relevant stories (with some of my own commentary) that impact the planned giving and fundraising world, and address interesting gift planning situations. Eventually, I plan to build a library of "how to" articles for those just learning the field (see article links in left column) which could eventually be published as an online book. Every good planned giving consultant needs to publish a book! Let's see if I ever get there.

Harvard Not Going Under - Massachusetts Passes UPMIFA!

2009-07-13T16:35:00.004-04:00

Not that anyone from Massachusetts is reading this blog but the following innocuous piece in the Boston Globe is actually major news for places like Harvard:

http://www.boston.com/business/articles/2009/07/03/nonprofits_get_relief_from_endowment_law/

One of the most prominent attorneys in the planned giving world told me several months ago that Harvard was literally teetering over their endowment woes - I can't confirm if they had consulted this particular attorney but it sounded like he had first hand info.

Here is a Wall Street Journal article talking about Harvard's endowment losses at the end of 2008: http://online.wsj.com/article/SB122832139322576023.html. What the article doesn't detail is how much less cash the university would have had as a result of the "freezing" of most of their endowments. To put it in context, a $39 billion dollar endowment could have spun off close to $2 billion a year in various scholarships, program funds, endowed professorships, etc... $2 billion is a lot to make up for, even for Harvard.

Well, the storm is over, Mass has UPMIFA! Those who have been dealing with underwater endowments will understand what I mean.

See previous discussions about this law on this blog for more info.

I wonder when New York will fall in line - at least 34 states now have ENACTED UPMIFA, and only three remain that have not even proposed it. But, in New York, common sense doesn't seem to prevail when it comes to legislation.

Credit Where Due - Insurance Does Have a Place in Planned Giving

2009-07-08T12:55:00.003-04:00

I am already jaded when it comes to new insurance plans - as my previous posts have shown.

But, I have to give credit when it is deserved.

As mentioned in a previous post, many of us in the planned giving community in New York were bombarded with Fedex'ed invitations and phone calls to attend a gala insurance event (The CHIEF Plan).

The whole thing threw me off. Firstly, the aggressive invitation approach. Secondly, a claim by the promoter that their plan is "patent pending" (one of my main signals that the plan is probably absolutely bogus - not that I know about this one or will ever find out).

What confused me the most was that Peter Fleischmann, the head of the Jewish community foundation in Buffalo and one of the top planned giving professionals around, was a guest speaker at their event.

Finally, last week I was able to speak with Peter and hear what the event was about and see if he had really gotten caught up in one of those schemes we all moan about.

Surprisingly, what Peter described to me was a firm, particularly his contact with them, that did standard insurance things that any decent planned giving program should be considering. Donors sponsoring the premiums on policies that will someday create endowment funds, arbitrage with commercial annuities, careful review and consideration by investment committees, and so on.

Insurance does have a place in planned giving. There will be opportunities that arise where it is the right vehicle for enabling major philanthropic objections. The challenge is to make sure the plans involved are truly vetted by the IRS, not speculative, honest, and worthwhile for all parties involved (not just the insurance salesmen).

I can't understand why these insurance people keep running around saying they have a patent pending or a highfalutin (a real word!) law firm's tax letter or required non-disclosure agreements.

Update on Gift Administration Providers

2009-07-06T10:08:00.006-04:00

After writing my previous post, I confirmed that one of my previous programs had also been given the "pink slip." That program had a few million in CRTs and CGAs - CGA program was around $1 million and the CRTs probably totaled $1.5- $2 million.

From previous conversations with BNY/Mellon after they merged, they had said their minimum was basically $5 million, which was the highest I had encountered in the business.

Places like Merrill Lynch, PNC Bank, and Bernstein had indicated that $1 million was generally the threshold to overcome minimum fees. That means that once your assets are over that amount, then the minimum fees are covered in the regular fees charged (otherwise, you would have to pay out of pocket to make up any shortfall in covering the minimums).

This isn't the first time in the planned giving business that clients will be getting fired.

I recall about 10 years ago that one of the "major" promoters of planned giving services dropped numerous clients after a merger. Not pleasant for the charities involved since they were typically subject to very hard sales pitches and lots of promises and then unceremoniously dropped if the accounts weren't profitable enough. And, this same bank came back promoting their services harder than ever, with even more promises a few years later.

In fact, every where I went (i.e. sales pitches), I kept hearing that this same bank says they can provide all of the planned giving "consulting" services to be included in their standard fees. I just wondered if they could really come through on their promises and whether they would really be interested in helping a charity promote bequests which are usually 80% or more of planned gift revenue (see http://www.onphilanthropy.com/site/News2?page=NewsArticle&id=7559 for my article on why Bequests still rule the PG world) in addition to life income vehicles.

Sadly, one of my former clients got suckered into going with this "do it all" bank and found out the hard way that they weren't everything they claimed to be. And, my hunch is that this one unmentioned bank, along with others, will dropping planned giving programs in the near future as struggling banks will be looking to clean house of lesser profitable (or even not profitable) clients.

So, we'll see if this new provider (Cornerstone http://www.cornerstone-companies.com/PlannedGiving.aspx) and others who serve the smaller end of the planned giving market will be ready to step in when the big promisers start breaking their promises.

Gift Administration Revolving Door Challenge

2009-07-02T11:47:00.005-04:00

For those who know me, you should know that I get very excited over planned giving issues that the world would otherwise not consider very exciting.

This week's excitement: Bank of NY/Mellon giving notice to over 50 smaller planned giving programs to pack their bags and get their money out by September 1, 2009.

I have been warning about this for a few years but it is always weird to see your predictions come true.

A little context. Having worked for, with, or consulted to about 200 planned giving programs, I can honestly say that finding a good 3rd party administrator/investment firm is one of the key elements to running a smooth and successful planned giving program. Otherwise, you and other staff will be wasting your time trying to keep up with the checks, mistakes, paperwork, etc.. when there are firms that do it all and the cost is basically included in the investment management fees. More time seeing donors, less time administering - it is a no brainer even if there seems to be some more costs involved.

In the past few years, even before the recent downturn, fewer and fewer such providers have been willing to serve the smaller programs. Minimum total accounts expected were $5 or $10 million. What about the $1 million dollar programs? Or less? The challenge has been to find solutions for those smaller programs when the banks will no longer take on new small ones.

But, what about the programs that got in before the minimums were raised? Bank of NY used to be very flexible as they were building their business. Well, with Mellon now in charge of that program, it seemed like a matter of time before BYN/Mellon would clean house.

And, apparently, they have decided to do this with a hard date of September 1 (announced around June 1). Three months over the summer is not a lot notice for non-profits to find a replacement 3rd party admin/investment adviser - if you ask me.

Interestingly, two folks who had been with Bank of New York planned giving services opened a new provider this past year and seem to be ready to take on all of those smaller programs that don't have many options.

Kudos to Tom Aschoff and Danielle Green for launching a planned giving services program to serve this very under-served market. Here is a link to their web page: http://www.cornerstone-companies.com/PlannedGiving.aspx. From my conversation with them, it seems like they can offer the full range of planned giving administration and investment services - one stop shopping - for less than 100 basis points a year. And, their minimum fee seems reasonable - you'll have to call them yourself for more info.

What I am wondering is who is next to drop planned giving accounts? I am just thinking about all of the promises a few big firms have made to attract new planned giving clients in the past few years and they don't even know if they'll be in business, let alone be able to serve the low margin planned giving world.

Have a great 4th of July to all!

Update on Previous Post about Barry Kaye Article

2009-06-29T11:32:00.004-04:00

In all fairness to Mr. Kaye and my readers, I have some new information that clarifies that story. When I met with Mr. Kaye a few years ago, he gave me the impression that he would put prospective "insurees" on the board of his private foundation and then the private foundation would borrow money to take out a life insurance policy on its new board member. This scenario raises a bunch of legal issues which I was stilling wondering about all this time.

Today, I had a conversation with the writer of the story in the Palm Beach Post and finally I have a better understanding about what Mr. Kaye was doing. Mr. Kaye did say he put our board member his foundation board, he just didn't say which foundation. It just happens that Mr. Kaye also owned/controlled the Wealth Creation Foundation. Not a foundation in the sense we normally think because it was a for-profit company (mentioned in the Palm Beach Post article that it closed).

Now I got it. Mr. Kaye put the prospective insuree on his for profit "foundation" board, it borrowed money and took out a policy our board member's life, sold the policy after two years for a significant profit (in this case because the insuree almost didn't make it), and then donated the net profits from the deal to his private foundation (to be granted out to charities of Mr. Kaye's and the insuree's choice).

This answers a big question for me since from my own conversation with Mr. Kaye. I was under the impression that everything was done through his private foundation. I was taking notes during our meeting and I think I would have picked up on the for-profit entity if he revealed it or maybe he was spinning a confusing web which I just didn't get.

So, I have to give Mr. Kaye credit, his plan was more legal than I thought even though his glossing over facts definitely gave me some false impressions.

Story About Gift Annuities in Chron. of Philanthropy

2009-06-29T09:54:00.003-04:00

I spoke to the author of this article extensively and provided lots of documentation in hopes of getting my name in the article.

Well, I didn't get into the article but she did do a very good job on a very sensitive topic. I wouldn't have been so sensitive if I had written it.

To see the article:

http://philanthropy.com/premium/articles/v21/i18/18001701.htm

(you might need to be a subscriber to get to it)

Article Touting Some New and Not So New Techniques

2009-06-25T15:45:00.004-04:00

I try to keep up with new options in the planned giving/fundraising world by glancing at the titles, scanning through interesting ones, and eventually reading closely important stories. This most recent article on the Planned Giving Design Center would have just remained in my "scanned" category but for discussion of a new approach to lead trusts. Any interest? Here is the story: http://www.pgdc.com/pgdc/shark-fin-clats-vs-bears-charitable-giving-down-times

As an aside, the article struck me as not being in touch with reality. The author quotes someone as saying that lead trusts are "poised to explode in popularity." What a load of you know what. Check out my primer on lead trusts that you can click through on the right column. There is no way lead trusts will become the popular vehicle like the author says. Unfortunately, if lead trusts really do increase in popularity, the only explosions will the law suits of unhappy families sold on false promises by either charities or advisers - most of whom are typically inadequately knowledgeable about the multitude of pitfalls that come with these trusts.

Update on Previous Post About Insurance Schemes

2009-06-23T10:35:00.004-04:00

Finally, someone read my previous post and wondered what I was saying (Thank you to Josh Wilk!).

As I said in my previous post, I only spent a few minutes looking at the overview of the Ohio case on insurance fraud. One key thing I learned early on as a lawyer is to read the case and not rely on summaries (summaries are helpful for locating an issue but you need to see the case itself to determine if there is something useful or not in the case).

So, here is my summary of the Ohio case previously posted for those in the charitable world (and if it interests you, read the case). The case has nothing directly to do with charities. It is about a convoluted, viatical scheme whereby the promoter would find elderly (possibly dying) individuals to buy life insurance on themselves to immediately transfer the policies to the promoters who lined up investors on the policies. Ironically, there were multiple frauds going on - fraudsters against fraudsters - and of course the whole thing went under. Too complex to even attempt to describe.

The short of it: the receiver in bankruptcy of the principal fraudster wanted to get back premiums on three "fraudulently" obtained policies from an issuing insurance company (mind you - as much as you might hate insurance companies, this one was not a part of the fraud). Court says: you (the plaintiff) perpetrated a plan to obtain insurance policies fraudulently and now you want the money back because the policies were fraudulently obtained (by you!)? No way, end of case (for now).

What should we in the charitable world learn from this? Number one: insurance policies purchased "with the intent to resell...constituted insurance fraud because the viators (the elderly persons buying the policies) never intended to insure their own lives." In other words, anyone promoting a plan that rests on the reselling of policies after two years to "investors" is treading on a very thin ice. And, most charitable insurance schemes that I have seen in the past few years relied exactly on that idea.

See my earlier post about the possibility of Barry Kaye's big pledge to FAU not coming to fruition because of his inability to resell insurance policies for nice profits after two years. http://www.palmbeachpost.com/localnews/content/local_news/epaper/2009/06/12/0612kayepledge.html

I am going to save my thoughts on why even legally legitimate insurance schemes are not productive for charities to get involved with for another post.

My apologies to Choli, Stoli, and Stromboli and whatever else you might call yourself for lumping you in with this case.

More on Life Insurance Deals Going Down

2009-06-22T14:49:00.007-04:00

I lost track of these newfangled charitable insurance "too good to be true" schemes a few years ago. CHOLI stood for Charitable Owned Life Insurance, which was a version of STOLI (Stranger Owned Life Insurance).

Anyway, thanks to an anonymous friend who provided me with these links, if you want some enjoyable vacation reading on the topic, check out this summary piece posted by a law firm: http://www.bricker.com/publications/articles/1470.pdf.

If you are really a glutton for punishment, check out the full decision: http://www.bricker.com/legalservices/industry/insurance/09a0187.pdf.

I have to admit that I haven't read either carefully but I really plan to do so soon.

So who is going to "The CHIEF Plan Luncheon" on June 24, 2009 in NYC? They sent me a package and invitation by overnight mail. (CHIEF stands for Charitable Insured Endowment Fund plan)

Real Estate for Life Income All Over Again

2009-06-19T10:22:00.005-04:00

With the still down market, proposed Planned Gifts funded with real estate keep coming up more and more. And, if you are familiar with these situations, the idea of using gift annuities sounds all too enticing. FLIP CRUTs are really the "real estate" ready vehicles but what if there is a mortgage on the property? what if the donor demands an annuity and not a unitrust income?

I am going to put out the collective wisdom of many who have tried and learned their lessons: forget about gift annuities for real estate (at least for the start of the conversation). If I had my druthers, I wouldn't allow them like NY law used to.

Why am I so negative? Because they are disasters waiting to happen.

What if you have buyer ready and waiting? What if the buyer walks?

What if the property isn't sold during the year of the gift? NY and other states require you to put cash into the require reserves. What if the property doesn't sell for a really long time - you might not be employed by the time it gets sold.

What if the property sells for a lot less than everyone anticipated? Does your donor still get income based on "appraised" donation value?

These are just the start of complications. I actually love trying to figure out how these will work but no charity in their right mind should offer them in most cases.

Just my thoughts after working on a few of these potential gifts this week. Comments? Any successful real estate funded CGAs out there?

Charitable Insurance Schemes Falling? Surprise, Surprise!

2009-06-15T14:58:00.019-04:00

I can't even tell you how many charitable planned giving insurance schemes I have reviewed. In almost every case, I was convinced throughout the presentation. Then after the insurance salesmen leave, doubts start to sink in and finally, I know it is just too good to be true.

Bottom line: charities do not gain by leveraging the insurability of their donors, and/or by borrowing to buy insurance, or any other cockamamie plan (I had to look up the spelling of that one). I don't care who you are and how many tax-planning patents you have (a tell tale sign that the scheme is particularly insidious)or how many non-disclosure agreements you have me sign (another tell tale sign that the plan is bogus) or that you have a prominent law firm's "tax-letter" testifying to your plan (probably the worst of all the signs that you are dealing with crooks - try running your plan by the IRS lawyers and see what they say!).

For the non-planned giving professional, I am referring to "get rich quick" schemes for charities involving insurance - they are all the same in my mind: not worth your time and resources and worse.

Finally, if you have ever heard of Barry Kaye, the real King of Insurance, you shouldn't be surprised that his insurance/charitable empire may be starting to tumble. Here is the story:

http://www.palmbeachpost.com/localnews/content/local_news/epaper/2009/06/12/0612kayepledge.html

I met with Barry a few years ago just after he made his $16 million dollar pledge to FAU. In fact, he seemed to be very proud of his charitable giving but also seemed to be using it as leverage to get his foot in our door (just my sense, of course). He had a new "can't miss" twist on the whole charitable insurance scheme industry. Yes, he wanted to have insurance policies issued on our donors. His new program was that he would put insurable donors (with significant insurability of course) on the board of his own private foundation. The foundation would then borrow money (he was talking about borrowing hundreds of millions of dollars for this new deal) to buy insurance on its "new board members" (a neat way around insurable interest questions). Then, after two years of holding the policy - if the donor survived that period of course - the foundation would sell the policy, pay some taxes, pay itself back for the funds expended on the premiums, and then let the board member direct half of the net profits from the deal to his/her charities of choice. It was a no risk transaction for us - right?

Well, we weren't biting. We had no interest in inviting Barry to meet with our trustees and in fact, the ones that knew him personally absolutely refused to discuss any meetings (we needed to show that we made some effort). If our trustees found him on their own and did it, fine. But, we were not going to be a "party" whatsoever to this new deal.

Also, my general concern at the time was about legislative efforts to put the viatical settlement business out of business. I didn't have the foresight to see an economic collapse.

The main point to understand is that insurance contracts are subject to multitudes of unknown or unexpected factors that makes the iron clad guarantees of the salesmen very flimsy. In Barry's case, he couldn't see (or wouldn't admit) that the market for insurance policies on the lives of strangers might dry up. Apparently it has and it could take down his empire.

Interestingly, only once in my career have I ever seen any of the insurance schemes pitched actually benefit a charity. I would love to be proven wrong by hearing good stories. That case: it was a policy that Barry Kaye's foundation bought on a trustee of an entity I worked for! The trustee survived the 2 year non-contestability and they did sell the policy for a profit! A very large pledge was made and at least a very significant payment was on it by the Kaye Foundation. After that, I moved on in my career don't know if the institution ever received everything promised.

That was the exception to the rule. Most of the promoters of these schemes won't admit that no one (but themselves) has benefited. Ask for names and phone numbers of charities which have seen monetary benefit from being involved in one of these things. I invite the world to report back on all of the great get rich quick charitable insurance schemes that have worked marvelously for your institutions (miraculously if you ask me).

Underwater endowments in New York and other places

2009-06-11T09:59:00.006-04:00

Anyone following a really important issue for non-profits with permanent endowments, particularly in New York? Assuming you have "underwater" permanent endowment funds - which are effectively frozen - haven't you been wondering if there will be a change in the law to open up distributions?

Well, over 30 states have already enacted UPMIFA, the updated version of UMIFA (the law that originally let you use a spending rate irrespective of principal for permanent "income only" funds as long as your fund principal was over its original gift amount). This was the "modern" approach started in the 1970s but that last caveat reared is ugly head this past year in a big way. Currently, only three states have not even proposed UPMIFA - so with more than 30 on board, and up to 47 states potentially enacting, this new law should be the standard (see below for more about it).

What about New York? Well, not yet! It was proposed for the first time this past April but passing laws in NY is not that simple. Bottom line, these things usually take a few goes around and anything effecting charities needs the AG to support it. And, they break by July 4th weekend for the year! Not looking good for this year.

The new law though adds the letter P - for Prudent to UMIFA. In other words, underwater/frozen endowments will be a thing of the past - Prudent decisions will reign and let's hope charities learn how to be prudent.

Here is a short summary of UPMIFA. Annual distributions from permanent funds should be based a series of “prudent” factors: 1. the duration and preservation of the endowment fund; 2. the purposes of the institution and the endowment fund; 3. general economic conditions; 4. the possible effect of inflation or deflation; 5. the expected total returns of investments; 6. other resources of the institution; and 7. the investment policy of the institution.

For more information or to confirm if your state has enacted this important law, go to: http://www.upmifa.org/DesktopDefault.aspx.

Gift Annuity Risk

2009-06-10T15:08:00.001-04:00

Gift Annuity Risk

I was wondering if I am crazy or not. Was I the only one in the planned giving world ringing the alarm, calling out to whoever would listen, that many gift annuity programs might be in big trouble? When you are an alone alarmist, you have to start wondering.

At Planned Giving Day in New York a few weeks ago, I presented on a panel various “doomsday” projections about exhausting CGAs but the response was quiet – too quiet, like maybe people didn’t want to hear the message or maybe I was wrong. There was of course the misleading article in the Wall Street Journal, hardly backup for my theory that CGA programs in general could be in trouble.

Finally, Frank Minton on PGCalc’s latest webinar on Advanced Gift Annuities dedicated the first 20 minutes of his presentation, billed as a discussion on advanced and new gift annuity techniques, to “risk control.” And, listening to Frank’s presentation and seeing that he used similar projection models to what I use, mostly “what ifs” using assumed constant rates of return, I know I am not crazy.

Here is the bottom line in what I found with the NEW (February 2009) ACGA rate tables. If your program returns 4% a year constant returns, I feel comfortable saying that your program will never experience (or very rarely) exhausting CGAs. Great news if you think 4% is attainable on a consistent basis.

The problem is what are we to do with older annuities? Under the same analysis on ACGA rates a few years ago, I figured out that you need to return 5% a year consistent returns, to be generally safe from gift exhaustion. Less than that, not always safe.

But the problem gets even stickier. I know from experience that even the biggest and best gift annuity investment/administration providers have seen the CGAs pools on their watch drop over 25% in principal value since January 1, 2008. That is on the conservative side – I am sure many have lost more. And, as CGA payments don’t change, the rate of diminishing principal speeds up even if you return to “normal” investment returns. What I mean is that your program may seem ok but really it’s not – one big annuity that runs out of money could bring the rest of your pool underwater with it. You don’t want to be hoping that your donors don’t live into their 90s because their annuity principals will be gone and perhaps eating up the rest of your pool.

In the midst of working through sticky situations for clients, I finally started feeling a ray of hope. Not that all will be well with every annuity out there – certainly not – as many are paying the price now for offering rates over the ACGA tables, or for the ACGA rates being too high, or for sloppy oversight, or for uncontrolled gift acceptance policies, or for small organizations taking on CGAs when they shouldn’t have, or taking on CGAs much too large for certain organizations.

The point is that proceeding carefully from this point forward can rescue your CGA program from “doom” that might be coming. Wake up now. Ask your provider for an updated “market value” report showing the current value of every annuity. Create an excel spreadsheet calculating what happens to the principal of each annuity under different flat rate assumptions over the next 10 to 20 years. Here is my super-secret excel formula for doing this: =(C1*$A1)+C1-$B1, column A is the assumed rate of return, column B is the fixed annuity payment, column C is current principal, put the formula in column D and then drag it over the next 10 to 20 columns. The $ sign keeps rate of return and payment amount fixed – the rest changes column by column – year by year. If you have trouble doing this, get someone from the finance department to help you.

You will start to see when CGAs are approaching negative. Maybe you will see an exceptionally large CGA that not only might run out of funds in 4 or 5 years, but will literally eat up the rest of the pool should it exhaust. It might be time to meet with that donor to see if he or she will take a lower income stream or would even give up all of the income.

New annuities are great for struggling pools as long as the pool isn’t so far depleted that news funds will only just push off the inevitable exhaustion of the whole pool – that really is more like a Ponzi scheme.

Perhaps it’s time to ask new CGA donors if they will take less than the ACGA rate – preserves a bigger remainder gift and bolsters the whole CGA program.

The biggest change though has to be your “remainder” policy. Dig deep enough into the CGA concept and you will find that the CGA program rests on the theory that “you win some and you lose some.” In other words, “profits” from annuitants dying before life expectancy should cover “losses” from those outliving their life expectancies. But most organizations pull 100% of an annuity’s funds when an annuitant passes away leaving a pool that is filled only with the “losers,” those outliving their life expectancies. Coupled with unexpected 25% investment losses in principal this past year and this is why we’ll soon start seeing CGA programs fail.

You should consider developing a policy to leave something from every annuity in your CGA reserve account – look at it as a rainy day fund. One large charity I know actually leaves all of the “liability” portions of each matured annuity in its reserve – creating an unrestricted endowment within their CGA reserve account. Even after years of offering even higher than ACGA rates, this past year’s market losses didn’t have a material impact on their program.

And, in dealing with a fund currently in danger of exhaustion – or at least a few years away, one solution after adding the proper reserves that the New York State Department of Insurance requires (and not a bad idea for non-New York licensed issuers either) is to leave 100% of new matured annuities in the fund until the pool has recovered. I know that your donor’s wishes may be delayed a bit, but you also have to make sure your program and organization is solvent.

Eventually, with careful supervision and understanding that CGA programs don’t run on autopilot, your program can be back on track for providing long-term financial resources for your institution.

Jonathan Gudema, Esq.
Changing Our World, Inc.