Happy Thanksgiving, New York Style

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

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

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

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

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

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

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).