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Making Foundations Work for You and Your Clients
Roger Silk | 10-25-01
Charitable giving is universally admired and respected. This is true in a way that does not apply to most other things people put their money to. One way that advisors can encourage their clients' charitable giving is by helping them set up private foundations.
In my last column, I discussed some of the benefits that accrue to advisors who are able to provide their clients with full-service private-foundation management. This time, I'll talk about the other advantages and give some tips on picking an outside professional to set up and run the foundation.
Attract Clients and Cement Client Relationships
Private foundations are an important planning tool for the wealthy, but few advisors are able to easily deal with them. By offering private foundations to your clients, you'll be in a position to attract not only charitably minded prospects, but also those motivated by tax deductions.
Once those clients are on board, private foundations will help you keep them. Astute observers have pointed out that if you are able to secure three points of financial interaction/service with your clients, you will be likely to keep the client relationship long-term, despite the efforts of competitors to lure clients away.
A private foundation facilitates multiple points of contact and thus helps to secure your relationship. These points of contact may include the foundation itself, your relationship with the client's other advisers via their role in the foundation, and your investment-management relationships with the client and the foundation.
Moreover, the foundation's board members may be sources of future business, as well as the charities that the foundation supports. Perhaps more important, the private foundation helps you develop a meaningful relationship with your client's heirs, a relationship that could have significant long-run value.
Shelter Retirement-Plan Assets
Qualified plan assets (e.g., IRAs, Keogh Plans, 401(k)s) are subject to high levels of taxation when they pass through a client's estate. Income taxes and estate taxes combined can take 75% to 80% of the plan's assets. For example, a $5 million qualified plan may result in an inheritance of only $1.25 million.
For a client who is interested in supporting charity, the solution is to leave the qualified plan to charity. If the client is interested, he may be able to effectively replace the money from the retirement plan with life insurance purchased outside the estate. The following example illustrates how to use this approach.
Assume your client has a $5 million qualified plan, annual income (not counting extra qualified-plan distributions) of $250,000, and gives $50,000 a year to charity. To implement the plan, the client creates a life-insurance trust and funds it with an appropriate amount of life insurance. The client then withdraws an additional $100,000 from the qualified plan each year, bringing his income up to $350,000 annually. The client also contributes $100,000 to his private foundation, effectively making the withdrawal from the qualified plan tax free. Your client now makes his charitable contributions from his foundation, freeing up $50,000 of income that can go to pay for the life insurance.
At death, the qualified plan goes to the private foundation, completely tax free, and the children get the life insurance death benefit, also tax free.
Other estate-planning techniques likewise use a mixture of insurance and private foundations. Advisors who are interested in more detail on these issues should contact Sterling and request our publication What Every Life Insurance Agent Needs to Know about Private Foundations.
Finding Help
Let's say you're sold on the benefits of offering private-foundation services to your clients. You'll need outside help, which you can get from a variety of sources.
Foundations can be created by attorneys who are familiar with the field or by a firm such as Sterling which specializes in creating and managing private foundations. In seeking a partner, you should look for the following characteristics:
- Experience with creating foundations.
- An ability to offer comprehensive services so your client enjoys a convenient, hassle-free experience.
- A firm which will take responsibility for dealing with the client on all foundation matters.
- A relationship which will provide ongoing management and administration.
- A firm which will not compete with you in the investment area.
Few if any attorneys will offer this comprehensive set of services, which means that if an attorney sets up the foundation, you or the client will have to retain additional services to administer it over the long term. There are some potential pitfalls to be avoided if you choose this route. I'll review them in a future article.
The bottom line is that private foundations provide a great opportunity for high-end investment professionals to establish themselves as a leader in the market for providing philanthropic solutions to wealthy individuals and families. And you can not only build your business by helping your clients give to worthy causes, but gain personal satisfaction as well.
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