Tag Archives: ESTATE PLANNING

Is Obama’s Estate Tax Plan The Nail In The Nonprofit Coffin?

We folks who deal with high net worth clients have wondered for years what will happen with estate taxes when the current plan sunsets in 2011. Let me make a guarantee here (which is something I don’t often do). I guarantee that estate taxes will be addressed before 2010 which is when they are set to return to zero and return to 2001 levels when 2011 begins. Already, congress is abuzz with talk about what to do about it. Frankly the estate tax has been the running joke in the planning community for years when congress said that the estate tax would disappear in 2010. People said that they would start to write special instructions for “pulling my plug”, but only if it were advantageous from an estate tax planning perspective. All kidding aside, regarldless of what gets decided, I guarantee that there will be implications. As The NY Times reported in 2005, the last time there was talk about eliminating the estate tax, charities remained shockingly silent for fear that any attempts to block the measure would be donor suicide. I mean really, would you give to a charity that intentionally lobied for higher estate taxes? Are you crazy? Make no mistake, this time, I guarantee there will be legislation being passed and it will have a major impact on both the wealty, and nonprofits.

While many in the nonprofit community have been quite vocal against Obama’s plan to lower the charitable tax deduction, if history is any guide, I don’t think they will be speaking up now. Perhaps they should. I believe that the changes to the estate tax will have a much bigger impact on charities than the income tax deduction. Charities felt that they had nothing to lose by speaking up on the proposed change to the deduction because the change would be bad for BOTH the wealthy, AND the charities. By lowering the deduction, the wealthy would be losing a tax incentive to give to charity (perceived as bad for the wealthy), and the charities would be hurt by that. Nobody had a problem speaking up to say this was a bad idea. The estate tax is a completely different animal and I would argue, will hurt charities much more than the income tax deduction. Have you heard anyone talking about this? Nope. This will be a silent walk to the grave for the nonprofits. Here’s how it will happen.

Year/ Exclusion Amount /Max Top tax rate:
2001 $675,000 55%
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 repealed 0%
2011 $1 million 55%

In the above chart, notice that the estate tax exemption amounts have been going up since 2001. From 2001 until 2008, the exemption amounts didn’t go up that much; essentially from $1-2 million. The period from 2001 to 2002, up until recently, was the worst period of time for the markets since the great depression. While the exemption amounts did go up slightly from $675,000 to $1 million dollars, that was not a big increase in real dollars for the wealthy. From 2003 up until 2008, the stock market experienced a bull market while the exemption amounts only increased from $1 million to $2 million. This year however, the exemption amounts went to $3.5 million. That means that a husband and wife can leave $7 million dollars free from federal estate taxes. Compare that to only $2 Million total in 2002 ($1 million for each individual), and that’s a lot of extra millions. Let’s add somthing else here. Portfolios are down much more than the last recession. This means that exemption amounts are much higher, and people have less money. Well that’s great for the wealthy right? How about for the nonprofits? They are still talking about how the drop in the income tax chariable deduction is going to impact them. Folks, wake up, you have a new problem. It’s called the estate tax. While nonprofits have had lots of other things to deal with lately, I fear that what’s being discussed with the estate tax is going to be yet another blow to their ability to continue to operate as they had been.

Before the wealthy shoot me here, let me point out that there’s a fine balancing act that needs to take place here. Nonprofits play an essential role in society and they perform many responsibilities for society that the government isn’t good at and has no place in. If charities are not fundamentally strong, society is worse off and someone else needs to pick up the slack. If the government needs to do more, guess what, that means we all will wind up paying higher taxes anyway. It’s in our nation’s interest to make sure they remain financially healthy.

At present, the latest word on the street is that the Democrats support leaving the estate tax at the current level of $3.5 million. The exemption amount has never been this high before and only time will tell how much of an impact that will have on charities and donations. In my business, avoiding paying estate taxes is one of the primary functions that a wealth manager helps clients peform. While emotion has been the primary driver of charitable contributions, not taxes, I fear there’s a perfect storm that is lining up. For many in the wealth managent community, charity is only a means of avoiding taxes for their clients. Unless an adviser can use charity as a way to save taxes for their clients, they generally don’t bring it up. Doing so means less under management for the adviser and that translates directly to less fees. I assure you, right now, many advisers are just struggling to keep their doors open and discussing charity with their client is the last thing on their mind. The big question is, how many potential donors were lost by dropping investment portfolio values, raising the estate credit amounts from $2 million to $3.5 million, and cutting the charitable income tax deduction?

Just to be clear, I would be in favor of  freezing the estate exemption limits. I feel people pay enough in taxes and they shouldn’t have to pay again when they die. Make no mistake though, this will be another blow for charities. Don’t drop the charitable tax deduction, raise it, by a lot. I’d also be in favor of paying higher income taxes to pay for things like universal health care, education, and alternative energy. I realize you can’t have your cake and eat it too, I just worry that the cake recipe is looking like pie and we’re all going to get some in the face if we don’t think these things through more clearly.

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Filed under ESTATE PLANNING, FOUNDATIONS, NON-PROFIT & CHARITY, TAX

Nonprofit Recession Survival Guide to Getting Donations

First the markets, then Madoff, now the Obama administration is proposing reductions in the charitable tax deduction for your biggest donors. What else could possibly go wrong? Oh yeah, I forgot to mention the snow day and nobody came to work. One thing is for certain; raising funds in the current environment is much more difficult that it was last year at this time. Here are some specific suggestions and things to keep in mind as you talk to donors:

Speak the Unspoken Truth
Personally, I like this tactic. Call it like it is. What are the most powerful four words in the English language? “I NEED YOUR HELP”. Talk to your existing donors about what is happening and the state of your organization. Tell them you need help. Let your donors know how the current environment is impacting your organization.

Be Specific With The Ask
This is something that is always a good idea. Even before the mess the last year, donor fatigue was certainly an issue. I believe that in general, nonprofits do a poor job marketing themselves when it comes to being specific about their accomplishments, how donations help, and making specific connections between the ask and the impact. Kiva.org is the opposite of everything I just said. Their supporters choose the cause (lending to a specific entrepreneur who needs a loan), and Kiva reports back on the status of the loan from the individual it was given to. It’s a terrific example of the donor getting involved directly with the cause that they support. Strategic, venture, or tactical philanthropy; call it what you want, people have been demanding more accountability in recent years. This trend towards greater accountability and transparency is only likely going to increase. Help your donors go from a “spray and pray” approach go giving, to being focused and knowing exactly what they are giving to.

Create A Donor Adviser Panel
Invite your top donors into a room for a “Manhattan Project” style round table. The objective of the group is not to gang up on them and tell them how badly you need their money, but to come together and brainstorm new ideas for raising funds. Let them know how much you have appreciated their past support and you are offering them a “no money required” way to help make a huge difference with the organization. Ally you want is their input. Not only will they feel appreciated, do you think there might be a possibility they could cough up a little extra after sitting in on that? If I were a betting man, I’d say your odds are pretty good. That’s not the objective though. Remember that. You are after their ideas and things you are not thinking about right now.

Address Financial Fear
Your donors are shell shocked with what’s going on in the markets now. Everyone is. Do you want to be someone’s hero? Address this head on. This is the one I think that nonprofits have traditionally been the most uncomfortable with. Even large organizations that have planned giving departments have struggled with “the line of control” that exists between donors and their professional advisory team. While planned giving folks want to “get that seat at the table”, and be INVOLVED in the conversation with the financial adviser, attorney, or CPA at the time giving decisions are being made, often they are not. Understand that there is a line, and there should be. Generally speaking, the unspoken truth is that donors know that planned giving officers have one motive, to get money for their organization. This is nothing new though, so what?

The real opportunity to be a hero here is to talk about some of the things that donors are afraid of now and things that they can do to feel more financially secure. The number one concern of the wealthy is that they will lose what they have. While this has always been the biggest concern, the fear is now being realized. Understand that unless your donors feel financially secure, they will likely not give at the levels they had given previously. You cannot help them feel more secure, but you can make recommendations that will. One of the things that’s at the top of the list is recognizing that donors and high net worth clients traditionally have had multiple advisers giving them advice. Their accountant is discussing their returns, their attorney discusses their will (or might not have in a while), and their “financial adviser” is talking only about their investments. Most people have no idea who they should be talking to about the big picture and their ability to achieve what’s important to them.  No wonder you have such a hard time getting a seat at the table, that’s because there usually IS NO table. The advice your donors receive is sporadic and fragmented in professional silos and generally NOBODY is discussing the big picture! Markets aside, the tax changes occurring are faster than the drop in their portfolio value and now is a good time for them to be meeting with their team to reassess where they are and reevaluate their goals.

The key to success lies in your ability to have a trusted relationship with your donor, understand what attracted them to you, what inspires them, what they are afraid of, and how to connect them with the appropriate resources who can help them achieve everything that’s important to them. To the extent you make yourself a master networker and not make it about you and your cause, you’ll be a hero. Ask your donors, “How can I help, YOU?”

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Filed under Current Events, ECONOMY, ESTATE PLANNING, Financial Life Planning, FINANCIAL PLANNING, INVESTING, NON-PROFIT & CHARITY, TAX, venture philanthropy

Want the Secrets About Money They Don’t Teach In School? « Richie Richer’s Guide To Everything Money (and more…)

Financial Planning, Meet Philosophy

Several years ago, I took an interesting philosophy course. The instructor suggested that in order to become “wise”, we needed to embrace some critical concepts. I’ll call this concepts “The Circles of Knowledge”. The main points go something like this:

  • There are things you know you know- I know I know that the earth is round.
  • There are things you know you don’t know- I know that I don’t know how to speak French.
  • There are many more things you don’t know that you don’t know-I don’t know for example, that left handed people named Skip are five times more likely to have sleep disorders, nor did I know that there was was an organization looking into this phenomena (there isn’t really but you get the point).
  • Paradigm Shifts- “There are facts, and people’s interpretation of facts”

What’s Your Money Paradigm?
To further illustrate, consider Steven Covey’s example of  a “Paradigm Shift” from his book “7 Habits of Highly Effective People”. Covey tells a story about an experience he had on a quiet Sunday morning New York subway ride. When a man and his children entered the subway car, the children became loud, rambunctious, and disturbing to everyone in the car. It was obvious that everyone in the car was disturbed by these children, and even more irritating that that the man didn’t seem to want to do anything to attempt to calm his children down. Covey explains to the man that his children were disturbing a lot of people and asked politely to try and control them. The man, seemingly oblivious to the situation replied “Oh, you’re right. I guess I should do something about it. We just came from the hospital where their mother died about an hour ago.”

The moral of this story is, one’s perception and opinion of facts are based on our own interpretation of events, coupled with our common sense, personal experiences, and knowledge of a particular subject (knowledge is a dangerous thing). Our opinion may not always lead us to the correct conclusion. This is the case with money too.

Why do People Make Dumb Mistakes? 

No matter how many times we experience volatility in the markets, people still run for the hills at the first sign of trouble. Even though “buy low, sell high” has been drilled into our heads at nausea, people are still human and will run for the exists when someone yells “fire”. This is human nature. There is an entire field of study in people’s reactions to money called “behavioral finance”. How about another example?

Ever held a stock that kept going down? Remember the Internet bubble? You held on to the stock because you thought it would come back right? The stock was originally $75/share, but now it trades at $10/share. You held on because you think that the real value is $75/share. That’s called “anchoring”. A popular example of this is the price marked on a car at the dealership. You determine how good of a deal you got by how much you were able to knock the salesman down, having never known what the “real value” of the car was. When it comes to the price of the stock, the “real” value is generally determined based on the fundamentals of the company, and comparable investments, not what the price of the stock was in the past. The fact is that the information changed. The price it is, or was, could have been an overreaction or not. The fact that the stock is a fraction of what it once was, likely has nothing to do with the current attractiveness or value of the investment.

So now you still have that stock in your portfolio right? Studies have shown that people have a tendency to hang on to “losers” (perhaps not just investments?) because they are biased toward inaction. If you sell and the stock goes back up, you have made a BAD decision. If you do nothing, your inaction feels less painful somehow even though the results are still just as bad.

Why I’m Here

There are things you think you think you know that you don’t. There are many more areas where you have absolutely no knowledge of something that is important and you never knew about the issue, or how important the issue was to you. I’m here to help educate you about money and understand what’s important from my perspective. Enjoy!

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Learning From Warren Buffett-Good For the Heart, Good For The Tax Return

 The Associated Press recently reported that Warren Buffett Wants Charities to Use His Fortune Within 10 Years After His Estate Is Closed.

Warren Buffett is arguably one of the greatest investors of all time. We should all be so fortunate to be in his position. Warren Buffett is not only a smart investor and generous philanthropist, he no doubt has achieved significant tax benefits from his donations.

If I were in his shoes, I would want to create a lasting charitable legacy that carried on after my death. I find no greater satisfaction in knowing that my money went to worthy causes and helped in contributing to make the world a better place.

I’m sure most people who had Warren Buffett’s money would answer the same way. The fact is, people who have significant wealth over the current Unified Credit Amount (for gift and estate tax purposes) are subject to onerous estate taxes (45% Federal, plus any applicable state death taxes) at the time of their death. People in this position who take the time to plan their estates properly, can realize significant tax deductions by making charitable contributions. Vehicles like Charitable Remainder Trusts can provide a tax deduction for the charitable contribution, remove assets from one’s estate so that they are not subject to estate taxes, and provide the donor with an income stream in return for the contribution. In my opinion, these kinds of trusts are particularly useful when one has highly appreciated assets (like real estate or low basis stock positions) which would be subject to capital gains tax if sold outside the protection of a trust of this type. In some cases, the donor can actually wind up with MORE, by actually gifting the asset away! This should not be construed as legal advice (I’m not an attorney and not qualified to give legal advice), but a wake up call to people that if done properly, people can have their cake and eat it too in many cases. When considering a charitable gift of this nature, I would say that it is helpful to determine how much money one needs in order to live the lifestyle they desire, how much estate taxes they could potentially be subject to, what steps could be taken to reduce their taxable estate, and what legacy objectives could be realized as part of this process.

Warren Buffett’s desire to have the charitable organizations spend his assets within 10 years of his death reflect a trend among large donors called “Strategic Philanthropy” where donors want to have more control of what happens to the money that they donate. Realizing that in some cases, only a very small percentage of a donor’s contribution goes to the actual cause intended, many wealthy individuals have opted to create their own private foundations instead. This can allow the donor to take a salary (within limits) from the foundation, employ family members for pay (within limits) and create a lasting legacy that carries on after the donor’s death. People are advised to speak to a qualified estate attorney for legal advice.

In my opinion, the bottom line is that while many people know “giving to charity is good” they don’t know about the financial benefits that can come from “doing good”. I’ll bet Warren knows…

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