cfo.com

Print this article | Return to Article | Return to CFO.com

Sowing the Seeds of Your Legacy

Want to get in touch with your inner Warren Buffett? There are new ways to do just that.
Chuck Jaffe, CFO Magazine
September 1, 2006

When Warren Buffett announced his plan to channel billions of dollars worth of his personal fortune through the Bill and Melinda Gates Foundation in an effort to eradicate major diseases, philanthropy became headline news. Few can rival the size of Buffett's donation — approximately $37 billion, or nearly 15 percent of the $260 billion that Americans donated to charity in 2005 — but experts say that more wealthy people are following Buffett's lead in donating money while they are still alive and thus able to more actively determine how the money will be spent.

Executives interested in charitable giving can take a page from the Buffett playbook and do more than simply list a favored recipient or two in a will. There are new ways to manage one's legacy while still alive. Perhaps more to the point, that June announcement should serve as a wake-up call to the philanthropically minded regarding the value of planning.

"You'd be stunned at how many people are so busy working that they don't think about what happens next, either for their family or their own personal legacy," says Dallas-based financial adviser Carece Slaughter. "They think that they don't have enough money to make an impact; in reality, it's never too early to start planning to give to your family and friends — and to those causes that you think are important."

The process is essentially evolutionary, starting with basic estate planning and expanding as assets accumulate. There are three basic questions to ask:

  1. Who gets it?
  2. How much do they get?
  3. How and when do they get it and what is it to be used for?

The first two questions are fairly easy. Providing for family and others close to you comes first for nearly everyone; even Buffett, committed as he is to not making his children automatic qualifiers to the Forbes 400, certainly addressed their needs. Beyond that, estate-planning experts say that deciding where the rest of one's money goes involves both research and soul-searching. For most people, the decision boils down to groups and causes that have touched their lives personally. This means giving to religious groups, colleges, and universities; supporting groups doing research into diseases that have affected loved ones; and so on.

As for how to transfer assets to a charitable organization, this is where it helps to be Warren Buffett. The vastly wealthy can afford to make substantial gifts while still alive, but the fact that such gifts are irrevocable should give pause to those of more modest means.

"You sound like a grouch if you discourage someone from doing something nice," says Stephen Ziobrowski, a partner in the Boston office of law firm Day, Berry & Howard, "but you have to be careful about things that are irrevocable. Younger executives may be better off making gifts out of income — and thinking about the big gift down the road — rather than locking too much into place right now."

Fortunately, there are several ways to transfer some wealth to charities without risk of regret. Perhaps the most interesting is a relatively new vehicle called a donor-advised fund, or DAF, which may be operated by a mutual-fund company or a charity (typically in conjunction with a financial-services firm). Donors can suggest both how their contributions are to be invested (which underlying funds receive the money) and how the money will be channeled to various charities.

The Feeling Is Mutual Fund
Donor-advised funds, sometimes called "giving accounts," provide an immediate tax benefit at the time of donation and can simplify the process of giving; for example, many have Websites in which a participant can quickly indicate how he would like funds to be distributed to various charities. Donations can take the form of cash, stock, and sometimes real estate and other assets. The financial-services firm handles all the paperwork.

Most giving accounts do require a fairly sizable initial contribution (Fidelity's Giving Account, as one example, requires $10,000), and usually subsequent donations must be in excess of $1,000. The contributions are still irrevocable, but can be made incrementally. The financial-services firm that plays middleman is, of course, retaining a fee for its services. But DAFs are growing; a survey of more than 12,000 households with income in excess of $125,000 found that 4 percent currently participate in one, and the figure is growing at 50 percent annually.

Those with loftier ambitions can establish their own foundation; typically, experts suggest that this requires a minimum of $1 million, in order to pay for administrative costs, which will entail the hiring of an administrator and possibly additional personnel (another option would be to set up a family foundation, which may not have employees). Establishing a foundation is very similar to establishing a corporation, with steps ranging from the creation of a mission statement to recruitment of board members to requesting a mail permit and an employer-identification number. It is possible to create a charitable organization that is not a registered nonprofit, but while that can be much simpler, donors won't get a tax break. Which path you choose will depend on your ultimate aims. (See "Life Cycle of a Public Charity," on the IRS Website, for more information.)


If that's too much of a good thing, charitable remainder trusts, or CRTs (also known as charitable unitrusts), provide another vehicle that can ensure that your family is cared for even as a substantial portion of your assets pass to one or more charities. Under most such plans, you transfer assets to a trust that essentially has two beneficiaries — you (and your spouse), and one or more charities. The first beneficiary receives an income stream for the remainder of his or her life. After that, the charity(ies) receive the underlying principal. The tax advantages are numerous, and CRTs are especially good for assets with a low cost basis but high appreciation, such as stocks and property. While assets in a CRT cannot be passed to heirs (other than a surviving spouse continuing to receive the income stream), a CRT can be combined with other estate-planning vehicles, such as a legacy trust, to provide cash distributions to your heirs without gift-tax complications.

A person hesitant to make large donations or transfer assets today could purchase a life insurance policy with a favorite charity named as the beneficiary. That maintains personal liquidity while ensuring that the charity will someday receive a sizable chunk of money.

No matter what route you take, remember the lesson offered by Buffett and Gates. "If you want to have control and some influence over how your money is used, start thinking about this early," says Philip Holthouse, of the California investment and accounting firm Holthouse Carlin & Van Trigt. "You'll feel good about what you can do with your wealth when you see some of it put to work."

Chuck Jaffe is senior columnist for Marketwatch.





CFO Publishing Corporation 2009. All rights reserved.