Philanthropy and AUM
Often investment advisors are held back in serving the client's philanthropy by the fear, partly justified, that the gifts to charity, if significant, will come at the expense of assets under management. As discussed in a prior post, however, we are on the cusp of a major historical opportunity to help Boomer business owners in transition from success to significance, and also greatly increase and retain assets under management.
A Case in Point: Todd, A Day Late
Todd (not his real name) came to our wealth transfer firm the day after he sold his business, a C corporation with zero basis, for $100 million. His capital gain was $100 million. Tax due was $20 million. He said, “Help me wipe out my $20 million tax bill.” We helped him some, but the truth is he came to us at least one day too late.
Charitable Planning for noncash assets, particularly for closely held business interests and commercial real estate, is one of the most complex intertwined areas of the tax code. Proper planning requires a team with at least a tax attorney, a CPA, a business valuation expert, an investment advisor, and perhaps an insurance professional.
To see the value of proper planning, consider how Todd might have done better. Assume he sold half his firm inside a Donor Advised Fund and half outside. What would be the effects?
- No capital gain on the half sold inside the DAF
- A charitable deduction up to 30% of Adjusted Gross Income, with five year carry forward, subject to whatever limitations may apply under the phase out of itemized deductions. (Thank the Lord, for CPAs.)
- Half sold outside the DAF, with the gain partly offset by the deduction for the part given to the DAF.
Note the effect on AUM.
- $50 million new dollars under management in the DAF
- $50 million (minus whatever residual tax is due) outside the DAF
Yet, an advisor might fear that the $50 million in the DAF will be headed soon to charity, depriving the advisor of asset management trails sufficient to educate a child, buy a vacation home, and retire in comfort. Fear not! In fact, some well-respected philanthropic advisors will caution against a massive outright gift to charity for an endowed program. Instead, the leading edge idea is "personalized philanthropy," with staged payments.
Lawsuits: What We Can Learn
Robertson vs. Princeton
In a famous case, Princeton settled a lawsuit with a donor family, where the family said the school had drifted from the donor's intent.
$35 million in A&P stock had gone to Princeton in 1961 to create a supporting org. to fund the Woodrow Wilson School of Public and International Affairs for the education of future diplomats. The fund grew to $900 million and was used for Woodrow Wilson School and other items as well.