Staying True To The Course

Staying True To The Course

Ethics, Integrity, And The Heart Of Planned Giving
Article posted in Ethics on 24 May 2000| comments
audience: Partnership for Philanthropic Planning, National Publication | last updated: 18 May 2011
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Summary

Do we get so bogged down in the technical aspects and tax benefits of planned giving that we forget why people give in the first place? In this edition of Gift Planner's Digest, University of Denver's Scott Lumpkin reminds us that truly successful gift planners place the horse ahead of the cart.

by Scott R. Lumpkin

"If you're looking for real action in planned giving, forget the Internal Revenue Code. Peer instead into the soul."

Douglas E. White from The Art of Planned Giving: Understanding Donors and the Culture of Giving

Definitions

Ethics: 1) The study of standards of conduct and moral judgment; moral philosophy. 2) A treatise on this study. 3) The system or code of morals of a particular person, religion, group, profession, etc.

Integrity: 1) The quality or state of being complete; unbroken condition; wholeness; entirety. 2) The quality or state of being unimpaired; perfect condition; soundness. 3) The quality or state of being of sound moral principle; uprightness, honesty, and sincerity.

Philanthropy: 1) A desire to help mankind, especially as shown by gifts to charitable or humanitarian institutions; benevolence. 2) Altruistic concern for human welfare and advancement, usually manifested by donations of money, property, or work to needy persons, by endowment of institutions of learning and hospitals, and by generosity to other socially useful purposes.

Why Charities Receive Special Treatment

Nonprofit organizations have come to be known as the third sector of our society, with government and business making up the other two-thirds. Charitable organizations do for the common good what no other entity will or can do. This is why the U.S. government gives such organizations special status, allowing donors to make tax deductible contributions and exempting them from taxes on the revenue they generate. Because of this special treatment, charities also have an obligation to conduct themselves in such a way as to merit the continued trust and support of the public.

Charities exist first to help society. Government recognizes charities' value to society by giving them tax exemptions to help them succeed. Sometimes we get it backward and think that tax deductions are the reason people should make charitable gifts. Congress didn't invent the charitable tax deduction and then go looking for charities to do good work. Understanding this truth equips us to deal with many of the ethical issues that face gift planners.

What's Missing?

True gift planning is largely just a dream at many organizations because they have focused so heavily on the technical aspects and merits of the wide range of charitable planning strategies and given so little attention to understanding why people give and understanding the role of charities in our society.

Failure to understand the importance of a charity's mission in a donor's decision to make a planned gift prevents many gift planning programs from ever making it out of the gate. In fact, an over emphasis on technicalities often results in a lack of comfort with mission and a fear of getting out there and simply calling on prospective donors. In these cases, all the technical expertise in the world won't equip such techno-planners with a comfort level of why people give and an ability to uncover and cultivate such motivations.

Many organizations have sacrificed the heart of gift planning in exchange for a lifeless skeleton or framework built on technicalities. The result is a lifeless shell that lacks the true ability to attract and compel prospective donors to make a significant transfer of assets in the form of a charitable gift. For example, the gift acceptance policies are in place, the gift planning committee has been recruited, sample documents have been drafted and approved, gift planning software has been installed, the gift planner has been through an entire week of planned gift training and is all dressed up, but with no place to go, waiting for gifts to walk in the door.

Occasionally gifts do walk in the door, but only very rarely. True planned gifts are the result of relationships, cultivated over time, and forged around a common commitment to a mission that is fulfilled by a given charitable organization. The human dynamics that are involved in this process are far more important, in my opinion, in building a successful gift planning program.

Going Beyond The Technical

Think about it: How important can gift planning strategies be without donors to bring them to life? What is missing in our profession of gift planning is a perspective that looks beyond the technicalities, beyond the formulas, as well as looking inward--inward to what makes charitable organizations worthy of public trust and individual acts of generosity. Something is wrong when seminars teach only the mechanics of giving and omit the human component. The inevitable results are abuses of the type that garner headlines in The Wall Street Journal and, ultimately, the attention of Congress.

Our real challenge in convincing someone to make a planned gift to a charity is connecting him or her to the organization's mission. Once this is accomplished, merely the "how" remains to be solved. As difficult as gift planning may be to master from a technical standpoint, the far greater challenge is understanding why gift planning donors do what they do.

In 1992, the National Committee on Planned Giving conducted a national research project to identify characteristics of planned gift donors with a particular focus on understanding why donors give. The study tapped into a demographic pool of 150,000 households across the United States. For anyone with long-term involvement in gift planning, the results were not surprising. When asked to rank the importance of various factors in their decisions to make a planned gift, whether a bequest, life income gift, or noncash gift, over 90% of the respondents cited a desire to support the work of the charity as somewhat important or extremely important in their decision to make the gift. This is that elusive, abstract "donative intent" that is the cornerstone of NCPG's Model Standards for Charitable Gift Planners (See Exhibit A). Tax savings factored way down the list in order of importance, reflecting the truth that charitable gifts do not generally solve tax problems.

The Language Of Philanthropy

The language of philanthropy is not technical; it is abstract. And it is a native tongue to very few people, even many of those who raise funds professionally are uncomfortable with it. Why? Because it is a language that speaks to the heart and soul before it speaks to the mind or the pocketbook. We would do well to give time and energy to learning and mastering this language of philanthropy.

The other reason why we, as gift planners, must master this language is because it is up to us to teach it and pass it along to our society. The language is no more natural to the average person than it is to most of us when we enter this profession.

Learning to speak this language is the key to understanding why some people, rich and poor, give away their fiscal and temporal resources when nothing tangible is returned. Teaching people the language of philanthropy is part of teaching them to be charitable and earning the trust that is the foundation of true giving. It is a language that focuses on mission, purpose, and the role of nonprofit organizations in our society.

Recent Challenges

The following are recent challenges presented to the gift planning community. Each section provides a summary of the challenges with a link to more detailed articles at the end of each section.

The Son Of Accelerated CRT

Review: The Original Accelerated CRT

  • Developed in the early 90s by some clever tax planning attorneys and accountants.

  • Used a literal and selective interpretation of tax regulations to avoid the recognition of most of the capital gain on highly appreciated assets transferred to a two-year CRUT and subsequently transferred back to the donor as "a tax-free distribution of principal" using payout rates of 80% and higher.

  • Targeted by the IRS and addressed by the 1997 Tax Act, resulting in the imposition of limitations on a CRT's payout rate (it cannot exceed 50%) and the minimum remainder interest (it must be at least 10%).

Same Song, Second Verse

  • Recently a national accounting firm has outlined a variation on this theme, with a clear disregard for the potential impact of such actions on the future of charitable remainder trusts.

  • This version depends on the trustee holding, rather than selling, the contributed assets as with the original Accelerated CRT, but instead borrowing the funds for the first distribution.

  • Under the same theory as the original, since the trust has generated no income, the funds distributed to the beneficiary are treated as tax-free return of principal.

  • In a later year, the trust sells the original assets and pays off the loan.

  • Potential problems: self-dealing, acquisition indebtedness.

  • Proposed Treasury regulations would curb this abusive practice.

For further reading:

Charitable Family Limited Partnerships

  • Marketed as an alternative to charitable remainder trusts.

  • Involves a transfer of a large percentage (e.g., 98%) of the limited partner interests in a partnership under the theory that the income of the partnership will not be taxable as long as a charity is the primary owner.

  • Partnership provides for marginal income distributions for several years while income builds "tax free."

  • Charity is expected to exercise an option to cash out of the partnership early at a substantial discount, leaving the bulk of the value for family members who originally held only a tiny interest.

  • Family members may also be designated as managers of the partnership and receive substantial distributions as "compensation" for their services.

  • Bottom line: In many cases the involvement of charity is simply to provide tax benefits for family members that are substantially greater than the benefit to the charity.

For further reading:

Charitable Reverse Split-Dollar Life Insurance

  • Involves contributions to charity with the expectation that the charity will return much or all of the contribution to a life insurance trust established by the donor.

  • Charity receives life insurance benefits from the arrangement, but the charity's payments may outweigh its economic gain from the policy and represent a windfall to the donor or the donor's beneficiaries.

  • May cause charities to disregard the laws requiring donees to issue gift receipts and make good faith estimates of the value of any goods or services received by the donor in return for the gift.

  • Failure to note on such receipts charity's intention to participate in the charitable reverse split dollar life insurance (CRSD) plan could violate both federal tax law and the Model Standards of Practice for the Charitable Gift Planner.

  • Participation by a charity in a CRSD program could put the charity at risk of loss of tax exempt status under the private inurement rules.

  • IRS Notice 99-36 warns taxpayers and charities that CRSD plans will not produce advertised tax benefits and may subject participants to adverse consequences including penalties.

  • Killed by legislation (H.R. 1180) that passed in December 1999, which denies charitable deduction for transfers associated with CRSD arrangements.

For further reading:

Selling Charitable Gift Annuities on Commission

  • Recent incidents in which insurance agents were recruited by one or more charitable foundations to sell charitable gift annuities on commission.

  • May subject organization's gift annuity funds to SEC regulations under terms of the Philanthropy Protection Act of 1995.

  • Violates NCPG's Model Standards of Practice for the Charitable Gift Planner.

  • May cause states to impose licensing requirements on organizations issuing gift annuities and subverts nationwide efforts to exempt gift annuities from state regulation.

  • Tax deduction may be reduced by amount of commission.

  • Commission will reduce amount of charitable residuum.

  • May jeopardize organization's tax exempt status.

For further reading:

Lifetime Charitable Lead (Vulture) Trust Regulations

  • Abusive application of charitable lead trusts.

  • Involves payment of a fee to a seriously ill individual in exchange for his/her consent to be named as the measuring life of a lead trust funded by unrelated person, in order to artificially inflate the charitable deduction.

  • IRS has proposed regulations that would curb this potential abuse by providing that only the donor, the donor's spouse, and a lineal ancestor of all the remainder beneficiaries may be used as measuring lives for a charitable lead trust.

  • Comments on the proposed regulations are due by June 19, 2000.

For further reading:

Exhibit A

Model Standards of Practice for the Charitable Gift Planner


Preamble


The purpose of this statement is to encourage responsible gift planning by urging the adoption of the following Standards of Practice by all individuals who work in the charitable gift planning process, gift planning officers, fund raising consultants, attorneys, accountants, financial planners, life insurance agents and other financial services professionals (collectively referred to hereafter as "Gift Planners"), and by the institutions that these persons represent.

This statement recognizes that the solicitation, planning and administration of a charitable gift is a complex process involving philanthropic, personal, financial, and tax considerations, and often involves professionals from various disciplines whose goals should include working together to structure a gift that achieves a fair and proper balance between the interests of the donor and the purposes of the charitable institution.

I. Primacy of Philanthropic Motivation

The principal basis for making a charitable gift should be a desire on the part of the donor to support the work of charitable institutions.

II. Explanation of Tax Implications

Congress has provided tax incentives for charitable giving, and the emphasis in this statement on philanthropic motivation in no way minimizes the necessity and appropriateness of a full and accurate explanation by the Gift Planner of those incentives and their implications.

III. Full Disclosure

It is essential to the gift planning process that the role and relationships of all parties involved, including how and by whom each is compensated, be fully disclosed to the donor. A Gift Planner shall not act or purport to act as a representative of any charity without the express knowledge and approval of the charity, and shall not, while employed by the charity, act or purport to act as a representative of the donor, without the express consent of both the charity and the donor.

IV. Compensation

Compensation paid to Gift Planners shall be reasonable and proportionate to the services provided. Payment of finder's fees, commissions or other fees by a donee organization to an independent Gift Planner as a condition for the delivery of a gift is never appropriate. Such payments lead to abusive practices and may violate certain state and federal regulations. Likewise, commission-based compensation for Gift Planners who are employed by a charitable institution is never appropriate.

V. Competence and Professionalism

The Gift Planner should strive to achieve and maintain a high degree of competence in his or her chosen area, and shall advise donors only in areas in which he or she is professionally qualified. It is a hallmark of professionalism for Gift Planners that they realize when they have reached the limits of their knowledge and expertise, and as a result, should include other professionals in the process. Such relationships should be characterized by courtesy, tact and mutual respect.

VI. Consultation with Independent Advisers

A Gift Planner acting on behalf of a charity shall in all cases strongly encourage the donor to discuss the proposed gift with competent independent legal and tax advisers of the donor's choice.

VII. Consultation with Charities

Although Gift Planners frequently and properly counsel donors concerning specific charitable gifts without the prior knowledge or approval of the donee organization, the Gift Planner, in order to insure that the gift will accomplish the donor's objectives, should encourage the donor early in the gift planning process, to discuss the proposed gift with the charity to whom the gift is to be made. In cases where the donor desires anonymity, the Gift Planner shall endeavor, on behalf of the undisclosed donor, to obtain the charity's input in the gift planning process.

VIII. Description and Representation of Gift

The Gift Planner shall make every effort to assure that the donor receives a full description and an accurate representation of all aspects of any proposed charitable gift plan. The consequences for the charity, the donor and, where applicable, the donor's family, should be apparent, and the assumptions underlying any financial illustrations should be realistic.

IX. Full Compliance

A Gift Planner shall fully comply with and shall encourage other parties in the gift planning process to fully comply with both the letter and spirit of all applicable federal and state laws and regulations.

X. Public Trust

Gift Planners shall, in all dealings with donors, institutions and other professionals, act with fairness, honesty, integrity and openness. Except for compensation received for services, the terms of which have been disclosed to the donor, they shall have no vested interest that could result in personal gain.

Adopted and subscribed to by the National Committee on Planned Giving and the American Council on Gift Annuities, May 7, 1991. Revised April 1999.

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