Giving’s on the Rise—and a Deadline Approaches for Foundations

Now’s the season for helping others who are less fortunate than you by giving your time, talents and resources to a worthy charitable cause. According to “The Nonprofit Fundraising Survey: November 2010,” compiled by the Association of Fundraising Professionals, Blackbaud, the Center on Philanthropy at Indiana University, the Foundation Center, GuideStar USA Inc., and the Urban Institute's National Center for Charitable Statistics, charitable donations in the U.S. are on the upswing, but still have not climbed back to pre-recessionary levels.

Specifically, 36% of the charities surveyed recorded an increase in donations during the first nine months of 2010, compared to just 23% that saw an increase in 2009. Additionally, just 37% of the charities reported lower donation levels this year, versus the 51% that experienced declines last year. Other findings: Organizations focused on international causes such as the Haitian earthquake and Pakistani flood relief efforts reported the greatest increase in donations. Domestic health organizations and religious charities reported the greatest declines in contributions.

Overall, charitable organizations remain “guardedly optimistic” about 2011. In fact, 47% plan to spend more, while only 20% expect to make budget cuts.

If you have a family foundation, you know that to avoid taxes for under-distribution, you must generally distribute at least 5% of the value of investment assets (minus fees and investment taxes) each year. Ideally, of course, this annual amount has been calculated and distributed throughout the year. However, as the year draws to a close, it’s often wise to take a look at the year’s distributions to avoid shortfalls.

Missing the 5 percent distribution can result in penalties from the IRS, but often the agency allows the offending foundations to make up for their miscalculations by contributing more than 5 percent in the following year. However, missing your mark could also result in higher taxes on investment income.

A Question of Ethics

In her recent article “Why do investors trust advisors, but not Wall Street?” Susan Antilla explores the disconnect between investors who proclaim their distrust of the financial securities industry, but exempt their financial advisors from that profound mistrust. In fact, it seems many investors are so trusting of their advisor that they fail to vet them properly. For example, the article includes details of an arbitration won by actor Larry Hagman where Citigroup Inc. was ordered to pay $1.1 million in damages, plus $439,000 in legal fees for the mishandling of his account by a broker who had seven customer disputes registered with the Financial Industry Regulatory Authority.

Investors looking to work with an advisor can avoid such a situation by working with a fiduciary, someone who is sworn to act in their best interests. In addition to being a fiduciary, I am governed by the professional codes of conduct that accompany my CPA, CFP^® and AIF^® designations.

While Citibank was justly punished, our society has become too willing to excuse serious ethics violations. For example, although Congressman Rangel was convicted of 11 ethics charges, amazingly, he is not going to lose his seat. What does this teach our children? Our kids are certainly getting mixed messages – like the one highlighted in a recent Washington Post story about a Fairfax County high school that allows cheaters to retake tests.

Sadly, we have witnessed too many examples of unethical behavior from political leaders over the last two decades. And the same is true in business world with Enron, Worldcom, Madoff, the list goes on. As is the case in my business, there must be consequences to ethical violations. All politics aside, we must strive to set a positive example for our young people and underscore that there are consequences for ethical violations.

Passage Likely for Estate-Tax

Although agreement seemed highly unlikely just weeks ago, Democratic support for a plan put forward by Republicans and accepted by President Obama seems to be gaining steam. The compromise in waiting would reinstate the estate tax at 35% for two years starting next year, with the first $5 million of an individual’s estate exempted. According to data from the nonpartisan Tax Policy Center, this plan would result in about 43,540 taxable estates in 2011, and raise about $34.4 billion.

Arizona Republican Jon Kyl authored the current estate tax provision accepted by the President. Although House Democrats offer tough opposition, it’s likely there are enough moderate Democrats to side with Republicans and President Obama to pass the bill. If Congress doesn’t act before the end of the year, the estate tax, which lapsed in 2010, is set to return at a 55% rate, with a $1 million exemption on January 1, 2011.

The battle over the state tax has long provoked heated philosophical debate. As Lee Farris, senior organizer on estate-tax policy for United for a Fair Economy, has noted, there’s more than simple politics at work as Congress works towards forging an agreement. According to Farris, “an agreement has proven more complicated than splitting the difference on the numbers because this has been cast as a moral issue” being debated between those who believe the estate tax destroys family businesses and those who argue it is necessary to preserve meritocracy in the U.S.

Interestingly, if a plan is passed this year, Congress may allow this year’s heirs to choose whether they factor taxes based on this year’s rules, whereby some inherited assets are subject to higher capital-gains taxes, or next year's rules – whatever they may be. Stay tuned.

Still Dreaming of Early Retirement?

In spite of all your best laid plans, there may be a glitch in your retirement dreams. If you retire early, before you would qualify for Medicare, you may be looking at a costly gap in your health insurance. If you figure you will simply keep the coverage you have from your employer, think again. The nonpartisan Employee Benefit Research Institute (EBRI) recently examined data for private-sector establishments to answer the question: How many employers offer retiree health benefits to early retirees? Here’s what EBRI found:

• Overall, 444,150 private-sector establishments offer health benefits to early retirees, or about 11.2 percent of the total.
• Large employers are much more likely to offer retiree health benefits than small employers; 34.5 percent of employers with 1,000 or more workers offered them, compared with 1.2 percent of employers with fewer than 10 workers.
• Of the 984,697 employers with 1,000 or more workers, the 34.5 percent account for 339,720 employers that offered early retiree health benefits.

While these statistics don’t boost your confidence in your plans to rely on your employer, keep in mind that there is plenty more uncertainty in the mix. As companies cut costs to survive in an increasingly challenging economy, keep in mind that health benefits to retirees could be on the chopping block. Also, it is anyone’s guess what will happen to healthcare reform when the new Congress takes over.

A Trusting Relationship is a Two Way Street

Trust is a curious thing. Having faith in someone – trusting a person or an institution can be a bond that is stronger than steel. Witness a mother bonded to her young child, or a soldier’s unflinching obedience to a commanding officer, or how you feel when you board an airplane for a flight. The weight of the world can hang on the bond of trust. We will literally step into the void holding only a thread of trust.

Naturally, you want to work with a financial advisor who tells the truth and looks out for your best interests. As I’ve said before, you owe it to yourself to work with an advisor who is sworn to act as a fiduciary and therefore bears the legal obligation that requires them to act in your best interest at all times.

However, trust is a two way street. To gain the most from your financial advisory relationship, don’t keep secrets from your financial advisor. That is, you also must trust your advisor enough to fully disclose all your financial assets and liabilities, your dreams and desires, your hopes and your needs, your fears and worries, even if the truth isn’t comfortable to discuss.

Interestingly, many investors apply the concept of diversification as a risk reducer to purveyors of financial advice and work with multiple financial advisors. There’s no question that in today’s complex, challenging market you require the expertise of financial advisors, CPAs, estate planning attorneys, even insurance professionals and bankers to manage your wealth accumulation, preservation, and transfer. However, new research from State Street Global Advisors and the Wharton School at the University of Pennsylvania illustrates how using multiple advisors -- who often do not communicate with each other -- can increase rather than dilute risk and put you in danger of not achieving your short- and long-term goals.

Specifically, because multiple advisors work out portfolio strategies independently you might be left with overlapping exposures or an unintended over concentration in an asset class. Especially in this challenging market, you need a firm like ours that functions as a personal chief financial officer to take a complete, aggregated view of your finances and prioritize sometimes conflicting needs and goals.