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Changing Times, Altered Demographics, New Assumptions -- The Shifting Philanthropic Sands Strategies and Tactics for Success King McGlaughon, Senior Vice.

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Presentation on theme: "Changing Times, Altered Demographics, New Assumptions -- The Shifting Philanthropic Sands Strategies and Tactics for Success King McGlaughon, Senior Vice."— Presentation transcript:

1 Changing Times, Altered Demographics, New Assumptions -- The Shifting Philanthropic Sands Strategies and Tactics for Success King McGlaughon, Senior Vice President, Chief Philanthropic Officer, Wells Fargo Wealth Management

2 What is the Environment Today? Increased and evolving regulations, oversight, and potential liability of officers and directors Increasing competition for donors, other funding dollars. Basic capitalization and fiscal challenges at the institutional level Diminishing endowments and reserves (-30%) Adoption of UPMIFA in most states by 2009 Stresses on federal, state and corporate funding and grantmakers (2010 and forward) Financial stress on individual donors Nonprofits face increasing pressure for accountability and sound management from Government Donors New donor demographics Increased use of technology, expansion of the “local community” of nonprofits and donors

3 80 percent of US households give to charities each year. An estimated 75% of all donors (not all donated dollars) receive no tax benefit from their charitable gifts As our wealth increases, the percentage of households that contribute rises markedly 95% of families with a net worth in excess of $1 million give to charitable organizations annually 98% of families with a net worth in excess of $5 million give annually The Dimensions of Giving in the United States

4 ($ in Billions) 2009 charitable giving Total = $ billion

5 Total Giving, 1969–2009

6

7 Millionaire Households (in Millions)

8 Types of recipients of contributions, 2009 Total = $ billion

9 Giving by type of recipient as a percentage of total giving Five-year spans; does not include “unallocated” Data began in 1978 for foundations and in 1987 for environment/animals and international affairs.

10 The number of 501(c)(3) organizations 2000–2009

11 Total giving by source by five-year spans in inflation-adjusted dollars, 1970–2009

12

13 Giving by type of recipient Five-year spans, adjusted for inflation

14 Motivation for Increased Giving

15 The Importance of Giving for the Affluent Source: Boston College - Social Welfare Research Institute & Bankers Trust

16 The Importance of Giving for the Affluent Source: Boston College - Social Welfare Research Institute & Bankers Trust

17 Philanthropy is one of the top 4 financial issues for UHNW investors 51% 73% 89% 91% Philanthropy Estate Planning Asset Management Tax Minimization

18 Philanthropy is one of the top 4 financial issues for UHNW investors 51% 73% 89% 91% Philanthropy Estate Planning Asset Management Tax Minimization

19 What DOES Matter? – Net Worth

20 What DOES Matter? – Source of Wealth

21 What DOES Matter? ATTITUDE “Destin-ators” versus the predestined. Wealth builders/creators versus wealth preservers/conservors Change agents Entrepreneurs versus inheritors The secure versus the insecure The “controllers” versus “the controlled”

22 Giving to foundations, 1969–2009

23 The Boom in Donor-Advised Funds Size of Donor Advised Fund Market grew more than 1300% from 1995 to 2007 Size of Donor Advised Fund Market grew more than 1300% from 1995 to 2007 Proliferation of “commercially sponsored” DAF programs since Fidelity Gift Fund established in 1991 Proliferation of “commercially sponsored” DAF programs since Fidelity Gift Fund established in 1991

24 Client values that DO affect Philanthropy: Philanthropic Motivation Concern about effects of wealth on heirs Desire to control access to wealth by succeeding generations Preservation of capital Protection of assets from spouses, creditors, etc. Desire to create a “legacy” Sense of moral or legal obligation

25 Philanthropic Motivation

26 What Matters? ATTITUDE “Destin-ators” versus the predestined. Wealth builders/creators versus wealth preservers/conservors Change agents Entrepreneurs versus inheritors The secure versus the insecure The “controllers” versus “the controlled”

27 Wealth Recency

28 A Demographic Shift

29 What is the Environment Today? Increased and evolving regulations, oversight, and potential liability of officers and directors Increasing competition for donors, other funding dollars. Basic capitalization and fiscal challenges at the institutional level Diminishing endowments and reserves (-30%) Adoption of UPMIFA in most states by 2009 Stresses on federal, state and corporate funding and grantmakers (2010 and forward) Financial stress on individual donors New donor demographics Nonprofits face increasing pressure for accountability and sound management from Government Donors Increased use of technology, expansion of the “local community” of nonprofits and donors

30 How do we connect with the “Younger Donor”? Communication and message strategies Board composition “Control and leadership” opportunities Technology Invite a group of younger people to view your technology resources – make adjustments Phone versus tablet versus PC Strategic (planned) giving opportunities

31 Who is the “Younger Donor”? Traditional “Donor” was 66+, with planning occurring in the year old period “Younger Donor” is Financially focused Control oriented Planning oriented Expects much from charitable “partners” Has long-range goals and aspirations

32 Perspective of Younger Donors Longevity: have much longer planning/investment horizons Longer/multiple retirement periods: high retirement income expectations Inflation conscious: need to avoid “erosion” of principal over time Focused on growth, inheritance and creativity

33 Financial Expectations of Younger Donors Growth of income stream over long investment horizon Equal or better performance of “philanthropic assets” relative to “financial assets”--NEVER LESS Frequent, accurate and informative reporting

34 Planning Focus (Traditional) by Age AGEGOALS 25-40Generate “survival” income 40-55Build assets--gather and invest 55-65Position for retirement 65+Live on income--preserve principal-- “second career”

35 Planning Focus (Evolving) by Age AGEGOALS 25-40Build asset base and income 40-50Transition assets into ventures 50-65Diversify business, personal and investment interests 65+Fine tune investments and business interests; focus on unfulfilled interests and quality of life

36 Strategies “Escalating Payment” CRT Donor creates 5% NICRUT at age 40 Initial funding with $250,000 Invests “aggressively” for growth Total return on equities = 11.15% (avg. return on large and small cap equities ) Yield on bond allocation = 5.88% (ML 1-10 yr. G/C Index, held to maturity) Yield on S&P 500 = 1.42% (as of 5/26/98)

37 Strategies “Escalating Payment” Income $88,922 $52,646 $27,896

38 Strategies “Escalating Payment” Principal $6,167,862 $1,910,057 $570,936

39 Strategies “Escalating Payment” CRT Income stream never equals 5% payout in aggressive growth investment strategy Future income not guaranteed--only a projection

40 Strategies: Term CRTs Phase I: Term CRUT used to grow assets efficiently while producing supplemental income Phase II: Remainder interest used to create Foundation used as vehicle of “second career” interests and goals

41 Strategies: FLIP Trust Retirement Plan Donor creates FLIP Trust at age 40, with FLIP in year after 60th birthday Initial funding is $250,000 Additional funding of $20,000 each year until age 60 Invests for growth during Phase I, for income during Phase II

42 FLIP Trust Retirement Plan DONOR CHARITY 5% FLIP

43 Strategies: FLIP Trust Retirement Plan Total contributed: $630,000 Total Income Tax Deductions: $169,455 Total Before Tax Income: $5,555,960 Total After Tax Income: $3,355,800 Remainder Value: $7,839,017 [1.4% income/10% appreciation years 1-19; 5% income/5% appreciation thereafter; AFR=5.8%]

44 Strategies: FLIP Trust Retirement Plan AgeIncome (Before Tax) 45$6,424 50$12,055 55$21,124 60$127,608 65$155,108 70$197,962 75$256,655 80$322,459 83$373,287

45 Strategies: Founder’s Stock and CLAT Donor and husband are 55; two adult children Donor owns stock in business begun 10 years ago, valued at $4,000,000, representing 15% of business, pays 6% dividend Company being positioned for IPO within a few years Projected value of Donor’s interest is $15,000,000 5 years after IPO

46 Strategies: Founder’s Stock and CLAT 6% CLAT: 10 years $2,000,000 Founder’s Stock Charitable Deduction $845,035

47 Strategies: Founder’s Stock and CLAT 6% CLAT: 10 years $1,200,000 Gifts

48 Strategies: Founder’s Stock and CLAT 6% CLAT: 10 years $1,200,000 Gifts

49 Strategies: Founder’s Stock and CLAT 6% CLAT: 10 years $1,200,000 Gifts

50 Strategies: Founder’s Stock and CLAT 6% CLAT: 10 years $7,500,000 Happy Children!

51 Strategies: Founder’s Stock and CLAT Gift reduced by $845,035 charitable deduction Net gift of $1,154,965 can be “covered” with transfer tax credits/exemptions of Donor and Husband At end of 10 years, CLAT stock is worth $7,500,000, given to children $1,200,000 given to charitable causes in community

52 Strategies: Closely-Held Business CRTs C-Corp shares to CRT to ESOP QRP (after ESOP funding) to CRT CRT/Stock Redemption to “move” closely-held business to next generation

53 Strategies: Lifetime Foundations and SOs Use to create income tax shelter through gifts of appreciated assets resulting in income tax charitable deductions with 5-year carry forward Build and operate a strategic foundation during productive years, affecting change and creating leadership role in community

54 The Current Market Environment

55 The Current Regulatory Environment Changes in overall federal tax regime 2010 as year of “no transfer tax” (maybe) 2011 as year of “reversion to ‘old transfer tax’” (maybe) – the “stepped-up basis” conundrum Projected increases in Income Tax (and Capital Gains Tax) rates Interest in income tax deductions will increase as tax rates climb, especially capital gains rates (collectibles currently at 28%) Changes in overall “charitable giving” infrastructure Gifts from IRAs and other “tax-benefitted” tools Supporting organization, private foundation, large public charity, and donor-advised fund proposals

56 The Current Market Environment CRTs are excellent asset management tools Tax free asset management zone (increases “real” net total return on investments) Ability to move around in market without concern for realization of gains in portfolio Creates cash flow through Income Tax Deduction, conversion of dividends a/o interest into income stream based on total value Ability to control taxability of income stream through changes in asset allocation Interest will increase as tax rates climb, especially capital gains rates (collectibles currently at 28%)

57 The Current Market Environment The “Fearful Investor” Has become “risk averse” Wants to bail out into fixed income assets Wants economic security in erratic market Use a CRAT to create a “fixed income asset” from equities. Consider a “Megannuity”

58 The Current Market Environment “Not-readily Marketable” Assets (Generally unaffected by stock market declines; may rise in down markets; may experience increasing values as “safe harbor” for uninvested assets)

59 The Current Market Environment “CLTs: Leverage Market Down-Turns” Historically low effective rates allow maximum planning leverage for CLTs Strong stocks that have lost value Client intends to hold Deflated value makes for optimal CLT funding, all “bounce back” occurs outside donor’s taxable estate Leverage the Market AND the lifetime estate/gift tax exemptions/exclusions

60 Advisors and Giving

61 What Donors Want in Their Charitable Advisor Planned-giving officers Professional advisors Expertise in the technical details of executing the planned gift16.0%97.9% Skill and efficiency in working with the donor's professional advisers or with the charity Willingness to let the donor set the pace in the planned-giving process Help in deciding what type of planned gift to make Knowledge about the advantages and disadvantages of each type of planned gift Sophisticated understanding of the donor's personal motivations to give Effectiveness in getting the charity to treat the donor as he or she wants to be treated Note: 603 donors surveyed.* Donors in the survey had made planned gifts worth at least $75,000 and had a net worth of $5-million or more. Source: Prince & Associates and Private Wealth Consultants


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