A Primer on Charitable Giving, Part 2 – Charity vs. Philanthropy

March 29, 2010

By Raymond G. Russolillo, CPA/PFS, CFP®, Partner, Family Wealth Services

To assist friends of the firm with their income and estate planning, Eisner & Lubin will be publishing a series of articles over the next several months entitled A Primer on Charitable Giving. The current article describes certain planned giving vehicles that can be useful in meeting the objectives of the giver.  This information is general in nature and should not be used to make specific planning decisions.  We urge you to discuss your specific issues with your Eisner & Lubin engagement partner.

When does altruistic giving cross the line from being mere “charity” to “philanthropy?”  In reality, this is a semantic question – the words “charity” and “philanthropy” are synonyms and can be used virtually interchangeably.  But in our minds the terms suggest somewhat different results.  We tend to think of charitable individuals as being altruistic yet basically informal about their giving.  A need arises, they make a contribution.  The universe of their “causes” is limited to those organizations that they know directly or to whom they are introduced through family or friends.   On the other hand, philanthropic individuals take a more formal approach to their giving and are apt to use specialized charitable vehicles in order to meet several planning objectives at one time.  It is not a matter of “good” or “bad,” or “appropriate” or “inappropriate,” it is a matter of degree of the HNWI’s engagement in the process.

When HNWI’s begin to make large charitable commitments (typically but not always later in life), the need to address the use of charitable vehicles becomes self evident.  The use of a planning vehicle generally presupposes a multiyear commitment to philanthropy and provides the structure needed to meet both the goals of the HNWI and put the brakes on runaway giving.

The following are some common vehicles to assist with planned giving.  One or more of these may be appropriate given the circumstances of the HNWI:

  • Donor Advised Fund (DAF) – Donor advised funds are public charities that are sponsored by either charitable or commercial organizations and enable the individual to time their contributions to the fund (generally accelerating them) as well as their distributions to the ultimate charities (generally made at a more leisurely pace).
  • Pooled Income Fund (PIF) – This is a partially deductible gift to a common fund established by a charity that pays the donor an annuity for life.
  • Private Gift Annuity (PGA) – This is also a partially deductible gift to a public charity but one that gives rise to an individualized annuity between the donor and the charity.  A portion of each annuity payment represents ordinary income and capital gain.
  • Charitable Remainder Trust (CRT) – Contributions to these split interest trusts are partially tax deductible based on the actuarial present value of the remainder interest in the trust.  The donor (or other non-charitable beneficiary) retains the income interest from the trust for a period of years or his/her lifetime while the remainder interest is ultimately paid to a charitable remainderman.
  • Charitable Lead Trust (CLT) – This is another type of split interest trust which is essentially the mirror image of a CRT – the charity receives the income from the trust for a period of years while the remainder is paid to a non-charitable beneficiary.  Unlike the CRT, contributions to the CLT may or may not be partially tax deductible, depending on the legal structure of the trust.
  • Private Foundation (PF) – This is essentially a “private charity” that the donor or his/her designees control, subject to a nominal 1% or 2% excise tax on investment income.  PF’s are best suited for those with substantial wealth and are often used to underwrite generations of family philanthropy.

By mixing and matching these various vehicles, the individual can devise a lifetime and/or testamentary philanthropic plan that will meet his or her personal planning objectives, satisfy his/her need for cashflow, and impact one or more charities in a way that is meaningful to him/her.