July 2006
Volume 2, Number 4
Table of Contents

What Every Estate Planner Must Know About Charitable Transfers

By Mark B. Weinbergs

1. Charitable giving is not restricted to the wealthy. Tax benefits promote charitable transfers, but they are by no means the only incentive, or even the most important. The client need not even have an otherwise taxable estate to derive great benefit from charitable transfers. These benefits include setting a good example for the clients' children and other family members, honoring those things the clients hold dear and giving back for a lifetime of benefit from society. Charity is the dues paid for being a member of the human community.

Food for thought: In the aftermath of the World Trade Center disaster on 9/11, it was reported that some people who were already homeless and destitute contributed what little they had at fire stations around New York City. Also numerous web sites permit contributions to be easily and securely made with credit cards, delivering this service with information about a wide variety of charitable organizations.

2. Charity means different things to different people. What federal and state tax and asset transfer provisions consider to be charity may not square with what the client has in mind. As importantly, what the estate planner thinks is charity may vary widely from the client's view. There is a way to do what the client wants to do, so long as the client has charitable intent in the broadest possible sense.

Food for thought: Every estate planner who practices for any significant length of time encounters a client who wishes to donate or bequeath something to charity but does not trust his or her own judgment. Speaking to clients at length about the ways in which charitable institutions have helped them and their families throughout their lives can help them discover a nexus and greater personal meaning.

3. Do not besmirch the name of charity. Because charity is favored by the tax and property transfer systems, some use its good name as a cover for efforts to feather their own nests. Avoid this temptation, because it poisons the well from which the entire community drinks.

Food for thought: The history of charity is replete with examples of the ways in which donations to charity have been used for tax avoidance purposes. Charitable split dollar insurance and accelerated charitable lead trusts are examples of tax schemes that feigned significant benefit to charity while conferring outsized tax deductions or exclusions on the true beneficiaries, individual clients of jaded "promoters." For other examples of wrongdoing in which charity and its supporters are exploited, see the excellent article by Marion Fremont-Smith and Andras Kosaras of Harvard's Hauser Center for Nonprofit Organizations, Wrongdoing by Officers and Directors of Charities: A Survey of Press Reports 1995-2003, which appeared in the October 2003 issue of The Exempt Organization Tax Review. This article can be downloaded and an abstract viewed at http://papers.ssm.com/sol3/papers.cfm?abstract_id=451240.

4. Charity is the "Swiss Army knife" of the estate planner. Keep it in your bag of solutions when approaching every problem, and be sure it does not help or fit before discarding it. As the instinct to help one another is widespread, if not universal, so this means to that end is useful more often than most lawyers think.

Food for thought: Aside from providing satisfaction and tax benefits to the donor or testator, planned giving can solve real-world problems faced by them or their families. A charitable remainder trust can provide ongoing support for disabled or spendthrift family members, while protecting the assets from creditors and the beneficiaries' own weaknesses. Charitable gift annuities can permit those of modest means to gain the satisfaction of helping their church build its new home while stabilizing their own retirement portfolio. For extensive free information about the many ways in which charitable transfers can meet client needs, see the Planned Giving Design Center on the Internet at www.pgdc.com or a site sponsored by a charity or practitioner in your local area.

5. Charity is a worldwide phenomenon and possibility. Charity may begin at home, but its reach spans the globe. Direct bequests to foreign charities and lifetime gifts to domestic charities that work around the world are promoted by the tax laws and can reach every human concern across the planet.

Food for thought: Although only domestic U.S. charities can receive gifts that are deductible for federal income tax purposes, those U.S. charities can fund programs and benefits in other countries, so groups in this country can help anyone subject to U.S. income tax obtain tax benefits for money those groups spend to aid those in other lands. But the estate tax charitable deduction is not limited to U.S. charities, and so bequests directly to foreign charities qualify for the federal estate tax deduction. Through charitable gifts at death, international development and aid programs can be conducted completely by charities in those countries (which may be more effective, being free from outside interference). Review the Treasury Department's Best Practices for International Fund Raising, as well as comments filed with Treasury by the Probate and Trust Division's D-2 Organizational & Operational Issues of Exempt Organizations Committee. These appear at www.abanet.org/rppt/cmtes/pt/d2/2003-29Comments.pdf. Other valuable information about charitable giving can be obtained by subscribing to the committee's free electronic mailing list at www.abanet.org/rppt/cmtes/pt/d2/home.html and addressing questions to the list by e-mail.

6. Potential conflicts of interest are as prevalent in dealing with charity  as with any other human activity. The fact that a client wishes to make a contribution or bequest to charity should raise as many questions about motives and personal benefit as would an offer from a company's CEO to give his attorney a tip on the company's stock.

Food for thought: Contributions to The Nature Conservancy by insiders have recently raised questions about the contributors' motives, after news accounts reported that these gifts were part of a system of preferential land sales. Although newspapers and magazines often get the facts of a case wrong, the issues raised by the Washington Post articles are instructive.

7. Watchdog groups are the quick and easy way to misjudge a charity. Clients want their contributions to help "worthwhile" charities. Influenced by the mass media's need for facile answers, groups have arisen that develop simplistic standards and apply these to charities. In truth, these groups are no better at determining whether a charity is "worthwhile" than a palm reader is at determining a person's character. If a client wants to support a worthwhile charity, he or she must get involved with that charity, seek and study information about it, and learn its history and current operations. Without this kind of hands-on involvement, there is no way of assessing whether the client would consider it to be "worthwhile."

Food for thought: Artificial limits, such as "percentage of gross receipts that go to administration, overhead, and fund raising," falsely identify these as expenses that are not worth making; but without them an organization will be weak, and limiting them to an artificial number penalizes groups that do very important things. Some watchdog lists treat salaries as administrative, even when they are for staff who do charitable work directly by providing information to the public or by helping patients. Is a secretary who types the order shipping tons of food to the needy unnecessary? Increasing the number of factors increases dependence on the rating group, which after all has its own motive for attracting support by "making the news" with discoveries of impropriety. Without checking more deeply, a donor cannot know whether the watchdogs are serving their own agendas or that of the public. For those having an interest in the contours and varying viewpoints on regulation in this area, a visit to the CharityChannel.com web site archives for CYB-ACC (short for "Cyber-Accountability") can be exciting.

8. As with all important things in life, the more one puts into charity, the more one gets out of it.To understand how clients can best achieve their charitable goals, volunteer with a local charity and rise through the ranks to a responsible position. The more the estate planner learns about what is most difficult to come by, the better he or she can advise clients on how to make a difference.

Food for thought: Over the past 20 years or more, the stock of buildings in which educational and other charitable activities can be conducted has risen far faster than the funding for programs. This is widely attributed to the fact that major donors seek permanent and tangible memorials to their gifts. Thus there is a premium associated with a long-term program or unrestricted gifts, which the attorney would easily learn about by working at various levels in any charitable organization. This knowledge gives the estate planner insight that will help him or her advise the clients who are most concerned about how to approach the charity of their choice.

9. There is always room for new ways to do charity. There may be nothing new under the sun, but new tools and technologies are constantly being developed, and creativity in their use to benefit the community is a necessary element to keep the charitable spirit alive.

Food for thought: Bill Gates, Larry Ellison, and other commercial entrepreneurs are bringing their creative talents to charitable endeavors and taking on challenges that previously were considered so formidable that only governments would undertake them.

10. Lawyers should be active advocates for charitable transfers (when that isconsistent with ethical considerations), leaving it to the client to select the specific charity or cause that will benefit.Estate planners are the people whotraditionally speak to community members about gifts, donations, and other asset transfers. They should also be the most knowledgeable about the benefits and limitations associated with transfers to charity. There is no better spokesperson for the community at that point, especially when the planner is careful to avoid promoting any given charity or cause. Already legions of others appeal to the individual's selfish side by showing him or her how to keep more money for his or her family, usually by minimizing taxes. The public should have an advocate to seek repayment for all the benefits that the individual has received from society.

Food for thought. Because of a recent ethics opinion, practitioners in Maryland are uncertain to what extent they can participate in advising members of their churches, alumni associations, and other community charities about gifts to those charities. That opinion concludes that there is a nonwaivable conflict of interest for a lawyer who sits on the fund-raising committee of his church who offers to write wills for members of his congregation for free if they make a bequest to the church. Is this the proper result, and would your answer change if the lawyer (1) were not on the fund-raising committee, (2) charged full price for his services, (3) did not require a contribution to the church, or (4) all of the above?

Mark B. Weinberg is a member of the Rockville, Maryland, firm of Weinberg & Jacobs and vice-chair of Group D, Charitable Planning and Exempt Organizations.

Copr. (C) 2006 West, a Thomson business. No claim to orig. U.S. govt. works. This article is reprinted with permission from West, a primary sponsor of the General Practice, Solo and Small Firm Division.



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