Counseling Clients On The Importance Of Including The Community In Their Planning

By John F. Hopkins

This article advocates an approach to estate planning that I think differs significantly from established practices. I have developed these ideas over the years, borrowing heavily from Scott Fithian and others in the field, and I have spoken frequently to groups of professionals developing this theme, namely: "As advisors, we need to learn how to talk with our clients about the importance of what giving back to their community has to do with their relationships and their goals for themselves and their families." I hope you will take a few minutes to explore and think about the concepts and apply them in your practice.

Many, if not most, estate planners have traditionally focused on tax reduction as if it were the client's most important goal. Since the techniques used to accomplish tax reduction are complex and mysterious to clients, they have an attraction, and both counselor and client tend to become caught up in the intricacies to the exclusion of everything else. Yet, tax reduction is only a means to an end, which is usually to leave more to their heirs. I ask clients why they want to leave more to their heirs, particularly if the size of the estate is such that the heirs will receive a substantial sum without any tax planning. It has surprised me that most clients have difficulty answering the question. They have not thought of it in that way, and do not know how much they want their heirs to receive. Rather, their goal has been to be a prudent steward to their wealth while they are alive, without any conscious planning about how much they want to leave to heirs or what they would like them to do with it. Regrettably, estate planners do not have much to say on this subject either.

In recent years, the focus of estate planning, at least for clients, has begun to shift away from tax reduction toward client-centered values having to do with how they should use their wealth to bring meaning and satisfaction into their lives, and how they can shape the legacy they wish to leave to their children and their loved ones. In short, they are open to consider their deeper values and goals. Clients who have children want to plan so as to maximize the possibility that their values will be passed to their children along with their wealth. More clients are also ready to think and plan for building a legacy of community support that will continue into future generations. As an advisor, I have the unique opportunity to help such clients in bringing meaning into their lives in a way that might not have happened had I focused too quickly on the techniques of tax reduction.

While I strongly believe that this change of focus is arising from within our clients and also our culture, I can point to at least two outside factors that are influencing it. First, government is withdrawing from the field of social programs and that responsibility is shifting back to the local communities. Most local agencies cannot continue with the same level of support without government funding. The result is that clients are becoming more aware of the importance and the extent to which local social programs need help. Second, the financial services industry has experienced incredible growth in the last 15 years. It has recently discovered estate planning and is now spending substantial resources in advertising and marketing the need for planning for one's estate as well as their finances.

The Concept Of Social Capital

Another fairly recent development that has a significant impact on the estate planning process is the concept of social capital. There is the involuntary social capital, known as taxation, by which our clients send money to the IRS that Congress spends on the social programs they deem appropriate. And there is voluntary social capital, known as philanthropy, by which clients contribute capital directly to social programs in their community that they choose. Because voluntarily contributions to community organizations reduce the client's taxes, he or she has the power to direct those saved taxes to the causes he or she wishes to support.

This reframing of the issue of charitable giving is a powerful tool in dealing with clients, but discussing charitable giving often moves too quickly into the tax techniques that diverts the client's attention away from "why" he or she wants to give to charity, to "how" these tax tools work. Part of my message is that advisors need to hold off on the "hows" until the client has identified the values that he or she wishes to express with the gift. The best method I know of to lead clients to their deeper values is to talk with them about what they want for their children, other loved ones, and what kind of a legacy they wish to leave to their community.

Ways Of Presenting Philanthropy To Clients

The comments above are really the only "theory" that you need to keep in mind when talking with your clients about the importance of including the community in their planning. I originally developed this concept as a presentation that I have given several times throughout Silicon Valley. In that presentation, I set up a role-play with two volunteers from the audience so that a "client," or "pair of clients," are responding to and commenting on questions I ask. The next several sections of this article are written as if I was talking directly to clients. Obviously you will follow your clients and take the conversation where they lead you. Still, you will want to touch on most of the items listed below. I hope you find this useful.

Ascertaining Your Clients' Values And Goals

There are several questions I would like to ask you before we jump into the numbers. To me, these questions are more important than the numbers because your answers make it easier to run the numbers. Please forgive me if some of the questions sound general. They are intended to stimulate your thinking about the bigger picture and what is really important to you. The first question is:

How do you want to be remembered?

By whom?

What kind of legacy do you want to leave for your children?

How much?

How do you want your children to use this legacy?

Do you have a plan to achieve your goals for your children?

Are your children trained in handling the wealth you intend to leave them? If not, you can begin the process by providing the opportunity for them to learn these skills by using a charitable fund or family investment partnership.

What values would you like to pass to your children?

What would your children say your values are?

What causes do you support?

Would you like the activities you support to continue after your death?

Are there other causes you would like to support?

How do you feel about treating the community as one of your children?

One powerful way to leave money to your favorite cause is to designate a portion of the future growth in your estate, over its present value, to go to the community. You can establish a formula so that your children will receive the after-tax portion of what you presently have, and the rest, or part of the rest, goes to a donor advised fund or community/charitable organization that they can spend on the community but not themselves.

Or, you can leave a fixed sum of your assets to a charitable organization in your memory, or in the memory of another family member or loved one. You can set this up so that your children choose the organization.

Using Family Philanthropy As A Learning Lab For You And Your Children

I encourage you to create a charitable fund each year. You put in most of the money and ask the children to contribute to the fund as well. You could ask them to give to the fund what they would have spent for a holiday gift for you. Then have a meeting to discuss where the money will be contributed. Ask each child to recommend an organization they believe in and tell the family why they believe in it. You and your family then make the decision. This may vary for each family. Once the decision is made, take your children with you and deliver the check to the organization.

This approach has several potential benefits. If pursued, you will create a family tradition of giving to the community. You provide a model to your children as to what you believe in and this helps you connect with your children at a deeper level. It pulls the family together, including grandchildren, should you include them, in an activity that goes beyond the bounds of family. The family as a unit also connects to the larger community. This creates strong relationships among family members. Finally, this approach is the best I know of for you to discuss your values with your children, and it helps establish a healthy stewardship of wealth.

You can also perpetuate the tradition of giving through gifts at death to a family fund or foundation that future generations can use to support their communities. This is a gift to future generations, imbued with your values and wisdom about the importance of community. Such a fund will shape the identity and character of future generations and it empowers future generations to effect changes in their communities.

In the end, there is no loss of legacy to your children. In fact, there is a gain because what you give to the charitable legacy is not diminished by taxes. In fact, I call this your charitable legacy to your children. Since your children will have to spend this portion of their legacy on the community, you have provided them with the opportunity to become involved in ways that will enrich their lives as well as their children's lives.

Giving To Community As Extended Family

There is an inner value to giving that improves heart and health. Your inner sense of well being is heightened. Planning your estate to express your personal values takes the emphasis off of wealth building, asset protection, and taxes, and shifts the focus to what you can do with your wealth for yourself and others. This is true enlightened self-interest.

Once you take this path, you'll begin a whole new field of learning about how to give. You'll move beyond simple check writing in response to a letter or phone call to the realm of grant making. This can be as simple or as complicated as you like. There are several resources available for you to help make grants such as community foundations, nonprofit development officers, and consultants.

Community foundations, as the name implies, can be found in most areas and have program staff who know about local nonprofit organizations. Community foundations also let you set up donor-directed funds of several types that allow you to have all of the fun of giving money away while delegating the administrative burdens, at a low cost, to the community foundation. Types of funds include donor-advised, scholarship, agency designated, supporting organization, corporate, and others.

An often overlooked source of information in grant making is the fund development staffs at nonprofit organizations such local hospitals, educational, social, or religious organizations in which you may have specific interest. In addition to sharing ways in which you can support their organization, they can also help you identify other organizations you might be interested in and how to fund them.

Foundation consultants are also useful in both determining if a private foundation should be established and running one as well. A consultant can also serve as an alternative to hiring staff when the private foundation has a small asset base.

When you begin thinking of the community as extended family, you make better connections and meet new people whose life's work has been much different than yours. You will develop a sense of participating in making your community a better place that will be part of your legacy to your children and grandchildren, and you will find meaning and joy through connecting with others.

This concludes the role-play. Notice that the issue of taxes has not yet been broached.

Your Clients Can Be Tax Savvy In Their Giving

It is important not to discuss tax techniques until your client has connected with why they want to give. You want to establish the client's personal and family goals before proceeding to discuss the tactics and tools of how to accomplish these goals. Failure to use this order results in confusion and gives your client information that is not useful. In fact, it distracts the client's attention away from his or her deeper goals. Keep in mind that the tax techniques are more about "keeping" or "saving" than they are about "giving."

Once you have focused on the client's values and determined an interest in supporting community needs, you may move to some of the more complex areas of charitable gift planning. I offer three ideas to you:

• The first is naming a community organization as the contingent beneficiary of a retirement plan or IRA. A good choice for such family charitable legacy can be a donor advised fund with the local community foundation. Other types of nonprofits as well that have sophisticated development departments, such as hospitals, colleges and universities, social, or religious organizations offer many types of funds as well. You probably know that upwards to 80% of a retirement plan will be drained as taxes unless your client plans otherwise. With this technique the children will receive 100% of the funds that they can use to make their communities a better place.
  
  
• The second idea is setting up a charitable remainder trust to enable a more flexible investment strategy free from tax on capital gains. By designating one of the aforementioned organizations as the remainder beneficiary of such a trust, you can create a charitable legacy for children and future generations to use in community work.
  
  
• The third idea is using a charitable lead trust to give money to grandchildren without incurring gift taxes. A trust providing income to charity for 30 years can provide grandchildren with a substantial gift at a later point in their life and benefit the charity now.

How Can You Internalize This Approach

To be able to speak with credibility about the impact giving to the community can have in fulfilling your client's deeper needs, you need to experience these benefits. You have to begin the process of learning how to give yourself. There is no way around this.

I know that I am attached to my money, and I see this in my clients as well when the subject of giving to the community comes up. If I am not certain that it is better to give than to hold on, I probably wouldn't even bring up the subject of charitable giving, even though is it their money, not mine. Jacob Needleman in his book, Money and the Meaning of Life, points out a very profound truth: "Greed is inevitable in the absence of an inner aim." As a planner, the greed I see in clients is usually unconscious and manifests itself in excessive attachment to their wealth. For example, a client in his late 60s asked me, in all seriousness, if I could assure him he would have enough to live on after he made a gift of about $1 million to his children out of his $70 million estate. Focusing on the clients' inner values, their desires for their children, and for those organizations that they have supported during their life leads them to inventory what is in their heart as well a what is on their balance sheet. When the client (and you) can begin to make decisions from his or her heart, excessive attachments begin to dissolve. A gift made from the heart will not be experienced as a loss; it will be replaced with a sense of connection to something larger and will bring meaning and purpose into their life. St. Francis articulated this beautifully when he said, "When you leave this earth you cannot take with you anything you received, only what you have given."