The Joy Of (Planned) Giving (Podcast)

Eric Meermann
Well, not in those amounts probably, but yeah, for the vast majority of people.

Amy Laburda
Right. I'm Amy Laburda and I'm the editorial manager at Palisades Hudson Financial Group. I'm here with my colleague Eric Meermann. Eric works out of our Stanford, Connecticut office, like I do.

00:39
He's the senior client service executive in the office, vice president, and he's been with the firm for — how long, Eric?

Eric Meermann
It's funny, actually, thinking about this for this question, I realized I've now spent more of my life working for Palisades Hudson than I have not working for Palisades Hudson. So I'm turning 45 next month, and I'll have been here 23 years.

Amy Laburda
Wow. That is, in fact, a long time.

01:06
At the beginning of your career, what drew you to financial planning and personal finance?

Eric Meermann
Well, I knew I wanted to work with people. That's, I think, a really important part of what we do, is sitting on the couches, talking to families, helping individuals. The skills that we learn in this business are good for working with pretty much everybody, because everybody has financial problems. Everybody needs to file their tax return each year.

01:31
So, when you work here, you learn a lot of valuable skill sets that can help not only our clients, but also your friends, your family, and yourself. That was a big appeal. Also, Palisades Hudson is a small company. I had come from a small company background in a totally different industry. Knowing I wanted to do investment and money management, primarily, when I was starting out, this looked to be a good fit for me.

Amy Laburda 02:00
So in our firm's book, Looking Ahead, Eric wrote the chapter on philanthropy, including how it plays into estate planning. Eric, you wrote that when we die, there are three places our money can go. Our heirs, obviously, charitable donations, or the government through taxes.

Eric Meermann
Yep, that's right.

Amy Laburda
How many of your clients choose to maximize option number three?

Eric Meermann
Not a lot.

Amy Laburda
I kind of figured. So how does charitable giving fit into people's financial planning?

Eric Meermann 02:29
Well, I think the first thing when thinking about giving away your money to charity is you need to figure out your goals and objectives. When I think about this or counsel my clients on it, I think of: How much do you want to give away? Of what? To whom? And when? And we can explore those four different areas by thinking of timing. Do you want it to be on the end of your life after you're dead and gone? Do you want this asset to pass?

02:58
What asset do you want to give away? Is it possibly an expensive piece of artwork? Is it a stock portfolio? And then, obviously, who are you giving it to? And how much of that do you want to give? If you're talking about a painting, well, it's just one painting. But if you're talking about a portfolio or cash, you have to come up with a dollar amount for how much you want to go to the various parties.

Amy Laburda 03:23
Do a lot of clients come in already knowing the answers to those four questions? Or is it a thing you often have to tease out?

Eric Meermann
It's a process to figure out how much do we want to part with now versus how much do we need for our own lifestyle? That can be a collaborative process to figure out the comfort level of, I'm going to part with these assets and I have to live off of whatever is left.

03:53
Another aspect that we think about with our clients is, is there a legacy component to your charitable giving? And what I mean by that is, do you want to create an ongoing involvement with the charity? Do you also want to involve your family members in your philanthropic activities? A lot of clients, especially with high net worth individuals that have a lot to give away, they want to create a legacy that also includes their children and grandchildren.

04:22
Whereas other people, they just want to give the money away, not think about it. I gave it away, it's done. So, those are the type of things you have to think about in the initial stages of charitable planning.

Amy Laburda
Makes perfect sense. So, if someone comes in without a clear idea of who they want to give the money to, do you ever advise clients on how to pick a charitable recipient for their donations?

Eric Meermann
Sure, yes. When we're picking a charity, we want to think about three things. Efficiency, effectiveness, and innovation.

04:52
When we're thinking about efficiency, that's how much money actually gets to the program you want to support, versus how much of it is to overhead, marketing, TV commercials, ads. And that stuff can be important too, because raising awareness, as we know in charity, is a big component, especially when you're talking about little-known diseases or things like that.

05:15
That could also be efficient. But a lot of people, when they give their money away, they want it to feel like a very high percentage is going directly to the cause. There are some databases that you can use, such as GuideStar and Charity Navigator, that have all of the financial information on each charity, how much actually ends up going to supporting the cause and program, versus how much goes to administrative overhead. They give a rating system,

05:44
sometimes four stars, five stars, something like that. I recommend you use GuideStar and Charity Navigator to help with the efficiency question. The next thing we think about is effectiveness. This is somewhat of a subjective decision to make in that, how is the organization achieving the goals that it set out? It's thinking about, OK, they want to solve this problem. How effective have they been at solving the problem?

06:13
If you're thinking about cancer, cancer still exists, but they have made a lot of breakthroughs over the years. The next thing we want to think about, and this one might be less important than the efficiency and effective, is innovation. Is the charity looking at things in a new and innovative way? If we've been trying to solve a problem for decades and there's only been incremental

06:42
progress, maybe a charity that is coming at it from a completely different viewpoint and an innovative way could be more beneficial spending of your dollars than the traditional charities.

Amy Laburda
Sure. Those all make sense as ways to sort of narrow it down. Obviously, there's no shortage of places that are deserving of your donations, so it makes sense as a framework. Now, one thing I do know, I've worked at Palisades Hudson for 13 years, and I know we never really look at any question in isolation. Part of what we do is look at the big picture.

07:10
So when you're discussing charitable objectives with your clients, do you talk about how that'll affect their taxes and if so, how do you go about that?

Eric Meermann
Yeah, absolutely. I think that's really a question of timing. So that gets to our “and when” question from our original objectives. Sometimes you might have a windfall year. Maybe you have a very large capital gain that you've realized in your portfolio or you've received an outsized bonus in that year, pushing you into a higher tax bracket.

07:40
When that happens, you might want to consider accelerating your gifts into the tax year of the high income. Say you have year one, low income, year two, and then in year three, you have this major breakthrough that creates a very high amount of income. It would be best to try to match the timing of the charitable gift with that high-income year.

Amy Laburda
Is that because you're going to itemize deductions rather than take the standard deduction?

Eric Meermann
Yes, that's right.

Amy Laburda
Great.

08:09
So you figured out where to give, you figured out when to give. What next?

Eric Meermann
Well, there's a lot of different ways that you can make a charitable donation. And we'll spend the next few minutes talking about all the different pathways you can take as far as giving. I think we'll start with the simplest, which is just giving the money away. An outright gift is what we call it. It's simple, it's straightforward, possibly the best bang for your buck. And there's no ongoing reporting or complication in just letting the money go.

08:38
A lot of donors overlook this option in favor of the more complicated and hands-on ones. And that could be because they feel compelled to or they're being advised to. But I think this case of MacKenzie Scott, Jeff Bezos' ex-wife, obviously came into billions of dollars in the divorce. And she's been in the news for just giving money away directly to charities, which I find very interesting, because someone with that level of wealth would typically be doing something like a private foundation,

09:09
like the Bill and Melinda Gates Foundation. But she has been doing direct gifts to not create a reporting requirement for the underlying charity, to just give it and let them handle it. And I find that to be a very interesting way. And if someone with that much money can do it, certainly someone giving away $50,000, $100,000, can consider just doing an outright gift.

Amy Laburda 09:37
So obviously MacKenzie Scott has been in the news and these big headline gifts are very attention-grabbing. But have you had any clients you worked with that you feel comfortable sharing about who found that direct gifts were the way to go?

Eric Meermann
Yeah, sure. We've had a lot of clients make charitable gifts over the years. One comes to mind from maybe about 15 years ago. This client had a concentrated position, so a single stock that was a huge percentage of their portfolio. That's not a good thing in your portfolio. You want to be highly diversified. But the problem was,

10:07
the cost basis, which is what they paid for the stock originally, it had been passed down from generations and was virtually zero. This multi-million dollar stock position with zero cost, if they were to sell it and diversify their portfolio, would have created a huge taxable gain, what we call a realized gain. In order to avoid that, what this client chose to do was do their charitable giving

10:36
with this stock position. Every time, every year, they wanted to give something away. Instead of giving cash or giving other securities, that was the go-to stock to give.

Amy Laburda
And since they were giving it to a charitable recipient, that recipient then didn't owe any tax. So you solved the tax problem.

Eric Meermann
That's right. A charity is a tax-exempt organization. So then they can sell the stock with no consequences.

Amy Laburda 10:59
So, even with someone with a less intensely appreciated stock position, giving appreciated assets can have a real upside, then?

Eric Meermann
Yeah, that's right. I think pretty much with any substantial amount of wealth, it's almost always better to give appreciated securities. Most people who have been investing for a while will have positions that have large unrealized gain, which means embedded gain in the position. And most charities are going to accept

11:29
stock. I often counsel my clients to give appreciated shares first. However, it is a little more complicated, because you've got to reach out to the charity. They might have a specific form. You've got to talk to your broker about which position is best to give. Then there's some transfer instructions that need to be made up. That can make it a little more complicated. To sum up,

11:57
If you're giving $50 to the local food bank, I don't recommend that you give an appreciated security. But if you're giving $50,000 to a university that's your alma mater, that you would absolutely give appreciated stock to.

Amy Laburda
That makes perfect sense. And I'm sure, given the size of the gift, they would appreciate even with the extra paperwork at that point. If you decide against a direct gift for whatever reason, what are some of your other options?

Eric Meermann
One of the ones we like a lot is donor advised funds.

12:26
And this is an investment that you can contribute to and you get the tax deduction for your charitable gift immediately. However, the money doesn't necessarily have to go to charity right away. The one we often use is the Fidelity Charitable Gift Fund. And what you do is you make the contribution to the gift fund. It's in your name, and you can invest it or hold it in cash or you can make a diversified portfolio,

12:54
and you don't have to distribute the funds right away. This is a great option when you have that timing issue we talked about earlier, where you have an unusually high income year, and maybe it was unexpected, and you say, “Wow, I got a high income year and I know I want to give some of this money away, but I don't know who to give it to, and it's December, and I don't have time to go on GuideStar and Charity Navigator and think about the financials of the underlying cause and its effectiveness.

13:23
But I know I want this tax deduction, so what am I going to do? I'm just going to put this money into the Fidelity Charitable Gift Fund, get my tax deduction this year, and then figure out later how it's going to be dispersed.” And just as a disclaimer, Palisades Hudson does not receive commissions from Fidelity Charitable Gift Fund or any other donor advised fund, or anyone really. There's many different options for donor advised funds. Schwab has one. There's lots of different ones.

Amy Laburda 13:52
Fair enough. This one is a little bit more complicated than a direct gift, but it sounds like not much in the grand scheme of things.

Eric Meermann
It's pretty simple, because they've already set up all of the accounts and investment options. What was interesting, and important to note, about a donor advised fund is — it's right in the name, donor-advised. This is not an optimal scenario where the donor wants to have absolute control over where the funds are dispersed.

14:22
The donor is only advising the donor advised fund as to where they want the funds to go. If they wanted that to go to pancreatic cancer research, in practice that would definitely be fine, but it's not ultimately up to the donor. They are just advising the donor advised fund. In practice, for most well-known 501(c)(3) charities,

14:50
they're not going to give you a problem. If you pick something really esoteric, they may reject it.

Amy Laburda
So in general, you've got the four questions, but it sounds like you don't have to answer all four questions at the same time or weigh them equally. So if timing is the bigger issue, a donor advised fund might be more the way to go than the recipient being the bigger issue.

Eric Meermann
Correct, yeah.

Amy Laburda
All right, so let's get into some more complicated ones. What else is available for people wanting to make gifts?

Eric Meermann
Yeah, so now we're getting into the complex and confusing ones.

15:20
but we'll try to make it as simple as we can. The first ones are called split interest trusts. And there's generally, well, there's many types, but we're gonna focus on two. The charitable remainder trust and the charitable lead trust. The charitable remainder trust is exactly what it sounds like. You set up a trust, this is a separate legal entity. You contribute cash or securities to that trust. And over time, it disperses money back to

15:50
the donor, or to a person that the donor appoints for a term of years or for their life. And so the remainder, charitable remainder, whatever's left in that trust after the term. So let's use an example of a life charitable remainder trust. So the donor puts in securities into a charitable remainder trust that, call it a million dollars, that's invested,

16:19
in a diversified portfolio. And every year, let's call it 5%, a 5% annuity is paid on an annual basis back to the donor. And that will happen every year throughout the remainder of their life. After their death, whatever's left in the trust after distributing those annuity streams, that goes to the charity.

16:46
What's important to note is the trustee can change the beneficiary, the charitable beneficiary after the trust is set up. So you don't necessarily have to pick right away, or you can have the charitable remainder go into a donor advised fund. So combining our last topic with the charitable remainder trust. The inverse of that is what's known as the charitable lead trust.

17:15
This is where you fund a trust and the annuity is paid to the charity for a term, and the remainder then either comes back to the donor or to a person, usually the heirs, that would be designated as the remainder beneficiary of a charitable lead trust. So to sum up, charitable remainder trust, you put the money in, you get an annuity back, the remainder goes to charity. Charitable lead trust is the reverse. You put the money in,

17:43
an annuity goes to the charity and what's ever left can come back to you or your heirs.

Amy Laburda
So it sounds like either of these trusts, depending on how you set them up, would be best for a giver who is concerned about taking care of a non-charitable beneficiary, like a family member, but also wanted to be sure that they gave some of their assets to a charity.

Eric Meermann
That's right. Yeah, we're combining estate planning here with charitable giving. And so with a charitable remainder trust, a lot of times

18:11
people are very attracted to this because they get an upfront tax deduction for funding the trust in that current year, kind of similar to what we were talking about with donor advised funds before. Then they receive an annuity back. If you set this up in a way where the annuity is quite high, you may exhaust the entire charitable remainder trust with nothing going to charity. And it's just a way to diversify that

18:37
position we were talking about before that had the zero cost basis and it had all this embedded gain in it. You could put it into the charitable remainder trust, which is a charity. So I should have made that clear before. Once you put it into the trust, the trust itself is a tax-exempt entity. And then the distributions out of the trust each year include a component of taxable income. So in this scenario, you can put it into the charity and sell and diversify your position

19:06
right away, then implement a much more diversified portfolio, and then receive an income stream back. And that income stream might be the whole thing. So, for people with concentrated stock positions, there may be less of a philanthropic intent sometimes. It's more of a tax planning and estate planning strategy.

Amy Laburda
Now, we've used the word annuity as part of what comes out of the trust. If people have heard about charitable gift annuities,

19:34
how are those different than the trusts we've been discussing?

Eric Meermann
Yeah, so a charitable gift annuity is very similar to the charitable remainder trust, but the simplicity comes from, it's set up by the organization already. So where you see this a lot is with universities. And so they'll have

19:54
a charitable gift annuity set up, which is basically like the CRT we described before, but you don't have to manage it. You're not responsible for being the trustee, for filing the tax returns, for doing any kind of financial bookkeeping or reporting. That's all on the university in this case. But it works the same way. You put money in and then they pay you back an annuity and you could set that for a term or for life. And then what's ever left,

20:24
the university keeps. It also puts the investment management burden on the university. So, if they do really well with their investments, they would have more left over for them. I'm a little skeptical of this because of the lack of flexibility compared to the CRT, the charitable remainder trust. And the reason for that is

20:48
you can't change your mind. Once you give it away to that university, that university is where the money is going. Whereas with a CRT, there's more flexibility to put multiple beneficiaries. You can also not be subject to their poorer investment performance. You put the money in thinking you're going to get an annuity for 20 years. They perform poorly, and the money is exhausted before you reach the term. You didn't actually get your full term.

21:19
So I'm a little skeptical of them. They're quite popular with planned giving offices of major charities, and sometimes they can be sold as basically a CRT that's a lot easier and sold as an investment option. But I prefer the flexibility of a charitable remainder trust, particularly if it's a large dollar amount. Just to clarify, for a small dollar amount, is it even worth doing it? Probably not.

21:48
But if you're talking about a large dollar amount, CRT is the way to go.

Amy Laburda
So you sort of touched on this as we went, but just to sum up, who would you advise as sort of the platonic ideal of a client who would fit best with each of these methods, the CRT, the CLT, and the charitable gift annuity?

Eric Meermann
So if you wanted to receive the income stream back, you're putting it in and then immediately getting this income stream or annuity back, then you would use the charitable remainder trust or the charitable gift annuity.

22:18
And if you wanted to do the charitable giving during your lifetime, you want to see that benefit the charity while you're alive, then you would do the lead trust, the charitable lead trust.

Amy Laburda
All right. So it sounds like we've sort of been moving into ways to have more control. And as you mentioned, maybe to see some results during your lifetime. For people who really want to lean into the legacy, as you mentioned earlier, what would you advise for them?

Eric Meermann 22:46
Well, that leads us to our next topic, which is private foundations. This one is the most complex, the most involved, and really for big dollar amounts. So here you're thinking Bill and Melinda Gates, Warren Buffett, these type of people. We talked about MacKenzie Scott before. I think she's been doing these outright gifts, but has received some negative feedback from some charities and from the public at large, and is also considering making a foundation.

23:16
What a private foundation is, is that there's two types. There's an operating private foundation and a non-operating private foundation. The non-operating one is the one that I think more people are familiar with, which is a charity setup where you're not actually trying to cure the disease or fight any social ills. You are contributing money and then parceling out that money

23:45
to various other charities over time. The best example of this that comes to mind is in the show “Seinfeld.” In “Seinfeld,” you might remember Susan was the wife of George Costanza, or fiancee I guess I should say, and in licking the envelopes, she got poisoned by the glue and died. Susan was from a wealthy family.

24:11
Instead of George inheriting this huge amount of money he was set to inherit from Susan Scherritt, they put the entire thing into a private foundation. And then they said, George, you can sit on the board of directors. And then a lot of hijinks ensue of him not wanting to actually be on the board and not wanting to actually do anything. But in the real world, this can actually be a big benefit of private foundations. And when we started the conversation, we talked about, do you want to create a legacy?

24:41
This is the one that I think is most for people that are trying to create a multi-generational, involved family legacy over time. That is not just

24:53
going to be a short-term thing. This is an ongoing, will likely last beyond your life.

Amy Laburda
So in a foundation’s case, it can also be a good endeavor and a good way for family members to spend time if they don't need to worry about making money anymore. Is that right?

Eric Meermann
Yeah, that's exactly right. So, you know, it could give your heirs purpose and meaning to their life to be involved in giving away this money to different

25:19
causes that mean a lot to them. And it's a way to engage your children and grandchildren in the charitable giving process and caring about society as a whole.

Amy Laburda
So even if you don't want to or don't have the resources to start your own foundation, what about giving to existing foundations?

Eric Meermann
Sure. Yeah. We all know of the Bill and Melinda Gates Foundation and Warren Buffett, another billionaire, gives a lot of his money to the Bill and Melinda Gates Foundation.

25:47
In this case, I think Warren is still focused on his stock picking and running his company. He says, “I think Bill's got this. I'm just going to contribute to him. I support the same causes, and it's an easier way for him to do it.” So, yes, you can just give to someone else's foundation.

Amy Laburda
It's a very neat way to tie in your earlier point about donating appreciated securities. I like that. Are there any more ways to give that philanthropic people should be aware of?

Eric Meermann
Sure. Well, there’s also, to the timing point,

26:17
for those that want to give on their death. Maybe they're concerned that they don't have enough money to live off of, and they're just not comfortable making any large gifts to a CRT or a gift annuity or outright, and they just want to hold the money for their life. But they know that they do want to support charity when they die. That could be because there's so much money they don't feel comfortable with their kids getting all of it. It could be for purely altruistic reasons. It could be

26:46
for a whole host of reasons that you want to wait until your death. And so with a charitable bequest, these are bequests that you leave in your will. For example, a piece of art or a fancy car or something like that. If you want to give that to a specific charity, so for example, you have a Monet and you want to donate it to a museum, that would be a specific

27:14
bequest. I specifically bequest that this painting go to this museum. The next type is a general bequest, and that's where you put in a dollar amount or a percentage, and you say, “I want to give a million dollars to X charity.” That would be general. So you have specific, you have general. The third type, which you see less often, is a demonstrative bequest, and that's a combination of the specific and the general.

27:43
What this is, is you say, I have this specific asset and I wanna take the proceeds from that asset and that goes to this charity. In this situation, if that asset has been sold prior to the death, then you would just sort of strike that from the will. It wouldn't, well, you wouldn't strike it from the will. It would still be in the will, but it wouldn't happen if the asset doesn't exist. And the fourth type is residuary bequests.

28:12
This is when you lay out all of the dispositive provisions, which is how you want to give all your money away on your death to everybody else, your kids, your grandkids, your friends, everybody. And then you say, whatever's left, give to charity. And so that's a residuary bequest.

Amy Laburda
So it sounds like some of these are fairly straightforward, a percentage of the estate or a dollar amount. But with some of these more complicated ones, have you ever seen that go wrong in any way?

Eric Meermann 28:38
So yeah, I have a real-world anecdote of a situation where we had clients that had made gifts within their will to a specific charity. As time went on, their goals changed and what they wanted to do with the money changed. But they had already had a relationship with this charity, and the charity was expecting it. The client ended up dying and the surviving spouse was

29:07
very aggressively pursued by the charity gift department, who can be quite aggressive, particularly in such a sensitive time. It was somewhat of an upsetting behavior. And so there are times, while charitable giving is great, we love charitable giving, it's important, there are cautions out there to be aware of.

Amy Laburda
Other than bequests, are there other ways that you can set up charitable gifts for after your death?

Eric Meermann 29:34
Sure. There's also something called a remainder interest. So say you have a beach house and you want to donate that beach house to the charitable organization after you die. What you could do is set up a what we call remainder interest where you get to use the beach house for what's called the life estate. The life estate is the remainder of your life. And so you give the beach house away and you are still responsible for maintenance, upkeep,

30:04
property taxes, but you get to still enjoy and live in your beach house until you die. Then the charity gets it at the end. And one of the main benefits of a remainder interest is that it can bypass the probate system which can be quite complicated and burdensome after you die.

Amy Laburda
Sounds like the best of both worlds. I don't have a beach house myself, but it sounds pretty appealing to me. In addition to bequests and remainder interests,

30:32
Is there anything else that you feel like someone should have in mind if they want to take care of philanthropy and their estate planning?

Eric Meermann
There's also endowments. Endowments are investments of funds or property, and they're meant for a specific purpose. It's meant for an enduring legacy for that specific purpose. Everyone's heard of the Harvard endowment or Yale endowment. These are endowments that are set up to provide the university with funds over an indefinite period of time. But they are for

31:02
the specific purpose of funding the university's activities. So an endowment can create a similar type of legacy as a charitable foundation. Another place we would see this is if you set up a memorial endowment to help underprivileged children in the name of someone who is deceased. Or you can do it while you're still alive, too. So an endowment is a specific purpose gift.

Amy Laburda
So we’ve covered

31:30
a lot of options. We started with a simple gift, but it's clear that that's not where it ends. How do you help your clients choose between all these different options?

Eric Meermann
Yeah. Choosing the best one really comes back to our opening discussion of the goals, the objectives, the when, the how much, the timing. One of our jobs here at Palisades Hudson is to help our clients figure out the answers to all of those questions.

31:59
How much can you afford to live off? How much can you give away? And help them decide which of these options is the best to deploy to reach those goals and objectives.

Amy Laburda
You might say the answers to these questions are … something personal?

Eric Meermann
You might.

Amy Laburda
All right, Eric, thank you so much for coming on the show today. It's been a real pleasure talking with you.

Eric Meermann
Thanks. This has been a lot of fun.

Amy Laburda 32:24
“Something Personal” is a production of Palisades Hudson Financial Group, a financial planning and investment firm headquartered in South Florida. Our other offices are in Atlanta, Austin, the Portland, Oregon metropolitan area, and the New York City metro area. “Something Personal” is hosted by me, Amy Laburda. Our producers are Ali Elkin and Joseph Ranghelli. Joseph Ranghelli is also our director, editor, and mixer. Our firm has written two books:

32:53
Looking Ahead, Life, Family, Wealth, and Business After 55, and The High Achiever’s Guide to Wealth, which offers advice for younger professionals, entrepreneurs, athletes, and performers. Both books are available on Amazon, in paperback and as e-books.