ELITE ADVISOR BEST PRACTICES

Simple Gifts: A Donor’s Story

Below is a great cautionary tale for advisors, for donors, for charities, and for financial institutions

By Randy Fox

Key Takeaways:

  • Advisors frequently underestimate the complexity of charitable giving—and how many of their clients are truly interested in philanthropy.
  • One of the most common suggestions for donors today is “Simply name your favorite charity” as the beneficiary of your IRA (or other qualified plan). That’s more easily said than done.
  • When it comes to charitable giving, advisors have to stay involved from start to finish.
  • Not understanding planned giving can be really costly: for the advisor (lost client); for the charity (no gift); for the donor (extra legal bill, maybe extra tax for the family and frustration).


Portions of this article republished with permission of Planned Giving Design Center (PGDC.com)

Below is a great cautionary tale for advisors, for donors, for charities; and for financial institutions. One of the most common suggestions for donors today is to “simply name your favorite charity” as the beneficiary of your IRA (or other qualified plan). We should have known. As this true story written by a cousin of mine explains, nothing is ever as easy as it should be—or could be.

My cousin’s personal story

Charitable giving should be easy. Right? Everyone concerned should have warm, fuzzy feelings about the process. Right? Then why did my recent efforts turn into five months of contentious exchanges that, for a time, had me thinking about leaving my financial advisor—someone, who until this point, was someone I liked and respected and who had provided me with sage advice and grown my portfolio over the years.

First, some background: I am a 68-year-old retired attorney who spent most of my career in public interest and public sector law. I have modest but significant assets and believe in paying back or paying forward to benefit others. My son understands and supports these values and knows that 20 to 25 percent of my estate will go to educational institutions. Second, although I am not a tax or probate attorney, I am somewhat more sophisticated than many investors or professionals about such matters. And as a former litigator and labor lawyer, I can be stubborn and adversarial.

The implications of changing your will

In the fall of 2013, with the help of a skilled probate/tax attorney, I revised my 7-year-old will, in part to recognize specifically the birth of my grandsons. My 2006 will made charitable bequests to two universities and to my high school, which also has a foundation. But the bequests came from the residuary of my estate. My lawyer suggested that I make the three charitable institutions the beneficiaries of qualified funds (IRAs and 401(k)s) instead to avoid the income taxes on the growth of those funds. My attorney also suggested making bequests through the will to my son and grandsons of assets that would not otherwise be taxed. That made sense, and we easily revised the will and informed my financial advisor of the need to revise the related beneficiary forms.

That’s where the trouble began.

My financial advisor warned me that the brokerage house considered such a designation “complex” and reserved the right to approve the language. Because both my attorney and I are considered skilled drafters of legal documents, I had no idea about the frustration to come. The first effort said something like “X% as a charitable bequest to the University of _____ Foundation for the benefit of the College of ______ , which amount shall be held, administered and distributed pursuant to the terms of a certain Endowed Gift Agreement dated ________ __, 20__, entered into by [me] and the University of ______ Foundation.” This was followed by the foundation addresses and federal tax ID numbers.

The unknown people in the brokerage house replied “No.” They did not say what was wrong, nor did they offer alternative language. They just said “No.” My attorney posited that perhaps the brokerage house feared it would have some type of obligation to oversee the use of the funds—but that was never our/my intent. I only wanted to make sure the funds would not be subsumed by the large foundation general funds and would go to the specific schools (law and journalism) that I specifically wanted to benefit.

First, we suggested that the brokerage house naysayers talk to one of us. The answer was, “No.” Then we asked if they had sample language that we could review. The answer again was, “No.” After I expressed my growing frustration to my financial advisor and asked if he could invest my funds through a more user-friendly brokerage house (the answer again was, “No”), I informed the advisor that I would be saddened to end our relationship if the matter could not be worked out.

I also had some harsh words about Texans who were accustomed to running roughshod over women’s rights because the brokerage house was headquartered in Texas. I later learned the bullies I was dealing with were based in the New England office.

My financial advisor and his assistant again contacted a mysterious person at the brokerage house, but that person lacked sufficient status to talk with the august naysayers. The report then came back that the only acceptable beneficiary for the New Englanders was the foundation with no limitations. That was unacceptable to me and I so informed my advisor. (Until that conversation, he may have thought me an easy client with a pleasant demeanor; that assessment no doubt changed.) Once again, I proposed sample language, and once again, I suggested that the brokerage house lawyers talk to me or my (less volatile) probate attorney. Once again they declined the opportunity to talk with us and rejected my proffered language. Instead, they went back to an earlier effort with approved language that stated “X% as a charitable bequest to the University of _____ Foundation, which amount shall be held, administered and distributed pursuant to the terms of a certain Endowed Gift Agreement dated ________ __, 20__, entered into by [me] and the University of ______ Foundation” followed by the foundation addresses and federal tax ID numbers.

This process took more than five months. (Had I died during that time, a considerable share of my assets would not have been disbursed in the manner I desired.) I still don’t know exactly what the brokerage house’s problem was with the language, as the approved version does not appear to address what I thought was the concern. I still suspect that brokerage house bullies or incompetents were involved. And I know that my financial advisor and his assistant served me well. I also know that this should not have been difficult and that this is just another instance in which brokerage houses should be held more accountable. Charitable giving should not be so difficult.

Conclusion

As my cousin’s story illustrated, the advisor did not lose the day here. He did not save the day either. He kinda muddled through and managed to keep his client. It could have been different if he knew his craft just a little bit better. How? Well, he could have utilized one of the many donor-advised funds (DAFs) to become the beneficiary of all three IRAs. Simple beneficiary designation language would have sufficed. Then, the donor could have worked with the one DAF to finalize the ultimate beneficiaries through her gift letter language. Or she could have allowed her son to distribute the funds via her instructions to him. This would have been so much easier for everyone. And the advisor would have been a hero, not the passive bystander that he turned out to be. Worth the time and trouble? I think so.


About the Author

Randy Fox is Editor in Chief of Planned Giving Design Center and is the regional representative of Charitable Giving Resource Center.