Free lunch, dinner, and football tickets. The poor man’s opportunity to be charitable. Unsolicited advice. Kill the messenger. Bill Gates needs people to know how much he gives. Polish people have no money. Why would you want a building named after you?
Welcome to our listener-supported podcast, Money Talk, uncompromised absolute financial truths behind financial perceptions with host, Ed Sutkowski and Chuck LeFebvre. Let’s listen in.
Chuck LeFebvre: I’m Chuck.
Ed Sutkowski: I’m Ed.
Chuck: Ed, this afternoon, I want to pick your brain about something. I think this is going to be in the category of give it. The premise here is I’ve heard this subject come up with several clients from time to time, I’m sure you have too, where you have somebody who wants to give a substantial part of their estate for charitable purposes. They’ll say, for instance, “I want X percent of my estate to go to some program that’s at this research hospital or some program that’s at this college campus. I want to go to the University of Illinois and here’s what I want them to do with it.” You’re putting that hook on that charitable gift, where it’s supposed to be for a particular purpose. Then the question is, how do you enforce that after you’re no longer with the living because, of course, those charitable organizations always want to just have a general gift, right?
Ed: Yes, you’re addressing an often encountered issue and there are multiple solutions, but the easiest is that you would make sure the money, instead of going to the charity directly, goes to your private foundation or to a donor-advised fund. More specifically, if you look in the internet and review the differences between a donor-advised fund and a foundation, they’re rather remarkable in terms of cost. Let’s make it easy and assume it’s a private foundation, it’s a Sutkowski family foundation. Specifically, the dollar amount would come into the foundation and there would be a board of directors of this nonprofit corporation. Provisions would be made for corporate governance, distributions, investments, all sorts of opportunities that the decadent could express by way of attachments to the foundation operating program and documents. He would specifically provide for a gift to this charity, the University of Illinois, but not a lump sum. It is a disaster to send it in a lump sum. Why? You get no lunches and dinners. Foundation members will not get lunches and dinners and free football tickets but aside from that, you really want strings. You want to make sure that these funds are applied as you deem to be appropriate and as you’ve expressed in the operating provisions of the foundation. The directors would be charged with the responsibility of monitoring that distribution on an annual basis. By way of an undertaking on the part of the charity, what they’re going to do with the funds, what they, in fact, did with the funds, kind of a report at the end of each year. To the extent that the guidelines are not being met, guess what happens?
Chuck: Different charitable contribution in subsequent years.
Ed: Yes, not only that, perhaps no charitable contribution, but instead to a charity that emulates the objectives expressed and they first are the primary donee of those funds. We oftentimes see this money going directly to the charity in a lump sum, huge mistake. You have no control over what’s going on and the alternative, as I say, is this donor-advised fund. It operates much like a private foundation except there’s no annual required distribution, and the funds are distributed to this donor-advised fund. I will call it the Sutkowski fund. You would appoint two or three individuals that have control over the distribution and investment of the subject funds. You’d have three people, one person would be able to identify the donees of a third of the assets per year for a fixed amount per year and likewise, with the other two. They could combine and achieve your objectives expressed in an operating plan, adjust like the foundation except that it’s far less expensive, annual fees are minimal if any, there are some constraints that Fidelity, Vanguard, Schwaub, it will impose on terms of the nature of the investments and the frequency of the changes. Bottom line, the donor-advised fund is a poor man’s opportunity to achieve charitable objectives. I would suggest that if the foundation has less than $5 million, you would use a donor-advised fund.
Chuck: My impression, tell me if I’m wrong about this, is that you can have an operating plan for those advisors for the donor-advised fund, but it’s not really legally binding, right? You’re trusting them to follow the plan. Is that right?
Ed: Exactly, it’s not expressed in concrete. It’s a suggestion. Back to the foundation for a second, there could be changes in the composition of the directors and they may not achieve those same objectives. There’s not a trust going on here and we’re thinking multiple generations. We can get into a harangue about what the second or third generations are going to do with these funds, but you’ve got to be careful. In the case of the foundation, you can pay the directors certain amounts of money, a fixed amount per meeting and the like. It’s not the case in a donor-advised fund.
Chuck: Now, I think there’s an alternative there for someone who really wants to make sure that their giving plan is executed in the manner that they specify and nobody later can modify it, and that would be to write all of that into a charitable trust. Is that right? Then the trustee just has to follow the terms of the trust unless they’ve got a sufficient basis to get a court to reform it somehow.
Ed: Yes, we’ve talked about charitable remainder trust, that is a unitrust with a fixed percentage of the subject assets revalued every year. Typically, from certain constraints, it’s got to be not less than 5 no more than 50 with a remainder interest to the charity of at least 10% and other series of mathematical computations. A charitable lead trust, just the opposite, where the charity receives a certain amount of money, a fixed dollar amount as contrasted with a percentage of the value every year. After the fixed term, 5, 10 or 15 years, it’ll be distributed to the descendants. I like to use the charitable remainder trust for IRAs. As you know, under current law, occasioned by the legislation enacted effective this year, the IRA to a non-spousal beneficiary must be drained out prior to the expiration of the 10 year period beginning on the day to the death of the owner. To eliminate that responsibility, that requirement, the draining requirement, you would send those assets in your IRA to a charitable remainder unitrust with remainder interest going to the subject charity, for example, your foundation. You can achieve the objectives by the use of one or more, I’ll call them tools, Chuck. That’s the fascination about this whole area. The real question is, what are your concerns? What are your fears? What are your costs that you anticipate? Who are the people you can trust or you think you can trust? At least, I spend, and I suppose I’m a little slow on this, I’ll spend 80% of my time just thinking and talking. What are your concerns? What are your fears? Never expectations by the way. Never ask someone, “What are your expectations in the financial arena?” That is an impermissible question. It never works. Yes, I want to fly to the moon, I want a gazillion dollars, I want to do it free. Your fears and concerns and 80 plus percent of your time is shutting up and listening.
Chuck: It seems like when people are engaged in this planning, they do get unsolicited advice from others other than their attorney, who maybe are not completely uninvested in the outcome. For instance, you’ve got these planned giving people at all the large charities who’ll have these planned giving coordinators that are basically salespeople to try to bring in these charitable gifts. What they want is, of course, the fewest restrictions as the greatest amount of certainty that that particular charity will get the money, get it as quickly as possible and with the fewest restrictions. Then I’ve also noticed another thing which is that the financial advisors out there tend to have various reasons why they don’t like these donor-advised funds and it finally dawned on me, as a financial adviser, you never have an opportunity to manage the investments in a donor-advised fund. It belongs to the fund.
Ed: Yes. You always have to consider the source. When you’re talking about, for example, a foundation donee, who are the managers and the like? If you’re talking about a charitable organization, who are the managers, what are the costs and expenses? If you’re talking about an investment advisor, I have one question I always ask and one question that’s never answered. Specifically, Charlie, your registered investment advisor, let’s see your year-end performance, your personal balance sheet for the last three years. Let’s see how you’ve done with the investments that you’re recommending. Never have I had a response. I can see this in the case of the large organizations, a Vanguard or Fidelity, a Schwaub, and I’m sure there are other large ones where there is no registered investment advisor who’s pushing a certain investment where you have the opportunity to make your own trades and take advantage of the litany of financial information available on those respective platforms. They have no real ax to grind. They’ll manage the funds if you wish. If you have a personal investment advisor, a registered investment advisor not associated with a very, very large association, ask the question. If you get an answer, email me. I’d like to like to see that answer.
Chuck: That would be fascinating.
Ed: What’s your experience, Chuck?
Chuck: Oh, I don’t think I’ve ever seen that information disclosed. The other thing that you have a very difficult time with these financial advisors getting any traction with is any discussion about modifications to the way they charge fees. I can’t count anymore the number of arguments that I’ve gotten into with financial advisors that essentially go along the lines of me saying, “You could probably have billions, billions with a B dollars of assets flow your way to manage if you came up with a fee schedule where you were charging hourly for your time rather than–
Ed: $500, or $800, or $1000 an hour, I don’t care about the hourly charge.
Chuck: Where the hemming and hawing that happens in response to that is usually, finally, after stumbling around a little bit. What I ultimately hear is, “Well, my clients complain about the way lawyers charge.”
Ed: Oh, I’ve always said, “Kill the messenger. Kill the messenger.”
Chuck: Anyway, it just seems like I have yet to find a financial advisor that’s willing to do that. My question is always, “Hey, if you are one of those people who is fortunate to have $50, $60, $70, $80, $100 million to invest, why on earth would you pay somebody a percentage of that when the management that they do of the last $40 million of that requires no more effort on their part than on the first $1 million?”
Ed: It can also be $4 million and $10 million or $400,000 and 4 million. The theory is the same irrespective of the amount. I see this in other professions where it’s a percentage charge. I’m sorry, I can’t buy into that. I think it’s a default because you don’t want to admit to the real costs, you don’t want to keep track of your time. In light of all this, you must understand that over the 200-year history of the stock market, the returns are from 6, 5 to 6.75. That includes–
Chuck: Over inflation.
Ed: Over inflation, adjusted for inflation. Over the last, what, 30 years, it’s eight-plus percent, the same numbers. If you simply focus on, for example, index funds or looking at the index funds seen with their largest holdings are and investing it. The key, and let’s not beat up the investment advisors too much here, Chuck, because some people will want someone to talk to almost daily or monthly or quarterly. There is a role to be played by a third-party helping you with investments.
Chuck: I definitely agree with that. I know any number of people that even if they could physically manage the assets on their own, they could learn what they need to learn in order to do it, but they either don’t have the time, or the patience, or they really don’t have, I want to say, the lack of anxiety that you need in order to stay the course. Sometimes they just need someone who they can go to when they start getting nervous, who’s just there to calm them down.
Ed: I think that’s a very good thing by the way.
Chuck: Yes. There’s real value in that because it’s the easiest way to lose money in the market or to fail to attain a return in the market is by trading emotionally. It’s the default position for most people.
Ed: Yes. I should tell you that there are all sorts of theories on rebalancing every year of the ratio of debt to equity that is fixed investments to stocks depending upon your age. If you’re 80, you should only have 20% of the equities, 80% in fixed. I’m sorry, I don’t buy any of that. The bottom line in my world is buy dividend-producing stocks or at least a combination of non-dividend producing like an Amazon and an Apple and a Microsoft. The last to pay dividends. The first, Amazon, does not and leave it alone. Play with tinker toys, talk to your dog, go fishing, but make the investment and leave it alone. People don’t do that.
Chuck: Oh, absolutely not. I want to return to one point about these donor-advised funds and the private foundations. One thing I think people should be a little bit cautious about with the donor-advised funds is there again, you do have to check out and see what fees are being charged depending on whose fund you buy into. The other thing is if you decide that you’re going to place money with a donor-advised fund at, let’s say, you have an Edward Jones broker who you like working with and you put a donor-advice fund at Edward Jones. First of all, you want to make sure you understand their fees. Second, you need to understand that there is no opportunity later to move that to Schwaub or Fidelity. That’s Edward Jones’ money in a sense from that point forward.
Ed: Yes. I donor-advised like a foundation. Let’s assume you’re sending money to the foundation during your lifetime. It’s gone. You cannot borrow against it, you cannot eat it, you can’t drink it, you can’t buy a car with it, you can do nothing with it. Once a lifetime donor-advised fund is established or lifetime foundation and it’s funded, it’s gone. Now, you may alter the destiny of the investments and the identity of the distributee, but it is not your money.
Chuck: I think that’s a lesson. Every once in a while, you see an article in the newspaper where someone needs to be reminded usually by a member of law enforcement.
Ed: Yes. That’s right. In the case of the foundation, it sounds really neat, but there are all kinds of operating restrictions, what you can do, what you can’t do. It’s a situation where you have to have enough money, a large foundation, in the number I’ve expressed because the maintenance costs, the education costs, the monitoring costs are significant, not insignificant I should say. In the case of donor-advised funds, they’re minimal. Now, that’s not to say that you can’t have a $100 million donor-advised fund or a $1 million foundation, but maybe we focus too much on costs. I do because over a long period of time, a 1% charge, 70 basis point charge, or a 50 basis point charge, or a no basis points charge makes a hell of a difference in the investments.
Chuck: It makes a huge difference. Talk me out of this. I tend to gravitate towards the idea that even if it isn’t a charitable remainder trust, that a charitable trust in some ways is simpler and easier than just a regular private foundation for those situations when a donor-advised fund isn’t going to work. Can you think of the pros and cons of those two versus each other?
Ed: I happen to agree with you. I’d like to disagree just on general principles, but you visit with the lawyer one time to draft it up and then the accountant handles the filings. Again, it’s a function of your sophistication, who the trustee is. By the way, you can be your own trustee. If it’s a lifetime donor-advised fund, you got to be careful not to make it to your foundation for tax purposes. That is the beneficiary element of your foundation if you control the foundation. Having said that, yes, the donor-advised fund is easier to work with I think, when you have a charitable remainder trust involved. The charity is your donor-advised fund. You retain control of it during the duration of the charitable remainder unitrust, I’ll call it. At your death, the charity to which the balance it goes to is a donor-advised fund, you have a set of individuals who dictate the identity of the distributees there and the nature of the investments.
Chuck: Now let’s cross that last bridge, which is somebody who has a grand enough vision that it seems appropriate for them to actually establish a public charity? How big does the plan have to be for that to start making sense?
Ed: Well, you’re in the 50 plus million dollar area or more. The Gates Foundation is how many billions of dollars, that’s a whole new area. You don’t run into too many people that have that sort of assets, or you run into a lot of people with a couple hundred million dollars in assets, which will still have a private foundation. You go to a billion, the operating costs, the compliance, the whole staff of individuals, investment advisors, accountants, lawyers, everyone else involved. That’s a different ballgame. I must tell you, I’d be interested to work with those, but not much fun. It’s too large, there’s less creativity available and it’s just not fun. Too much money is like having– how many Cokes can you have a day? I’d just soon work with a family and try to understand their objectives. Make sure everyone understands that the road at the end is dramatic. I mean, you’re not going to live forever. Watch out for scholarships in your name, buildings in your name, think about things that are going to reward the community that you reside in. Forget about trying to be perpetual, it doesn’t happen. No one cares, second, or third-generation, they didn’t even know you. I’m sounding like I’m a little jaded, but that’s reality, have you?
Chuck: Well, I want to get your thoughts on– You touched on something that I’ve recently heard someone comment on, which is these naming rights and giving anonymously versus publicly disclosing who you are as a donor. The argument goes something like this, that Bill Gates, for instance, has probably done a great deal of good in the World by letting everyone know that he, Bill Gates has donated as much money as he has to charity, because of the fact that that creates essentially a public pressure or a cultural norm or an expectation, just signals. It’s a type of virtue signaling, I guess, for other people to who have the means to likewise make very large charitable gifts. I wonder what your thoughts are on that?
Ed: Well, when I was a young kid, my father, who was the biggest influence on my life, said Eddy– I want you to understand something at the very beginning here, I was in my teens. “Your light shines brightest under a bushel basket. If you have to promote yourself, there’s something wrong with your objectives. Do it anonymously.” That’s my view. Understand, Chuck, that I’m coming from a point of view that’s my point of view. It isn’t necessarily Bill Gates’s point of view, the charitable organizations have their point of view, it’s Ed’s point of view and I’m comfortable with that. I’d just soon not have my name on a building. I can’t take that. This is something I can deal with. Can you?
Chuck: Well, I think that there are probably plenty of people who are glad not to have your name on their building. Various people you’ve run across at times in your life, Ed.
Ed: Well, not having your name on something, attracts a lot of dinners, a lot of patronizing. If you need that, fine, but bear in mind, consider the source.
Chuck: There you go.
Ed: Whether it’s Greek mythology, whether it’s an investment advisor, whether it’s a lawyer, whether it’s a doctor, consider the source and act accordingly. The deceit and I’ll call it deceit is when someone purports to be your friend, and when the economic relationship ends, you hope that person comes to your funeral. Let me tell you a little story that I found to be very, very attractive. The story goes like this. This gentleman, very well to do, no quote heirs. In a sense, no descendants, some collaterals, but no descendants and said, Eddie, “I want to do something in the way that I want people to believe in me too. I wanted to see if they’re really interested in me.” I said, “Well, Charlie, we’ll call them. Here’s an idea. Who’s your accountant,” let’s say? Here’s what we’re going to do. We’re going to name your accountant as the individual who arranges this and takes care of it specifically. You are otherwise buried in Decatur, which is where you were born and raised, so to speak. We’re going to arrange for your burial, not in Peoria, but in a little town, and you pick it, Broomfield, Illinois, hard to get to. Your accountant is then going to be authorized to give everyone that comes to that, not the funeral, not the visitation for lunch, but comes to the burial when you drop down into the ground, and that person is going to give every one of those people $15,000 per year for the next 10 years if they show up and stay all the way through the burial. I couldn’t believe it.
Chuck: Publish the will after the burial takes place.
Ed: Yes, that’s right. It was in a trust. No one knew this was going on but I will tell you, I was a little embarrassed at how few people attended the burial. They really cared. The difficulty is identifying who really cares about you and if it’s a handful, if it’s more than six, wake up, exclusive of family members. If it’s a handful, those people really don’t care about you. That’s the secret in non-charitable giving? Do they need it? Is it going to be too much money so they can do nothing? Is it going to be enough that they can do whatever they want to do and yet enjoy life? This idea of giving is worse than the accumulation process?
Chuck: Oh, I think it’s much harder for people to contemplate these questions. It really grips them sometimes. I’ve kind of come around to recognizing that where these wealth transfer plans tend to do the most good, leaving aside the charitable gifts, but the gifts for individuals is what they do is they provide a sort of a platform of economic security for somebody. As opposed to providing a lifetime of economic, let’s call it just the income to replace the income that you would normally get from earning in developing your own career and so forth. Just giving someone the sense that they have a safety net that they can fall back on, then they can kind of propel themselves forward with whatever their own grand goals are with some confidence. That seems to be where this type of planning makes the largest difference.
Ed: Yes, the idea is to provide for distributions of an amount that allow the individual to do what they have the passion about, not everyone has a passion for the games that we– I call them games, the wealth accumulation, distribution theories, and dealing with all these tax laws. It’s a game. Not everyone enjoys that or has the affinity for it. I mean, I can’t imagine Einstein liking and enjoying what today we’re talking about. You recognize that everyone has a different need, everyone is special, everyone has a special need and we forget about that. You’re going to give that person enough to do what they’re passionate about but not enough to do nothing. It’s very difficult, if not impossible.
Chuck: Well, I mean, it’d be nice to be able to calibrate that perfectly for each individual. This topic, I’ve seen this in numerous, not numerous, but on more than a handful of times where there will be a beneficiary of a fairly sizeable estate who, genuinely, at least for a period of that person’s lifetime has no real desire to live large. In a way, is happiest with a bit of what I call a bohemian lifestyle, and then later in life that changes. It’s interesting. Sometimes, just throwing extra money at somebody who, for whatever reason, seems to be happiest in a different lifestyle is not good for them either. It doesn’t make them happy. It makes them unhappy.
Ed: Yes. The presence of substantial wealth doesn’t translate into happiness. It is the process of accumulating it. The Odyssey, if you will, that captured the sense of all literature. The focus should be on the travel, the trip, not on the ultimate objective. You’re missing something if you’re trying to achieve happiness by way of wealth. It doesn’t happen. You can tailor your decision by providing for distributions equal to the matching of your W-2 compensation, the absence of a drug participation. You can design around the distribution of these trust assets, we’re talking about trust assets here, to suit your needs, bearing in mind that when you’re a ghost and the money if it’s distributed to the beneficiary, Chuck, it’s gone. In six months to four, five years, you are forgotten. Don’t think that you’re going to create a memorial to you by conferring the economic benefit on one or more descendants. It’s not going to happen.
Chuck: That’s what dust to dust means, right?
Ed: That’s what it means. Again, the accumulation process is a game, the management process is a game, and the distribution process is a game. Don’t think that you are special because everyone is special. Everyone has a story whether it’s picking cotton, whether it’s growing up in the steel mills, whether you have a silver spoon in your mouth, everyone is special and there are special opportunities for everyone.
Chuck: Well said.
Ed: I’ve enjoyed this. This was unrehearsed.
Chuck: Yes, exactly.
Ed: Next time, we’ll rehearse it.
Chuck: Sounds good.
Ed: This has been fun. Thank you, Chuck.
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