Donor/Client: The Two Faces of a Prospect

Donor/Client: The Two Faces of a Prospect

Article posted in Ethics on 14 July 1999| comments
audience: National Publication | last updated: 18 May 2011
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Summary

In this week's Gift Planner's Digest, planned giving officer and attorney Joel Breitstein presents "Donor/Client: The Two Faces of a Prospect" which explores the practical, legal, and ethical aspects of the planned giving officer's and professional advisor's roles in the gift planning process.

By Joel M. Breitstein, J.D.

Joel M. Breitstein is vice president, endowments and charitable planning of THE ASSOCI-ATIED Jewish Community Federation of Baltimore, Maryland. For the past 17 years, he has specialized in charitable gift planning and philanthropic resource management and development. Breitstein has had numerous articles published and writes a tri-annual newsletter dealing with creative philanthropic resource development. He is a member of the Pennsylvania and Florida Bars and serves as an advisory board member of the Chesapeake Planned Giving Council in Baltimore.

About a week before Thanksgiving in 1996, a donor named Sam, who I had worked with on and off for about eight years, called and asked if he and his wife could come to see me after the holiday. He had established a family supporting foundation when he sold his business in 1988, and had used some closely held stock in the business to make the initial gift for the foundation.

Over the years, his relationship as a donor to our institution developed, since ours was the supported organization of his supporting foundation. Charitable grants from the foundation went to fund many different philanthropic interests, and he made additional gifts into the foundation from time to time to coincide with his ongoing income tax planning needs.

The donor has two grown daughters and, although neither has a seat on the board, they do have the privilege of making grant recommendations for charitable distributions that may be of interest to them. It is the intent that these two children will eventually take their rightful place on the foundation's board in order to perpetuate the fund after their parents pass away.

What prompted Sam's call to me in mid November was manifold. He was beginning to do some serious estate planning, and wanted me to work through a number of issues with him and his wife. He was not satisfied with the financial and tax planning advisors that he had, and wanted to use me as a sounding board. He also felt that he was paying too much for the advice and counsel he was getting and, since I am an attorney, I could do just as well at zero cost. Sam believed this was the kind of service that should be provided by the nonprofit organization which employs me, given my position as vice president for charitable gift planning services and foundation relations. To sweeten the deal, he was willing to introduce me to other high net-worth friends who he felt might need the same kind of service.

So, what is the problem you ask? This must be every planned giving officer's (PGO) dream! Here was a wealthy donor who wanted me to be his charitable estate-planning advisor. On top of that he was willing to introduce me to his high net-worth buddies who might be able to use me as their advisor as well.

Instead of this being a planned giving officer's dream scenario, it began to cause me some serious concerns. Who was I, and what had my role become as a planned giving professional working for a nonprofit institution? Was Sam a donor, or was he putting me in a position where he should be treated as a client? Is there a difference between the two? Could I objectively give Sam the kind of advice he, and potentially others might need, when in reality I should be primarily concerned about securing maximum gifts for the institution for whom I work? Would I compromise my loyalty to my employer if the advice I gave Sam pointed away from making a gift to my institution?

My mind was awash in donor relations issues, professional advisor relationship issues, ethical questions, and questions of legal liability. These were matters I had not seriously thought about since I entered this profession 17 years ago, when I left the practice of law.

Before you think this is an issue that only touches and concerns a PGO, let me suggest that these issues are just as real for professional advisors (PA). In a 1997 issue of Gift Planner Update, published by the National Committee on Planned Giving, 80 people with assets of at least $50 million were surveyed. Of that group, 54% said their financial advisor NEVER discussed philanthropy or charitable planning strategies with them. Do professional advisors such as attorneys, CPAs, and financial planners have a legal responsibility to proactively advise clients about all possible strategies that might reduce the bite of income, gift, and estate taxes? Does that, by implication, include opening a discussion about charitable gift planning options in special situations that can help clients do good for themselves while doing some good for others at the same time? In order to facilitate such a discussion with a client, a charitable gift planning checklist (Exhibit A) may be helpful to the independent advisor, PGO, and volunteer solicitors who serve on development committees of tax-exempt organizations as well.

Issues Facing Planned Giving Officers and Professional Advisors

A prospect for a planned gift can be both a donor and a client, depending on the professional to whom he or she is relating:

Client-the party for which professional services are rendered-a customer or patron. In this relationship it is assumed that there will be some form of compensation paid by the client for the services rendered.

Donor-one that contributes something, such as money to a cause or a fund-a person who gives, giver, contributor. In this relationship it is assumed that there will be no compensation paid and, in fact, there may not be any quid pro quo between the donor and the nonprofit organization

Areas of Conflict

There can, at times, be areas of conflict between a planned giving officer and a professional advisor. For example:

It is the PGO's job to help facilitate a gift for the benefit of his/her institution, using planned giving techniques in an effort to turn a prospect into a donor. It is the PA's job to be an objective counselor and advisor, and to recommend any and all planning techniques that can minimize tax, and help the client preserve, enhance, and pass on wealth.

A PGOs serve the best interests of the institutions by which they are employed, and the PAs serve the best interests of their clients.

Often times, the PGO and PA have misgivings about one another. The PGO may think that attorneys and accountants have a chilling effect on charitable gift plans. And in contrast, PAs may be reluctant to suggest planned giving strategies to their clients because they lack a complete understanding of the technical aspects of sophisticated planned giving strategies and how they can fit into a client's total estate plan; they tend to confuse a charitable gift solicitation with charitable gift planning, and it is the donor/client who is caught in the middle of these issues.

The Planned Giving Officer as a Professional Advisor

If a planned giving officer begins to assume the role of a professional advisor, a prospect may become confused as to whether he or she is a donor or a client. The relationship between the PGO and his or her employer (the tax-exempt entity) can also be compromised. If the PGO begins to assume the role of the PA, his or her allegiance may drift to serving the best interest of the client, and not the nonprofit organization by which he/she is employed.

Also, the potential for legal liability of the PGO, and the institution by which the PGO is employed is greatly enhanced. In a recent issue of The Journal of Gift Planning, Elizabeth Mathieu, Neuberger and Berman, discusses this issue, "With more than 13,000 changes in the tax laws since 1982 and five types of charitable remainder trusts and four types of charitable lead trusts available for making planned gifts, it is impractical to expect most planned giving and development officers to be aware, on an ongoing basis, of law changes or their implications for the gift structuring?A good planned gift should be structured as an integrated part of a donor's financial and estate plans, and also his or her overall asset allocation and investment policy for all of his or her assets."

The National Committee on Planned Giving's Model Standards of Practice for the Charitable Gift Planner also suggests that this sort of crossover relationship is a potential violation. (See Exhibit B)

One of the best ways for PGOs to develop planned gifts is through the cultivation and cooperation of PAs. These relationships could be severely damaged if it is perceived that the PGO is in competition with the PA. When preparing financial or tax projections which illustrate the benefits of a planned gift strategy for a prospective donor, the PGO is well advised to receive the input of the donor's CPA, financial planner, and insurance professional. With respect to preparing full estate plans or when implementing planning recommendations, the PGO should consult and coordinate his or her efforts with the donor's legal counsel. Although the PGO deals in realm of tax law, accounting, financial instruments, and administration, he or she should never be considered by the donor as giving professional advice in any of these areas. The PGO's job is to present planned giving opportunities that help donors accomplish their personal financial and philanthropic goals, and then coordinate the efforts of the donor's advisors to evaluate and implement a plan that is coordinated and integrated with all elements of the donor's financial and estate planning.

Issues of Concern for the PA

Many times, a PA may become confused regarding the difference between the solicitation of a gift versus charitable gift planning advice.

Because a PA may sometimes lack knowledge in the field of planned giving; he/she may tend to play down the importance of charitable giving when a client suggests a proposed plan from a charitable organization. The PA believes that his/her primary job is to help preserve his/her client's assets that may be in direct conflict with advising the client to give them away.

Notwithstanding some of the conflict that may exist between the planned giving officer and the professional advisor, they do have a common goal-to make the individual seated in their respective offices (donor or client) happy. There are certain defined, opportunistic situations where charitable gift planning strategies can aid in the solicitation of a major gift, and can be beneficial to the donor/client's estate, tax, and financial planning objectives.

Exhibit "A" defines four of these opportunistic areas that can help the PA and PGO achieve a common goal. This checklist can also act as a primer for volunteer leaders who serve on a planned gifts development committee to spot planned giving opportunities in the marketplace. Exhibit C provides basic definitions of terms used in this article.

Appreciating the Two Faces of a Prospect

It is important to recognize that a planned giving prospect MUST have two faces. The PGO and PA each have distinct responsibilities in relating to the prospect, and if each does his/her job, the end result will be:

  • The development of substantial resources for the nonprofit organization.
  • The achievement of personal tax and financial planning objectives while helping the individual fulfill charitable goals.
  • Donors/clients who feel comfortable with the decisions they have made.
  • Enhanced credibility of the PA, PGO, and the tax-exempt organization

Exhibit A Charitable Gift Planning Checklist

Sale Of Major Capital Asset

The sale of a major capital asset is a windfall opportunity because:

  • It gives the donor an opportunity to make a major gift at a relatively low net cost.
  • It eliminates and/or defers capital gains tax on given property.
  • An outright gift to a public charity produces a maximum tax deduction.
  • A deferred gift to charity, using a charitable remainder trust, generates tax savings and can provide a source of income for the donor and/or others.

Client/Donor Looking To Generate Income For Self And Others

There are several gift-planning tools that can provide donors with an opportunity to combine financial planning, tax planning, and charitable giving:

  • Charitable Remainder Trust-This is a flexible income plan for life or set term of years.
  • Pooled Income Fund-Generates income for life; maintained by public charity.
  • Charitable Gift Annuity-Low cost; maintained by public charity; fixed annuity payments.

Estate Planning

Charitable Lead Trust-Front-end income for charity; pass property to next generation at low net gift or estate tax cost.

Remainder Interest In Personal Residence Or Farm Property-Generates income tax deduction; estate tax savings.

Bequest-Allows donor to retain total control of property until his/her demise, while making charity a beneficiary.

Life Insurance-Major gift at low net cost; wealth replacement.

Qualified Retirement Plan Assets-Maximize income to spouse and can be a voluntary, rather than involuntary, philanthropist.

Client/Donor Philanthropic Planning

Family involvement and charitable interests should always be discussed with a donor/client. The following are options (alone or in combination) that can fulfill charitable intent:

  • Private Foundation.
  • Donor Advised Fund.
  • Supporting Foundation.
  • Special Purpose Fund.

Exhibit B Model Standards of Practice for the Charitable Gift Planner

Preamble

The purpose of this statement is to encourage responsible charitable gift planning urging the adoption of the following Standards of Practice by all who work in the charitable gift planning process, including charitable institutions and their gift planning officers, independent fund raising consultants, attorneys, accountants, financial planners and life insurance agents, collectively referred to hereafter as "Gift Planners."

This statement recognizes that the solicitation, planning, and administration of a charitable gift is a complex process involving philanthropic, personal, financial, and tax considerations, and often involves professionals from various disciplines whose goals should include working together to structure a gift that achieves a fair and proper balance between the interests of the donor and the purposes of the charitable institution.

I. Primacy of Philanthropic Motivation

The principal basis for making a charitable gift should be a desire on the part of the donor to support the work of charitable institutions.

II. Explanation of Tax Implications

Congress has provided tax incentives for charitable giving, and the emphasis in this statement on philanthropic motivation in no way minimizes the necessity and appropriateness of a full and accurate explanation by the Gift Planner of those incentives and their implications.

III. Full Disclosure

It is essential to the gift planning process that the role and relationships of all parties involved, including how and by who each is compensated, be fully disclosed to the donor. A Gift Planner shall not act or purport to act as a representative of any charity without the express knowledge and approval of the charity, and shall not, while employed by the charity, act or purport to act as a representative of the donor, without the express consent of both the charity and the donor.

IV. Compensation

Compensation paid to Gift Planners shall be reasonable and proportionate to the services provided. Payment of finders fees, commissions or other fees by a donee organization to an independent Gift Planner as a condition for the delivery of a gift are never appropriate. Such payments lead to abusive practices and may violate certain state and federal regulations. Likewise, commission-based compensation for Gift Planners who are employed by a charitable institution is never appropriate.

V. Competence and Professionalism

The Gift Planner should strive to achieve and maintain a high degree of competence in his or her chosen area, and shall advise donors only in areas in which he or she is professionally qualified. It is a hallmark of professionalism for Gift Planners that they realize when they have reached the limits of their knowledge and expertise, and as a result, should include other professionals in the process. Such relationships should be characterized by courtesy, tact, and mutual respect.

VI. Consultation with Independent Advisers

A Gift Planner acting on behalf of a charity shall in all cases strongly encourage the donor to discuss the proposed gift with competent independent legal and tax advisers of the donor's choice.

VII. Consolation with Charities

Although Gift Planners frequently and properly counsel donors concerning specific charitable gifts without the prior knowledge or approval of the donee organization, the Gift Planners, in order to insure that the gift will accomplish the donor's objectives, should encourage the donor early in the gift planning process, to discuss the proposed gift with the charity to whom the gift is to be made. In cases where the donor desires anonymity, the Gift Planners shall endeavor, on behalf of the undisclosed donor, to obtain the charity's input in the gift planning process.

VIII. Explanation of Gift

The Gift Planner shall make every effort, insofar as possible, to insure that the donor receives a full and accurate explanation of all aspects of the proposed charitable gift.

IX Full Compliance

A Gift Planner shall fully comply with and shall encourage other parties in the gift planning process to fully comply with both the letter and spirit of all applicable federal and state laws and regulations.

X. Public Trust

Gift Planners shall, in all dealings with donors, institutions, and other professionals, act with fairness, honesty, integrity, and openness. Except for compensation received for services, the terms of which have been disclosed to the donor, they shall have no vested interest that could result in personal gain.

Adopted and subscribed to by the National Committee on Planned Giving and the American Council on Gift Annuities, May 7, 1991.

Exhibit C Definitions

Annuity A contract, legal obligation, to pay specified amounts over a specified period of time to a specified individual(s) in exchange for cash, securities, or other tangible property
Bequest A direction in a Will to pay over or distribute personal property. Also called a legacy
Charitable Gift Annuity This is part gift and part annuity. A donor makes a gift to the charity and also, by contract, purchases a fixed income for one or two beneficiaries for life.
Charitable Lead Trust A gift arrangement that is the reverse of a life income gift. It is a trust that pays income to the charity and when the trust terminates, the remainder transfers to the donor or another beneficiary
Charitable Remainder Trust This is a life income plan that pays a fixed dollar amount to a named beneficiary(ies) for life, or to a named beneficiary(ies) or class of beneficiaries for a term not to exceed 20 years, or a combination of life and term of years
Insurance Trust A trust consisting of life insurance policies or proceeds.
Funded Insurance Trust- A trust to which other property is transferred to be used, with the income, for the payment of premiums. Unfunded Insurance Trust- A trust that contains no fund for payment of premiums.
Irrevocable Trust A trust that cannot be changed or dissolved.
Life Income Agreement A gift of a principal sum, property, or securities with a stipulated life income paid to the donor or another person for his or her lifetime(s).
Life Income Trust A plan whereby gift assets are placed in trust for the lifetime benefit of an income beneficiary, with the remainder going to another beneficiary
Pooled Income Fund A type of charitable remainder trust that operates like a mutual fund. An individual's gift, along with similar gifts from other donors, is invested by the charitable institution, acting as trustee, or the trustee designated by the charity, such as a bank or trust company. The trustee agrees to pay an income to the donor and/or a designated income beneficiary for life.
Remainder The amount remaining in a trust after income payments have ended. A remainder is vested when payable to a designated beneficiary, or to a class of beneficiaries whether or not living at the termination of the trust. It is contingent when dependent on same occurrence or event to take place in the future


Definitions taken from A Guide to Starting a Planned Giving Program for Nonprofit Executives and Volunteer Trustees, National Committee on Planned Giving, 233 McCrea Street, Suite 400, Indianapolis, IN 46225, 1996; and The Basics of Charitable Gift Planning from A to Z, National Committee on Planned Givings Satellite Seminar, Sapp, Ron, November 18, 1998.

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