Listen to this article
Rich Americans who have spent their careers accumulating wealth are increasingly seeking guidance at retirement on how to give it away.
Philanthropy is a growing market for financial advisers. Merrill Lynch estimates $8tn will be donated in the US between 2016 and 2035.
Retirees can reduce their tax bills by giving back through investing in trusts or donor-advised funds, as opposed to simply gifting money. Trusts — the more popular of the two, according to advisers — are vehicles into which retirees transfer assets in order to avoid paying taxes. Donor-advised funds, meanwhile, are vehicles run by non-profit entities that individuals use to donate to charity.
“More clients are going through trusts than through donor-advised funds because they want more control over what they are doing and are very particular about what they want to do,” says John Ludwig, financial adviser at LPL Financial.
“The trust is more work up front, but it gives them more control in the longer term. There are various options for doing it, and that depends on how much control they want.”
The main considerations clients have to make is how much work they are willing to put in and what fees they are willing to pay. Setting up a trust is more cumbersome and expensive than investing in funds.
For example, there are operational costs involved with setting up a trust, as well as legal and adviser fees, which an individual avoids by investing in a donor-advised fund. As a result users of trusts tend to be richer retirees.
“Really wealthy clients will go down the trust route because they will spend more time on it compared to people investing, say, $10,000 a year. At that level, a trust does not make sense,” says Jim Adams, president at Adams Consulting Group, a financial adviser.
Wealthy individuals typically set up their own charity or foundation when engaging in philanthropy.
The most common foundation for philanthropy is a charitable remainder trust, in which clients can hold annuities or insurance policies. When they die, the policy becomes part of the charity, which reduces estate tax. It is a set up typically used when individuals wish to pass on a business to either their children or to long-term employees.
The cheaper and less time consuming alternative to trusts for retirees is donor-advised funds.
These typically sit within foundations and charge an investment management fee. Advisers also charge a fee for giving advice on how to select a donor-advised fund.
Mr Adams says donor-advised funds are growing more popular for people who do not want to create a trust or create a charity because of their ease of use.