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The Final Frontier of Wealth Realization

The Final Frontier of Wealth Realization

Ten areas of guidance you may offer your clients to clarify their philanthropic legacy


Many clients evolve through several stages of wealth: accumulation and preservation, efficient transfer to descendants and utilization to express a personal legacy, both philanthropic and inter-generational.

While clients may donate to charity throughout their lives, the desire for philanthropic impact increases along with their affluence and visibility. For this reason, philanthropy constitutes the final frontier of wealth realization and provides an opportunity to guide your clients beyond traditional estate planning.

Here are 10 areas of guidance you may offer in clarifying your client’s philanthropic legacy. 


Define Philanthropic Purpose

Philanthropy may arise from a wide range of motivations, including religious faith, a formative experience or affiliation with a university or other institution. Clients may give based on the personal appeals of friends; however, their larger gifts reflect their own interests and values. Discerning why clients give to various causes helps define their philanthropic values and purpose. Doing so can help prioritize and focus their giving among various charitable initiatives, candidates and vehicles.  


Identify Charitable Constituents

Instead of initially focusing on specific charities, clients should identify the ultimate beneficiaries of their largesse, whether it’s a specific ecosystem, local community or wider class of individuals. Non-profit institutions actually serve as the intermediaries of philanthropic capital and vary in their efficacy. Once clients have clarified whom they wish to support through their philanthropy, they can identify the optimal non-profit partners to advance their goals.


Determine Geographic Impact

Some clients may wish to affect their immediate community and view a discernible impact through their philanthropy. Others may seek to leave a global footprint, as systemic problems in health, the environment and other areas span borders. Whether clients seek to affect their immediate community or address a global issue, it remains critical to define the geographic area of interest and scan the landscape for existing resources that already address the client’s chosen issue. 


Discern a Timeline 

Resources include not just financial assets, but also one’s time and personal reputation. Often, high-net-worth individuals serve on several boards, with their time and energy dispersed among many initiatives. To ensure a meaningful allocation of time and effort, an annual review of priorities may help clients focus their energy and achieve traction in their philanthropy.

With respect to financial resources, tax considerations often arise as a primary factor in deciding how much and when to commit to charity. Charitable planning may play a greater role in managing tax liabilities going forward, given the higher tax environment under the American Taxpayer Relief Act of 2012 (the Act).  

Pursuant to the Act, individuals with taxable incomes above the $450,000/$400,000 thresholds for joint and individual filers, respectively, will sustain a higher 39.6 percent income tax rate and a 20 percent maximum long-term capital gains tax (increased from 35 percent and 15 percent, respectively). In addition, the 3.8 percent Medicare surtax on net investment income for certain taxpayers may motivate taxpayers to minimize their adjusted gross income (AGI) as much as possible.1 Accordingly, donating long-term appreciated assets may completely bypass gain recognition by the donor and minimize tax exposure as a result.

With respect to limits on the charitable deduction, the Act doesn’t impose a flat percentage or aggregate cap on itemized deductions. However, it does reinstate the Pease provision, which limits certain itemized deductions, including the charitable deduction, for those with AGIs above a certain threshold ($300,000 for married couples filing jointly and $250,000 for single individuals). 

Specifically, the Pease limitation reduces itemized deductions by the lesser of: 


3 percent of the excess of AGI above the threshold amount, or  

80 percent of the amount of itemized deductions otherwise allowable.


Accordingly, the maximum reduction in overall itemized deductions equals 80 percent, with the remaining 20 percent deductible.

Individual retirement account owners over age 701/2 may currently circumvent this limitation through direct IRA distributions to charity. Until Dec. 31, 2013, the Act allows tax-free distributions from IRAs to public charities, up to a maximum of $100,000. Such distributions trigger neither income nor a corresponding deduction, so the Pease limitation wouldn’t apply in such cases. 

Clients with environmental interests may continue to benefit from the enhanced deduction limit for qualified conservation contributions made this year. (The
50 percent of AGI limitation, as opposed to 30 percent for capital gain property in general, and 15-year carryover period would continue to apply.)2

Donating large amounts to an institution often entails restrictions imposed by the donor. Before negotiating such gifts, clients should become familiar with the issues governing the implementation of and adherence to the client’s desired terms.

After consulting with their tax advisor, clients may decide to make a significant charitable contribution in the current year, but remain uncertain about which charities and amounts to donate. In this case, they may contribute to a donor advised fund now and retain the flexibility to recommend charitable grantees over the course of time. Those inclined to sustain greater control, as well as public disclosure, may consider a private foundation (PF) instead.3  

Since non-publicly traded assets, like closely held stock, real estate and partnership interests, often constitute the largest components of a client’s wealth and inherent appreciation, they may serve as ideal candidates for donation, particularly before a liquidity event (assuming an appropriate lead time to avoid the application of the assignment of income doctrine). Accordingly, clients will value guidance not just in the choice of charitable vehicle, but also in the optimal assets to contribute. Some donor advised funds have the in-house capability to accept complex assets that many public charities lack the staffing and expertise to accept; thus, serving as a viable option for simplifying your client’s charitable planning.

Those with carryover charitable deduction amounts should remember that gifts made in the current year must be deducted first, before any carryover contributions within the same category (for example, cash to public charities, 50 percent of AGI). Accordingly, before making any donations in the current year, clients may wish to have their tax advisors determine the maximum amount clients could contribute this year and still fully use their existing carryover deduction.


Map Out Milestones 

As with any business venture, having a series of targets for your clients to attain through their philanthropy helps to focus and measure their progress. Desired milestones may involve a quantitative goal, for example, to elevate test scores at a particular school by a certain margin within a specific time frame. Alternatively, a client may seek to reach consensus among other funders to work towards a common objective within a certain time frame. 

Clients’ milestones may involve ambitious goals, which they may adjust as they gain experience in their philanthropic journey. The most important aspect of the markers involves the discipline and accountability needed for philanthropists to track their own progress and deliberately chart their journey for the future.


Encourage Peer Exchange

“Scanning” has arisen as a common term within philanthropy to avoid duplication of efforts and resources in addressing a social or environmental problem.  Convening with fellow donors and other partners with similar interests will significantly advance your clients’ knowledge of the relevant landscape. Clients may join a grantmakers’ association based on geographic region or area of interest, for example, education or health. In addition, discussions with program officers of PFs, community foundations and other non-profit organizations within a client’s area of interest will also help identify areas of unrealized opportunity, as well as lessons learned.

Social media has enabled individuals to rate charities based on their personal experience, akin to the model of Yelp and Zagats. For example, through the website Great Nonprofits, reviewers include those who’ve volunteered or donated to nonprofits and those who’ve benefited from their services. While the donor experience remains an important factor in all contributions, clients need to recognize that it constitutes but one aspect of a charity’s efficacy. For instance, a positive telephone experience in processing a contribution doesn’t guarantee the quality or efficiency of the charity’s programs. In addition, a small number of reviews may significantly skew the charity’s overall rating. Therefore, clients should also conduct their own due diligence to assess charitable candidates.


Review Resources for Due Diligence

The investment of philanthropic capital requires no less rigor and review than that of a financial portfolio. 

Commonly used websites. Clients may use various websites4 to examine an organization’s financial sustainability and overall transparency. Both Guidestar and Charity Navigator serve as common resources for donors who seek to learn about and differentiate among the charities within a certain program area. However, before relying on the rankings posted by Charity Navigator and other providers, clients should check the parameters of the organizations encompassed and analyzed to avoid a premature judgment on a particular organization. For instance, Charity Navigator doesn’t review:


Charities exempt from filing Form 990, including the Salvation Army and many religious organizations.  

Organizations that file Form 990-EZ.  

Organizations with public support of less than $500,000 and total revenue less than $1 million in the most recent fiscal year.  

Organizations with less than four years of Forms 990.   



For this reason, emerging charities may not fall within the ambit of Charity Navigator, but may still warrant critical support in their start-up years. For the non-profit organizations reviewed, clients may determine, to some extent, the relative peer ranking of a charity in the realms of financial strength and transparency.


Confirm tax-exempt status. To discern the tax deductibility of their donations, clients may use Internal Revenue Service Exempt Organizations Select Check, which consolidates three former search sites into one: www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check. Through this online search tool, donors may discover which non-profit organizations: 


are eligible to receive tax-deductible charitable contributions;5

have had their tax-exempt status automatically revoked because they haven’t filed Form 990 series returns or notices annually, as required, for three consecutive years;6 or

have filed a Form 990-N (e-Postcard) annual electronic notice.7 


The IRS updates both the Publication 78 data and Auto-Revocation List on a monthly basis (except in January).   

Given the plethora of non-profit organizations, it may help to enter the tax identification number or specific name in quotation marks to capture the specific charity. In addition, this IRS website indicates the exempt status category of the organization, for example, a public charity (PC), PF or private operating foundation (POF). Donors should view this information regularly as well, since the classification status may change over time. Organizations may default into PF status after failing to meet the tests for PC or POF status over five or four years, respectively, so the classification doesn’t remain static. 


Review Financial Sustainability  

A charity’s Form 990 and financial statement reveal important information on the organization’s fiscal health and sustainability. Form 990 serves as a tax reporting and disclosure document, while a financial statement relies on generally accepted accounting principles (GAAP) to reflect the organization’s financial status at a certain point in time. While Form 990 provides key data, it shouldn’t serve as the primary assessment of an organization’s health, as it doesn’t rely on GAAP. However, Form 990 may indicate certain overall trends, as reflected over several years.

Guidestar serves as a repository of federal tax returns and financial statements for non-profit organizations. Its database encompasses all Internal Revenue Code Section 501(c) tax-exempt organizations eligible to accept tax-deductible contributions. Given the reporting cycles and respective deadlines of both documents, the most recently posted document on Guidestar may lag by several years.  

In Part 1 of the 2012 Form 990, Line 19 reflects total revenue minus total expenses, indicating whether the organization operated at a surplus or deficit for the year and the size of such surplus or deficit. Donors may gain a more comprehensive view of the organization by reviewing three of more years of the organization’s Forms 990, since one year may represent an outlier. A trend of surpluses or deficits may more significantly predict the organization’s future financial condition.   

From Form 990, Charity Navigator extracts three key components of an organization’s expenses: program operation, administrative and fundraising and calculates their respective percentages. Since an organization’s programs serve as the reason for its existence, this cost component should constitute the largest. Indeed, the standard established by the Better Business Bureau’s Wise Giving Alliance (WGA) requires that a charity spend at least 65 percent of its total expenses on program activities.8 Charity Navigator’s data reflects that seven out of 10 charities reviewed spend at least 75 percent of their budget on programs and services, while nine out of 10 spend at least 65 percent. 

Some donors may insist that a non-profit organization devote 100 percent, or a close percentage, of all its expenditures to program activities. Some charities follow this model, with donors and/or board members underwriting both the administrative and fundraising costs of the organization. However, without this base of support, non-profit organizations do need to pay for competent management and effective fundraising, both of which remain critical to financial sustainability.   

Non-profit organizations should, however, fundraise efficiently with their finite resources. Towards this end, the WGA has specified that a charity’s fundraising expenses should constitute no more than 35 percent of the contributions received as a result of fundraising efforts.9 Clients should be sure to distinguish the fundraising efforts of the charity from those of professional for-profit fundraisers, addressed below. 

Net assets indicate the level of resources to help sustain activities in the future. Part 1, Line 22 of the 2012 Form 990 reflects total assets minus total liabilities and thus, overall solvency. However, donors need to examine this figure further, as charities may not currently access certain assets subject to restriction. The amount of liquid assets available to a charity directly affects its ability to survive downward economic trends and sustain its existing programs and services. Charity Navigator analyzes a charity’s working capital ratio by determining how long it could sustain its current programs without generating new revenue.10 To obtain this ratio, it accounts for unrestricted and temporarily restricted net assets and excludes permanently restricted net assets.11


Transparency and Accountability

The expectation of candor, accountability and transparency within charities continues to increase among legislators and donors, as more view contributions as a philanthropic investment that warrants careful stewardship and a focus on results. As with any for-profit entity, the responsiveness and integrity of the board and staff remain critical to an organization’s sustainability. While both accountability and transparency are difficult to assess systematically across organizations, donors may use certain proxies to discern both elements in an organization.

Clients may begin by checking whether the charity’s own website contains the following key information beyond the most recently filed Form 990:


Board members and key staff. This information enables the public to identify the charity’s governing body and those responsible for managing its operations.

Audited financial statements. Ideally, an outside certified public accountant should audit financial statements, and the auditor’s cover letter should generally carry an unqualified opinion indicating the financial statements’ conformity with GAAP.

Privacy policy. To honor the donor’s privacy and prevent unsolicited contact, the charity should declare, unambiguously, whether it will sell, trade or share a donor’s personal information with anyone else or send donor mailings on behalf of other organizations and whether it will only share personal information once the donor has given the charity specific permission to do so.


Charity Navigator incorporates these and other items in its rankings on a charity’s transparency.12

The current Form 990 also contains certain information regarding the organization’s governance, including whether any board member receives any compensation for his duties and whether it has established certain policies now expected of all public charities (that is, policies addressing conflicts of interest, whistleblowers and record retention).

Executive compensation has emerged as a significant issue for exempt organizations, especially since the introduction of the intermediate sanctions law for excess benefits transactions. Appropriate compensation greatly depends on comparable market data, which varies with each position and organization. Rather than reviewing the specific compensation amount, donors may focus instead on whether the organization’s compensation policy includes a review and approval by independent persons, comparability data and contemporaneous substantiation of the deliberation and decision (reflected as Question 15 of Part IV, Section B of Form 990). 


Prescribe Caution for Fundraisers 

Natural disasters and other calamities have long inspired spontaneous generosity to contribute through commercially organized campaigns and sporting events. Often, organizers will state that they’ll direct all “net proceeds” of a certain event to a designated charity. Before making a contribution, donors should understand how much actually does reach the charity.  

If a charity pays a commercial fundraiser (neither an employee nor volunteer) to raise funds, a significant percentage of such funds raised may result in compensation to the fundraiser itself. In addition, the determination of net proceeds, after expenses, may vary with each event. For instance, The Attorney General of the State of California has determined that, on average, the contracting charities received only 39.5 percent of the total dollars collected by commercial fundraisers in California, reflecting that more than one-half of the contributions paid for campaign expenses and fees to fundraisers.13 Donors should understand that contributing in this manner, while not illegal, may entail a costly method of raising funds.14 Many donors may prefer to make direct contributions to a charity instead of through a fundraiser.              


Credit Suisse Securities (USA) LLC (CSSU) does not provide tax or legal advice. We urge you to consult with your own tax or legal advisors to ensure proper interpretation and application of all legislation, laws, rules and regulations and to obtain advice specific to your personal financial situation. This information is for educational purposes only and is intended to provide a general overview of the topics discussed. Information and opinions expressed by us have been obtained from sources believed to be reliable. CSSU makes no representation as to their accuracy or completeness and CSSU accepts no liability for losses arising from the use of the material presented. References to legislation and other applicable laws, rules and regulations are based on information that CSSU obtained from publicly available  sources that we believe to be reliable, but have not independently verified.



1. Congress had enacted a 3.8 percent tax imposed on the lesser of: (1) an individual’s net investment income for the taxable year, or (2) the excess (if any) of: (i) the individual’s modified adjusted gross income (MAGI) for the taxable year, over (ii) the threshold amount. The threshold amount(s) are: (1) for a taxpayer filing a joint return or as a surviving spouse, $250,000; (2) for a married taxpayer filing a separate return, $125,000; and (3) in any other case, $200,000. MAGI is adjusted gross income (AGI) increased by net foreign-source income exempt from regular tax under Internal Revenue Code Section 911(a)(1). Accordingly, for most taxpayers, MAGI equals AGI.

2. Code Section 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii), as amended by the American Taxpayer Relief Act of 2012.

3.  For more information on donor advised funds versus private foundations, see Philip T. Tobin, “A Symbiotic Relationship,” Trusts & Estates (April 2011) at p. 34.

4. The websites cited herein provide additional analytic services that donors may access through a paid subscription. This article focuses on the resources available to the public at no charge.

5. The Internal Revenue Service had previously provided this data through Publication 78.

6. Previously known as the Auto-Revocation List.

7. Most small organizations whose annual gross receipts are typically $50,000 or less are required to electronically submit Form 990-N, unless they choose instead to file a completed Form 990 or Form 990-EZ.

8. www.bbb.org/us/standards-for-charity-accountability/.

9. Ibid.

10. www.charitynavigator.org/index.cfm?bay=content.view&cpid=35.

11. Ibid.

12. The Better Business Bureau Wise Giving Alliance (WGA) has set forth 20 Standards for Charity Accountability and, at the end of 2011, had accredited 489 charities.

13. http://oag.ca.gov/sites/all/files/pdfs/charities/publications/CharitiesSolicitation.pdf.

14. Donors may find out whether a particular appeal is properly registered and get some limited information about past performance. A list of state charities officials, with links to descriptions of their services, can be found at
www.nasconet.org. The Council of Better Business Bureaus offers information about larger organizations that conduct national fundraising campaigns (and some others as well) through the WGA. On the website, visitors can look at reports based on a set of WGA standards for governance and operations of nonprofits and find out why some organizations have failed this review.