Charities See Big Gains From Middle Class Prosperity


Staff Reporter

They're hardly in the league of Bill Gates or Warren Buffett, but through luck, pluck and virtue they have accumulated a net worth of several million bucks, and as a final financial strategy, they're looking to philanthropy.

But how exactly? Leaving six figures to a large university with endowments running into the hundreds of millions of dollars is a drop in the bucket. Leaving that same amount to a small non-profit might produce more tangible benefits, but provides less assurance that the money will be properly spent.

"The people in that range realize they are not the multi-billion-dollar giver, yet they feel like they can make a significant difference," said Joe Lumarda, executive vice president of the California Community Foundation, a Los Angeles-based group with a pooled asset base of $600 million. "They were business people who were successful and made an impact through wise investments, choices and businesses. Now, they want to do the same thing with their giving."

Just as they did with the investments that form the base of their wealth, these millionaires scrutinize the charities they support. Unlike the donations of the super-wealthy, which lean to institutionalized giving, most middle-class millionaires want to be involved in, and see the results of, their gift.

They assess charities by scouring financials either through IRS Form 990 or through audits before making the offer of a gift, said Dorothy Courtney, executive director of the Richstone Family Center, a Hawthorne-based counseling center for victims of violence.

"They're looking for the kind of business leadership they feel would ensure the proper management," said Douglas Freeman, chairman of the Institute for Family Foundations and partner at Freeman Freeman & Smiley LLP. "Are these individuals who have been involved in business, or understand financial statements and issues like how to deliver a program and product on time and under budget?"

No household names

Because they generally give $1 million or less, middle-class millionaires rarely give to larger, well-known charitable foundations, said Lumarda, who said they tend to favor organizations where a $100,000 gift can make a much bigger impact.

"If you are giving to a national household-name charity, you can get lost. There are a lot of $25,000 donors," Lumarda said. "I hear more and more donors say they want to make a difference in the organization and want to feel actively involved."

While poring over financial and mission statements is prudent, personal ties often come into play. Potential donors may know someone on the board of directors, or they may have had a personal experience with the organization that makes them more likely to consider a gift.

In some cases, they may have been treated at a hospital, or they want to reward the school they attended.

"It's a trust factor," Courtney said. "If they've had people tell them that 'so and so' is involved, they know this is a good organization and that the dollars are well spent."

In courting donors of $500,000 to $1 million, non-profits recognize the best approach is personal connections.

Carla Sanger, president and chief executive of L.A.'s BEST (Better Educated Students for Tomorrow), said the non-profit recently added four board members "with a Rolodex factor that can network and put out more tentacles to that population."

Often, she said, an organization has to tailor its mission to attract the attention of donors who may have similar, but not exactly, the same goals in mind.

The addition of new board members, said Sanger, is part of L.A.'s BEST's effort to diversify its funding base beyond its primary source, state and federal grants.

Growing base

Over the next 50 years, the amount of wealth passing from baby boomers will range from $41 trillion to $136 trillion, depending on the nature of individual savings plans, according to a study by the Social Welfare Research Institute at Boston College. The institute estimates that 15 percent $6 trillion using the lower estimate will go to charity.

Giving by middle-class millionaires already has had an impact. There were 4,200 private, corporate and community foundations in California in 1999, the most recent data available, up from 1,500 in 1991, according to The Foundation Center and the Center on Philanthropy and Public Policy at the University of Southern California.

James Ferris, director of the center, said community foundations are popular among middle-class millionaires because they offer donor-advised funds, which allow those who cannot create a private foundation the ability to direct giving to a specific cause or organization.

A net worth of $5 million to $15 million, he said, is generally not enough to make it financially feasible to create a private foundation.

And there are tax considerations as well.

Middle-class millionaires are just as diligent in scrutinizing charitable causes as they are about how much they pay in taxes, which can diminish half their wealth if they're not planning carefully, Lumarda said.

The tax benefits of giving to a community foundation or donor-advised fund are much the same as those of giving directly to a charity, Lumarda said. Private foundations, on the other hand, come with more tax regulations and limits on deductions.

Many also create charitable remainder trusts, which allow the donor to set aside money while alive but not distribute it until after death, said David Green, a partner in the personal services practice at PricewaterhouseCoopers LLP in L.A. That device allows a donor to take a tax deduction on the principal while alive, receive some compensation from the beneficial charity for interest on the principal, and avoid capital gains.

"At the $5 million to $15 million bracket, they're at the stage where it might be tough for them to give away large sums of money," Green said. "If they give away $1 million, that's 20 percent of their net worth, so they won't perceive that as a safety cushion. This trust gives them a safety cushion."

Wealth Often Breeds Conflict Among Family Members


Staff Reporter

Who said blood was thicker than money? Take the man in his 40s who cut his elderly mother off from the $10 million estate she created with his late father. Angered when she gave his sister a personal gift of $58,000, he accused his mother of stealing from the estate.

There was the ailing woman who became unable to care for herself later in life and left the bulk of her estate to a medical foundation. After she died, her nieces and nephews contested her competence in drafting the will, claiming she really wanted to leave her wealth to family members. Only later, after realizing she had drafted a will with the same provision in 1976 long before she became ill did the nieces and nephews give up their objections.

"The fighting that ensues after mom or dad dies can dissolve a family's foundation," said Lyn Hinojosa, a litigator at Hinojosa Khougaz & Wallet handling family trusts and estates.

"Mom and dad are always able to quiet ruffled feathers," he said. "When the first one dies, there's no longer that safety valve on the pressure cooker and it blows up."

What's more, in his 34 years of dealing with estate disputes, the arguments befalling the wealthy haven't changed.

"Just as food always drifts to the bottom of the sea, us bottom-feeders will always have something to eat," Hinojosa said. "As long as there's money left when people die, I will always have something to do."

The disputes come even as the wealthy take more steps to anticipate and defuse conflict.

It is common, said Douglas Freeman, chairman of the Institute for Family Foundations in L.A. and partner at Freeman Freeman & Smiley LLP, for best intentions to have the worst effect.

Parents often make the mistake of giving more to the less successful or irresponsible child to ensure they are cared for. That can have the dual effect of embittering other children and collapsing an estate under the care of an irresponsible heir.

"Mom and dad reward incompetence, indifference and ineptitude and as a result, the foundation is extremely ineffective," Freeman said.

If one child is the parents' caretaker, he usually expects to inherit more than his siblings, Hinojosa said. Most parents give equally to both children, regardless of who took care of them later in life.

One way to avoid these repercussions is to simply leave less to the family.

That philosophy is embodied in Warren Buffett's comment to Fortune magazine some years ago: "I want to give my kids enough so that they could feel that they could do anything, but not so much that they could do nothing."

Buffett, chairman of Berkshire Hathaway Inc., spoke as a father of three whose net worth is now $33 billion. But his words are the mantra of an increasing number of middle-class millionaires in Los Angeles, whose net worth falls closer to $5 million to $15 million.

"People have begun to understand what the wealth does to their children and grandchildren," said Freeman. "At some point, it doesn't give you a better life."

A decade ago, the seven-figure-and-up crowd calculated what to leave their families by assessing the potential tax bill. Today's priority is asking how much is enough for their children to lead normal lives.

They often realize that if a child's life becomes focused on the management of mom and dad's wealth, the child may never build his or her own wealth or success in life.

"What (inheritance) does is undermine your sense of self-esteem and your own willingness to achieve," Freeman said. "You end up just preserving what's handed to you. That's demeaning to a lot of people, even to those who inherit."

What gets passed onto children depends largely on how much is in the pot. An individual whose net worth is $5 million likely will leave the bulk of the estate to his or her children. One whose assets are valued at $15 million might weigh charitable interests against those of the family.

The number of heirs also can play a role: the fewer the children, the greater the chance a large portion of a large estate will be left to charitable causes, said David Green, a partner for the personal services practice at PricewaterhouseCoopers LLP in L.A.

Age, too, can make a difference. "Someone who is 40 years old is different from somebody who's 70," Green said. "Someone who's 70 has seen family members who have not used money as wisely as they could've, so they'll be more inclined to give to charity."

Then there are the preoccupations of attaining wealth. "The middle class millionaires don't spend as much time or money taking care of their estate as the super rich," Hinojosa said. "They're too busy trying to earn it and keep it."

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