Baby Boomers are realizing the rewards of Philanthropy
In the words of Warren Buffet, brace yourself!
That $31 billion that Buffet, the second richest man in the world, is donating to the charity run by Bill Gates, the richest man in the world, could look, well, kind of puny in a few years.
Not that the huge contribution Buffet is giving the Bill & Melinda Gates Foundation isn’t a whopper. There’s never been anything like it, and no comparable single donation is immediately on the horizon.
But Buffet is just one guy. Consider the combined potential philanthropic wallop of the baby boom generation. It’s an inevitability that widens the eyes of even seasoned financial planners who are otherwise blasé about dabbling in their clients’ millions.
“The numbers are all huge,” says Richard A. Stone, president of Salient Financial Corporation, during a round-table discussion in his firm’s office in San Rafael.
Stone says it’s a safe bet the parents of the baby boomers will be dead and buried within the next 20 years. “In that period anywhere from $25 trillion to $50 trillion will pass to the baby boom generation,” he continues.
“It will make the baby boomers the richest generation in history,” agrees Stone’s colleague, Susan D. Dickson, director of operations.
“In the history of money,” adds Jonathan Leidy, director of business development.
And blockbuster news events, like the announcement of Buffet’s historic gift to the Gates Foundation, help the notion of philanthropy—giving back after enjoying such a huge share of the pie—rise to the top of one’s consciousness.
“This is the baby boom generation. They were cause driven and came out of the 1960s wanting to do good and effect change. Now they have the opportunity to put their money where their mouth is,” says Stone.
The decision to give
Stone has been in the financial planning business since 1968, beginning in Oakland where he was born and raised and later moving to Marin County where he launched Salient Financial in 1983.
His firm ranks 19th among the Bay Area’s wealth managers. It currently manages about $360 million for 200 families. Its clients are affluent Northern California investors (many of whom are senior executives at mid-sized Bay Area companies) who bring a minimum of $2 million to the table.
The business is expanding. Assets have grown by about 33 percent for each of the last three years, according to Stone and his colleagues, and an increasing amount of philanthropy figures into the management plans of much of that money.
“Especially among the front end of the baby boom generation,” says Dickson. “Some of them are really rolling up their sleeves and getting into it.”
The increase Salient Financial is seeing in giving is not unique to Northern California. Nationwide, the number of foundations created for philanthropic purposes has more than doubled in the past dozen years, according to the Council on Foundations in Washington, D.C., an association of more than 2,000 foundations and corporate giving programs.
There were 25,600 private foundations in 1995. By 2000, that number had jumped to 56,500, largely because of the dot-com boom. Even during the shortfall years of the turn of the century, the numbers went up. Last year, there were 68,000 foundations.
“There’s no doubt that there’s a philanthropic trend taking place,” says Council Director of Media Relations Jeff Martin.
According to the Foundation Center (a nationwide nonprofit clearinghouse for information on foundations), overall giving to foundations rose 5.5 percent in 2005, to some $33.6 billion. Assets for all United States foundations in 2004 were up 7.1 percent to $510.5 billion, and monetary donations were up 5.1 percent to $31.8 billion in the same year.
Martin says the growth in giving isn’t just from people with big wallets. “This trend isn’t taking place just because of the wealthy or the super-wealthy,” he says. “It also represents people of modest income and means. We’re seeing more and more people becoming involved in philanthropy, often through donor-advised funds at community foundations, some of which can be started with as little as $5,000.”
Then came Buffet and Gates. There’s no doubt the two richest men on the planet have put a stir in the foundation world that’s expected to be felt for a long time.
“It created a tremendous buzz, and it’s not over. People are still talking and writing about it. The Buffet gift will do a lot to inspire others to follow.”
And they don’t all have to be multi-billionaires.
About two-thirds of private foundations have cash or portfolios of less than $1 million, and their founders represent the bread and butter of wealth managers like Salient Financial.
Stone and his colleagues say most of their clients come to them looking for help with all aspects of their financial lives. In many cases, philanthropy enters the picture and becomes part of the formula for managing assets and realizing goals.
“We find out right up front if there’s an interest in the charitable side of a financial plan,” Stone says.
Financial ability is the first question, and Salient plugs in the numbers.
“A financial analysis can tell us the probability of an outcome. Let’s test a $1 million gift for a client with a net worth of $5 million and see what it would look like. If the model shows you have a 95 percent probability of making the gift with a high degree of financial comfort, then you can give away the $1 million,” he says. “If it’s a 50 percent chance, then we revise downward.”
Where the money goes
If there’s room for philanthropy in a financial plan, identifying the right kind of financial vehicle is the next challenge. Clients can create their own private family foundation, give their money to a “donor-advised fund” that’s managed by a larger foundation, contribute to a community foundation, give directly to a charity or create some kind of a charitable trust.
Motives for giving can range from altruism to greed. Both are legitimate and both often work hand-in-hand. Salient lists a host of benefits for a person or family who may choose to establish a formal giving mechanism, such as a private family foundation. They include, among others:
• The ability to involve the family to work together in a charitable effort
• Create a legacy program designed for multiple generations
• Control distribution and use of donated funds
• Support favorite local or under-supported causes
• Avoid gift and estate taxes
• Enable tax-free growth for assets invested in the foundation.
A family can create a non-operating foundation and support programs by simply giving away money, or it can establish an operating foundation with which it can directly run its own charitable activity, such as a homeless shelter, museum or some other cause.
The advantages of both are clear: One is more hassle-free; the other offers hands-on control. There are other important considerations, too. A non-operation foundation enjoys a 30 percent tax deduction for cash, 20 percent for stock, donated to the foundation, while an operating foundation receives 50 percent tax sweeteners for cash and 30 percent for stocks.
In the final analysis, it comes down to personal preferences and goals.
Shoes That Fit
Stone says one of his clients, an East Bay family, was a natural for a private family foundation. Their philanthropic cause, Shoes That Fit, is very personal and hands-on.
Shoes That Fit is a nationwide volunteer program that helps disadvantaged children. It operates in 32 states, assisting students in some 750 elementary schools, including St. Anthony Catholic School in West Oakland.
“I started Shoes That Fit at St. Anthony’s eight years ago,” says Kathi Balousek. “It’s my passion.”
Balousek explains the program is dedicated to providing children from very low-income households with school uniforms, shoes, socks, underwear and winter coats. “This is a low-income school where parents have to pay tuition, and that’s sometimes all they can do. It puts them over the top,” she says.
The project assists students who otherwise would often arrive at school wearing hand-me-down shoes and clothing that’s old, faded, ill-fitting and sometimes worse. Some students stuffed their feet into shoes so small their toes would bend over, or they’d arrive wearing a damp uniform because that’s all they had, and it was washed every night and hung to dry.
Working with the faculty, Kathi Balousek identifies the specific needs of each child, puts the information on a 3 x 5 card and tacks it on the bulletin board of her own St. Monica Catholic Church in Moraga.
“Our fellow parishioners buy it, and we get it to the children within about 10 days,” she says. “Over the years, we’ve provided about 2,500 pieces of clothing and shoes to children.”
Balousek says receiving new clothes purchased specifically for the child is a very big deal for the kids. “We don’t accept any second-hand clothing. It’s all new,” she says. “There’s such a difference in the attitude of the students.”
Now Balousek and her husband, Jack Balousek, want to do more. They established the Balousek Family Foundation to provide the formal support for expanding the program. “We think there’s an opportunity to go deeper and involve more schools and help more children,” he says. “I could hand off a model of this whole program to another church or community that wants to start a Shoes That Fit program.”
Balousek says the process took about a year and about $8,000 to go through all the investment, accounting, legal and IRS hoops. It will culminate in January when the couple actually makes the charitable donation to their foundation.
Kathi says their foundation portfolio will be between $500,000 and $1 million, which is consistent with funds available to about two-thirds of all private foundations around the country.
She says the process of creating a foundation is intense. “You can get thrown off track and may get discouraged. You just have to plow ahead until you get what you need,” she says.
Establishing a foundation
In Sonoma County, Nancy Dougherty says she and her husband, Dale, were similarly motivated to establish a foundation for philanthropic purposes.
“We’ve been able to make a difference with programs we really care about,” she says.
Dougherty says she and her husband have been lucky. Dale is an editor and publisher at O’Reilly Media Inc., the Sebastopol-based, international firm that publishes computer software books and magazines and has been an innovator in the digital age for more than 10 years. He was the developer and publisher of Global Network Navigator (GNN), the first commercial website that O’Reilly launched in 1993. GNN was sold to AOL in 1995.
“Things fell into place with his work,” says Nancy. Tax considerations combined with ongoing philanthropic interests to spur the creation of the Nancy C. and Dale Dougherty Foundation.
Working with Bruce Dzieza at Willow Creek Financial Services in Sebastopol, Nancy and Dale are trustees of a foundation of less than $5 million that’s been the source of funds directed at several community projects including, among others, the Scott Lane Teen Counseling Project of Sonoma County, created at a time when west county high schools were considering cutting back counseling services; a capital campaign for the Sebastopol Community Center; and funding to the Sonoma County Humane Society’s Forget Me Not Farm and the Sonoma County Repertory Theater in Sebastopol.
“We already had a donor-advised fund, but we wanted to create something that was larger and more lasting and something over which we would have more control,” she says. “We wanted a more direct and personal program.”
Other options
Jason Gittins is a partner in the Willow Creek firm where, consistent with the experience at Salient, clients are expressing increasing interest in philanthropy. Gittins says Willow Creek Financial Services, which manages about $350 million for close to 300 families, steers clients to existing philanthropic programs before recommending they form their own foundation. The costs and expenditure of personal energy are lower.
“Private foundations aren’t the only option, and for most of the clients we work with it may not always be the perfect fit,” he says. “The cost and administrative burden can be significant.” Gittins says many of Willow Creek’s clients use the Community Foundation Sonoma County and the Marin County Community Foundation for their charitable giving. “We’re big fans of the Marin and Sonoma community foundations and commonly recommend them to clients,” he says.
Kay Marquet, president and CEO of the $115 million Community Foundation Sonoma County, says larger community foundations are a convenient and efficient place for family philanthropy when the donors simply don’t want to run their own foundation or need the expertise and services of a larger organization.
“People with both great and small means do donor-advised funds,” Marquet says.
Donors specify the kind of programs they want to fund by identifying either general fields of interest (youth programs or animals, for example) or specific organizations. Proposals come directly via the donor or through the chain of relationships established within the world of local philanthropy. “Through our Partners in Philanthropy program, we can link donors and projects together when they otherwise wouldn’t know about each other,” she says.
Marquet also says small foundations sometimes turn to larger community foundations for operational and administrative support.
Working together
Marquet also says some philanthropic funds come to larger foundations as “supporting organizations,” meaning they support the mission of the larger body and want the benefit of management and investment know-how, but want to maintain some control of their charity. Two such organizations are the DeMeo Teen Club, which owns the Chops teen center in Santa Rosa, and the Pepperwood Foundation, which oversees a more than 3,000-acre environmental preserve in Santa Rosa’s Mark West area. The Pepperwood Foundation was established in 2005 by former Optical Coating Labs CEO Herb Dwight and his wife, Jane.
Whatever the philanthropic vehicle, Richard Stone at Salient Financial in San Rafael says more and more people are expressing interest in charity but want some hands-on control of their efforts—how the donation is distributed and how it’s invested prior to disbursement. They also want to make it a meaningful family matter.
“This is a good vehicle for bringing the family back together,” he says. “It’s very important to several of our clients who express the need for family continuity, bringing the children in and making them part of the process.”
“That’s one of the reasons people start foundations,” agrees Susan Price, managing director of family foundation services for the Council on Foundations in Washington, D.C. “They want a way for the family to work together on philanthropy and leave a legacy for future generations,” she says.
Price is the author of The Giving Family: Raising Our Children to Help Others, which is available through the Council on Foundations. “It’s for anybody who’s worried about their kids growing up in a culture consumed with acquiring things,” she says.
After a lifetime of acquiring a fair share of the world’s riches, Warren Buffet demonstrated he understands philanthropy when he told Fortune magazine editor Carol Loomis to brace herself for the news that he was giving $31 billion to the Gates Foundation.
The extent to which the baby boom generation appreciates philanthropy will come into focus as the World War II generation declines and its wealth is passed on. “It’s not completely clear how much of that is going to go to philanthropy,” says Price, who is 56 and hopeful some of her fellow baby boomers will remember the high purposes they espoused in the 1960s and 1970s.
“We wanted to change the world back then, and there are a lot of boomers who want to change the world right now,” she says.
