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Last year Americans gave more than $260 billion to charity � one of the largest totals in U.S. history. At the same time, vast numbers of Americans, presumably including many of these charitable donors, are woefully unprepared for retirement. That tension between generosity and financial security is something for lawyers to consider as they ponder charitable giving. Writing a check for $500 is something many lawyers can do without much worry. But when that potential check is $50,000 or $100,000, the concerns also are larger: What if I need that money someday? So as this issue of Legal Times examines pro bono activities, lawyers should consider ways in which their giving can help good causes while also helping make sure they and their dependents don’t wind up in financial difficulty. Fortunately, a number of financial methods allow lawyers to donate generously to charities while still preserving a margin of safety against large retirement costs such as nursing-home care. These vehicles are loosely grouped under the label “planned giving.” Major nonprofits, including many law schools and colleges, offer planned-giving programs for substantial donations (often more than $10,000). If chosen wisely, these vehicles of giving can provide security against high retirement expenses while helping a favorite charity. PRINCIPAL INTEREST The basic idea behind many forms of planned giving is that the charity receives the body of the donation, but the donor receives income from that principal during his lifetime. There are several variations on that theme. One simple form of planned giving is a charitable-gift annuity, in which the donor gives the charity a lump sum of money and then receives a set annual payment for the remainder of the donor’s life. The amount of the payment is determined at the time of the donation, often by using the rates set by the American Council on Gift Annuities, available at www.acga-web.org. The ACGA rates vary with the age of the donor. For a 55-year-old, for example, the current ACGA payout rate is 5.5 percent, so a $100,000 gift to a charity would result in an annual payment of $5,500 to the donor. There are two disadvantages, however. First, the payment amount is influenced by interest rates, which are relatively low right now, and thus it is probably not the best time to lock in an annuity. If interest rates go up, a higher annuity payment might be available. Second, gift annuities frequently offer fixed payments (though some large charities have alternative options). With a fixed annuity, the dollar payout remains the same over time, and rising prices will erode its purchasing power. If inflation really takes off (a not-implausible scenario in the future, given the United States’ significantly underfunded entitlement programs such as Social Security and Medicare), fixed annuities won’t provide much protection. Another option is to forgo the certain return from a fixed annuity and take a fluctuating return from the investment. Payments to the donor will vary, but they could rise above the 5 or 6 percent currently available from most gift annuities. (Then again, returns could also be lower, of course. Charitable intentions are no guarantee of investment success.) One commonly available vehicle of planned giving with variable returns is a pooled-income fund. Similar to a mutual fund, a pooled-income fund involves the charity investing the principal and then paying out a share of the income to each donor. When a donor dies, the charity gets her principal. Some charities even offer a variety of options for pooled-income funds. Harvard University, for example, offers five such funds with different levels of stock exposure, including one international equity fund. Many of these funds, with a minimum contribution of $25,000, offer the potential for higher returns than do purely fixed-income investments that (sometimes) come from holding domestic and foreign equities. Gift annuities and pooled-income funds are some of the simpler choices. More complicated options include charitable-remainder trusts and gifts of real property (such as a primary or vacation home) with lifetime use for the donor. For those interested in more details, the Web sites of the Planned Giving Design Center and the National Committee on Planned Giving are worth exploring. An easy, user-friendly explanation can also be found at the Web sites of many universities and major charities such as the Red Cross and the Salvation Army. And the planned-giving specialists at charities should be more than happy to provide more information to potential donors. A MARGIN OF SAFETY Why consider planned giving, with all its complexities? Why not just keep your money, or alternatively, just give it entirely to charities (as they, at heart, might prefer)? The answer lies in the tension between (1) wishing to donate to favored causes after one has been economically successful and (2) fearing financial uncertainties in retirement, which are faced by almost everyone except the extremely wealthy. Planned giving is one way to balance these competing desires. True, even planned giving has its risks. People may donate improvidently, before they have adequately provided for themselves and their families. Until one has amassed 25 times one’s living expenses (thus being able to live for a 30-year retirement on the prudent 4 percent safe-withdrawal rate from a retirement portfolio), one isn’t financially independent. For example, if a lawyer spends $100,000 a year, he needs a retirement portfolio of $2.5 million. If would-be donors don’t have that level of financial security yet, perhaps their charitable impulses might be most prudently directed toward their own situation. But most well-paid lawyers should reach the point in their careers where they have sufficient assets to satisfy the 4 percent rule yet wish to keep working and earning money. What then? Planned giving provides a way to satisfy charitable desires while still providing a hedge against future financial challenges. And those financial challenges could be significant. On the expense side, medical technology may significantly extend life expectancies (requiring more money for a longer retirement), health care costs continue to rise faster than inflation, and nursing-home care isn’t cheap. As for investment returns, today’s historically low dividend rates may portend lower future returns. And that doesn’t include the financial turmoil that may result when our nation’s entitlement spending crashes into fiscal reality. The more years a person spends in retirement, the harder any of these potential financial risks could hit. Early retirees, a group many lawyers may wish to join because of the stresses of legal practice, are particularly vulnerable. They thus have a greater need to hedge their bets with their charitable giving. Planned giving is a prudent way to do so. And the donated money should not be counted in one’s retirement assets to satisfy the 4 percent rule. In that case, the income from the principal would provide a cushion around one’s main retirement portfolio. If one’s investments do well, the income from the planned gift can always be donated back to charity. But if one’s portfolio does badly, or if retirement costs unexpectedly increase, that margin of safety could be valuable. Even generosity can be prudent.
Robert L. Rogers, associate opinion editor of Legal Times , writes the Legal Tender column on personal finance. E-mail questions, comments, or suggestions for future columns to [email protected].

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