Practicing Good Behavior and Smart Investments

RohrBy Peter Rohr

Some physicians say the reason they entered the profession was to have the opportunity to give back and help others. Doctors can not only practice this tenet in their practice, but also with their investments.  Physicians looking to carve out philanthropic legacies that are designed to endure generations can do so by utilizing a number of specific financial vehicles that can also provide significant tax advantages.  This article will discuss your options for charitable giving and how it can enhance your current investment portfolio.

Benefits of Charitable Giving

Charitable giving is generally tax-deductible and special tax advantages can apply to gifting appreciated assets.  While there are virtually no limits on the amount of securities or cash you can give to your favorite charity, limitations do exist on how much you can deduct for tax purposes; but depending on your income and whether you itemize, these limits can potentially be quite generous, and amounts that exceed this limit can be carried over to future years.

Getting Started

Many physicians may find themselves relating to the 62 percent of Philadelphian respondents from the Merrill Lynch Affluent Insights Quarterly survey, who indicated that they need help in identifying the most appropriate investment vehicles to help them reach their financial goals.[1] Physicians often enlist the help of various professionals – an attorney, tax professional and a Financial Advisor — to support their philanthropic interests in the most cost-efficient and tax advantageous manner. By helping to support physicians in their good works, financial, tax and legal professionals can together provide advice to clients while they devote their time in fulfilling a philanthropic legacy.

Once you decide how your philanthropic strategy fits within your total financial portfolio, you should determine the most appropriate type of donation.  By exploring your alternatives, you’ll be able to identify the most strategic opportunities for you and your family.

Types of Donations

It is important to note that there are many gifting strategies that can help physicians lower their tax liability, as well as remove highly appreciated assets from your estate depending on your income. Your tax professional can best advise on the tax implications of each, but I will describe the different financial vehicles that physicians can consider to make charitable donations.

Direct Check: Many individuals find that the easiest way to make a charitable donation is by making out a check to a specific charity.  This method is certainly the simplest and most direct form of giving.  Yet, many donors are no longer happy with simply penning a check – they want a higher level of accountability from the organizations to which they contribute and they want a say about where they money goes.

There are a variety of more strategic ways to donate and there are several types of financial assets that can be used to fund your philanthropic efforts.  Consequently, philanthropic strategy now has evolved into an integral element of total wealth management, reducing income and estate taxes and ensuring greater control over the giving process.

Private Foundations:  For physicians who have substantial assets to donate, creating a private foundation presents a significant philanthropic opportunity.  Offering a great level of personal control, private foundations provide important tax benefits to donors, who can establish their own board of directors and decide which public and private charities receive grants.  However, private foundations require significant legal and tax advice to create and manage to realize the donor’s mission. Consequently, it is essential that one works with a financial advisor and legal professional who can give guided counsel to help fulfill your goals when planning a foundation.

Donor-Advised Funds: A donor-advised fund, much like a private foundation, helps physicians to accomplish their philanthropic goals in a very strategic and efficient way that can work with many different types of financial strategies. For donors who do not need a great deal of personal control over their charitable strategy and want to gain a higher level of cost-effectiveness, donor advised funds can be a popular alternative.

In a donor-advised fund, you recommend an existing public charity to which you donate.  You then make a tax-deductible, irrevocable contribution to the charity, and can retain the ability to request the way in which the contribution will be used.  However, it is the charity that has the final decision of how your donation will be spent internally.  Therefore your relationship with the charity might make a difference in considering how to invest.

Charitable Lead Trusts:  Another popular strategy is the Charitable Lead Trust. This method of giving provides a stream of income to selected charities for a designated period of time – either for your lifetime or a set amount of years.  At the end of the term, the asset then reverts back to your beneficiaries.

Charitable Lead Trusts could be a beneficial tool for transferring your assets to your children or grandchildren in a tax efficient manner, particularly if you expect those assets to significantly increase in value during the term.  With this type of contribution, both the charity and beneficiaries can potentially benefit from your contribution.

Charitable Remainder Trusts:  Yet another charitable giving strategy that provides the donor with a steady stream of income is a Charitable Remainder Trust.  In this case, the stream of income lasts throughout the donor’s lifetime and, subsequent to their passing, the remainder of the funds will be given to a designated charity.  An appreciated stock position can be contributed to a charitable remainder trust without triggering capital gains taxes to the donor. The tax deduction taken from a charitable remainder trust is immediate and is significantly smaller than a direct cash donation.

Leaving a Legacy

Physicians who hope to establish a legacy of charitable giving are not only impacting the futures of the institutions or charities that receive the donations, but are also impacting the legacy left to their family.  Establishing a family legacy of giving can help your heirs develop a strong sense of social responsibility and strengthen their commitment to causes you consider to be important – whether it is education, medical research or disease prevention.  You may find that inculcating precious principles of philanthropy to your heirs may be as significant as passing on wealth.

I encourage all readers, if appropriate for them, to engage in philanthropic giving that will benefit the charity of your choice.  The gifting choices made today can significantly impact other areas of your financial life, including your retirement, investments and tax obligations. Talk with your Financial Advisor about which philanthropic strategy is right for you and your family.

Peter A. Rohr is a Senior Vice President–Investments and Private Wealth Advisor with the Private Banking and Investment Group at Merrill Lynch in Philadelphia. He can be reached at (215) 587-4731 or peter_rohr@ml.com.


[1] Braun Research conducted the Merrill Lynch Affluent Insights Quarterly survey by phone between Dec. 1 and Dec. 16, 2009 on behalf of Merrill Lynch Global Wealth Management.

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