HOFFMAN,
WHITE & KAELBER FINANCIAL SERVICES, LLC
INVESTMENT
managers & WEALTH Advisors
December 2, 2005
This is the December 2005 monthly Wealth Management newsletter from Hoffman, White & Kaelber Financial Services, LLC. If you do not wish to be included in our circulation, please reply indicating your desire to be removed and we will be happy to oblige. Alternatively, any of your friends or colleagues may receive this on a regular monthly basis by sending their name and email address to info@hwkfs.com. Feel free to forward this to any of your friends who may find it useful. Thanks for your interest and I hope you enjoy the letter.
Is it the
winter holiday season, or is it me? Last
month’s newsletter about philanthropy and the use of charitable remainder
trusts was quite popular with my readers.
And, I’m not the only one writing about this topic. In fact, the November 28th issue
of Barron’s featured the growing interest in philanthropy since the beginning
of this decade.
According
to Barron’s: “When it comes to giving,
the rich are increasingly like Frank Sinatra:
They want to do it their way.
They want to give their money to their causes on their
schedules. And they want to make sure
the legacy lives on. That’s why they’re
rushing to set up their very own foundations.”
Over the
past several months, I have been participating in a leadership program
coordinated through my local chamber of commerce. The purpose of the program is to help our
Greater Charlottesville community meet its need for active participation of
informed and dedicated leaders. Its
primary objective was to have us study challenges and issues of concern facing
our community. Most of those challenges
we studied involved issues of health, education and welfare. Or, to put it more clearly, issues of health,
education and welfare seemed to be the best solutions to improve and maintain
the well being of the community. The
challenges, however, seemed more a lack of adequate funding.
Early in
our nation’s history, churches initiated the practice of promoting public
good. They used their resources to found
and operate schools, hospitals and homes for orphans. During the late 1800’s, wealthy families
began to supplement religious philanthropy by establishing charitable trusts
benefiting specific purposes. This
worked quite well up until the Great Depression. When the depression hit, religious and
private philanthropic resources were crippled in the face of overwhelming
need. This prompted government to step
in and they have remained in the business of social welfare ever since.
Yet,
don’t governmental programs more often resemble a band-aid than a cure?
As readers of my newsletters well know, wealth management is
the ultimate goal of all that we do at Hoffman, White and Kaelber. Yes, we promote our services; yet, you will find that we
always seek to present thought provoking topics that are relevant to our wide
audience.
This
month’s newsletter will discuss how private foundations serve venture
capitalism at its best and a brief introduction to the climate in which they
operate. And, whether you find this
topic of interest, or not, make sure you look over our review of the economic and investing climate for the month
past, the current market outlook and our investment performance. Our investors had a very rewarding month and
we won some honors!
Benefits of Private Foundations
Private
foundations are nongovernmental, nonprofit organizations organized and
supported by an individual, a group of individuals, a family or a company. In contrast to a public charity, they
typically have a single major source of funding (usually in the form of gifts
from one family or corporation rather than funding from many sources) and most
have as their primary activity the making of grants to other charitable
organizations and to individuals.
It is the social, personal and financial
benefits that make private foundations very special investments in the
future. Unlike a direct gift, which
usually benefits one recipient once, a private foundation perpetuates the
donor’s generosity for so long as it exists.
Affecting
human welfare, private foundations play a vital role in supporting social,
scientific and cultural innovation.
Whether you wish to change the course of things or invest your energy
and skill in alleviating suffering or advancing knowledge, a private foundation
can help accomplish those purposes. In
this setting, philanthropy borrows some of the best practices of the venture
capital world to invest in charitable ideas to build their capacity
effectively. A venture philanthropist
values their dollars in terms of the social return on investment. The kind of new ideas most needed by society
changes over time, and a private foundation can respond to new needs as they
occur.
In addition, several important
personal benefits accrue to donors who establish private foundations. Many donors utilize private foundations as
enduring tributes to loved ones – memorials that are not static monuments but
living, changing entities. As well, some
find that setting up a foundation is an effective means for organizing their
charitable efforts and for regularizing the amount given. A foundation is also an orderly mechanism
for giving that intervenes between the donor and potential recipients. In the case of a family foundation, most
donors have found the foundation to be a stimulating and effective vehicle for
teaching the next generation about philanthropy and its value to the
family. In those family situations, the
foundation also becomes a rallying place, an opportunity to share values and
concerns for society, and a common cause for family members who might be
scattered geographically.
Because a private foundation is a
charitable organization, financial benefits accrue as a result of its federal
income tax exempt status – although certain types must pay a 2 percent excise
tax on its net investment income.
Regardless, the gifts you make to establish a new foundation or grow an
existing one can afford you certain tax advantages; income, gift and estate tax
deductions are available under the law.
Types of Private Foundations
Every
organization that qualifies for exemption under the U.S. IRS Code section
501(c)(3) is a private foundation unless it is considered a public
charity. Generally, organizations that
are classified as public charities are those that (i) are churches, hospitals,
qualified medical research organizations affiliated with hospitals, schools,
colleges and universities, (ii) have an active program of fundraising and
receive contributions from many sources, including the general public,
governmental agencies, corporations, private foundations or other public
charities, (iii) receive income from the conduct of activities in furtherance
of the organization’s exempt purposes, or (iv) actively function in a
supporting relationship to one or more existing public charities.
Under the
tax laws, private foundations are distinguished as either operating foundations
or grant-making foundations. Yet,
private foundations can differ greatly in design and purpose. The major types of private foundations are
discussed below.
Corporate Foundation: A corporate (company-sponsored)
foundation is a private foundation that derives its grant-making funds
primarily from the contributions of a profit-making business. This type of foundation often maintains close
ties with the donor company, but it is a separate, legal organization,
sometimes with its own endowment. More
often than not, these are pass-through foundations.
Pass-Through Foundation: The pass-through foundation is a
private grant-making organization that distributes all of the contributions it
receives each year. The pass-through
election may be made or revoked on a year-to-year basis.
Corporate Giving Program: A corporate giving (direct giving)
program is a grant-making program established and administered within a
profit-making company. Gifts or grants
go directly to charitable organizations from the corporation. Corporate giving programs do not have a
separate endowment; their expense is planned as part of the company's annual
budgeting process and usually is funded with pre-tax income.
Family Foundation: Approximately two-thirds of the
estimated 44,000 private foundations in this country are believed to be family
managed and most are of the grant-making kind.
The Council on Foundations defines a family foundation as a foundation
whose funds are derived from members of a single family. Ordinarily, at least one family member serves
as an officer or board member and relatives may play a significant role in
governing or managing the foundation throughout its life. Most family foundations are run by family
members who serve as trustees or directors on a voluntary basis, receiving no
compensation. And, most family
foundations concentrate their giving locally, in their communities.
Grant-making Foundation: These private foundations are also
known as "non-operating" because they do not run their own
programs. The primary purpose, as you
might guess, is to make grants. This
type of foundation must distribute for charitable purposes approximately 5% of
the market value of their assets each year.
And, although exempt from federal income tax, they must also pay an
excise tax of 2% of their net investment income each year.
Independent Foundation: An individual usually founds
these private foundations, often by bequest.
Sometimes individuals or groups of people, such as family members, form
a foundation while the donors are still living.
Many large independent foundations, such as the Ford Foundation, are no
longer governed by members of the original donor's family but are run by boards
made up of community, business and academic leaders. The John D. and Catherine T. MacArthur
Foundation is another example of a well-known "independent" private
foundation.
Operating Foundation: Also called private operating foundations,
are not primarily, grant-making organizations.
They operate facilities or institutions devoted to a specific charitable
activity. Some conduct research while
others provide a direct service by operating museums, handicapped facilities or
historical sites, to name a few. The
Carnegie Endowment for International Peace and the Getty Trust are examples of
operating foundations.
Stand-by
Foundations: These are private
foundations created during a donor’s lifetime with a minimum or modest endowment. The concept here is that the bulk of its
future endowment is planned to be received upon the death of its founding
benefactor. This gives the donor the
ability to organize, train and develop the foundation’s directors, trustees and
/ or managers before large sums are involved.
Concluding
Thoughts
As you
might have guessed by now, establishing a private foundation is akin to running
a business. In fact, there are
significant administrative, legal and financial considerations to consider. Yet, like any business, it takes consistency
and focused effort to make an impact and build success.
Not
everyone should consider establishing a private foundation. Yet, there are far more needs in our country
than will ever be met. Therefore, if you
have the capability to establish or support a private foundation, and the
desire to do good, I know of no better way to have impact not only on your own
time and place, but on the future as well.
Hoffman, White & Kaelber Financial Services Investment
Performance Update
Did you
ever see Martin Scorsese’s 1980 black-and-white film biography of boxer Jake
Lamotta? LaMotta, as portrayed by Robert
De Niro – one of my favorite actors, was a man tormented by his temper and
jealousy. But in the boxing ring, his greatest
athletic talent was his ability to withstand punishment. When I think of how resilient our
Equity
markets finished November on a positive note.
Oil and gasoline prices have fallen significantly this month and,
although higher than last year, consumers appear happy and continue to
spend. December is expected to be a
positive month for equity markets also – so long as we continue to receive positive
economic reports.
Longer
term, the world economy is expected to enjoy continued growth – in the 3% range
– in both 2006 and 2007. And, as has
been the case for the past two years, continued
Given the
strength of the economy and increasing concerns about inflation, many
economists believe the Fed will continue to raise interest rates to 5% or more
- at a continued measured pace – before taking a break. If history serves as an indicator, this would
have negative implications for continued momentum. Also, with household debt at record highs,
how long will it be before
For the month ended November 30, 2005, our
one-month performance is up 2.85%, our year-to-date return is up 7.00%, and our
average annualized return since inception is up 9.21%. Our since inception risk profile remains very
conservative at +/- 5.60% and our Sharpe Ratio (reward for risk taken) is
admirable at 1.31. For more performance information, please see
our web site for details.
Two of
our own recently received some honors:
Virginia Business Magazine recognized Paul D. Hoffman, in
corporate taxation, and Henry
V. Kaelber, in personal financial planning, as Super CPAs for 2005. Also, Consumers Research Council of America, a
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