Enpo Tu: Good morning Doug, this is Enpo Tu calling on behalf of My Financial Coach. As a background for listeners, I’m happy to announce that My Financial Coach is reaching out to a few of our subject matter experts and today I have the pleasure of speaking with Doug Hostetler and I’m looking forward to having a conversation with you and thank you very much for taking this call. Could you give us a little bit of background on yourself?
Doug Hostetler: Yeah I’ve been about thirty nine years in the financial services industry. I operate Hostetler & Church LLC. I describe it as a family wealth counseling practice and the majority of my clients are first-generation wealth creators. Namely I work with business owners and a lot of them are family businesses. I get involved not just on the succession issues of their business but also in accumulating wealth, preserving it, and ultimately distributing it. I get involved with the family dynamics often with a family who have family statements and so forth. Often times, I also get taken into the business side of their finances but my real passion is dealing with the family dynamics and the intergenerational wealth transfer from generation one to two to three.
Enpo: All right, excellent! So it sounds like your clients won’t be part of that shirtsleeves to shirtsleeves in the three-generations crowd.
Doug: That’s exactly right. as you know eighty-five percent of the reason why wealth dissipates over four generations deal with the patriarch. Mainly the patriarchs troubles with control and ceding that control. The second main reason is the patriarch holds everything, so the lack of communication becomes intergenerational, and then thirdly is that the heirs don’t feel prepared. My practice is centered on counteracting those three trends.
Enpo: Alright, well Doug thank you so much for giving us a little bit of background. Today I am calling because I want to set the stage for you and I want you to present what you are saying when it comes to helping these very wealthy families. Often these wealth creators have a charitable aspect because a lot of people that build these businesses oftentimes recognize some sort of help that they’ve had along the way and they would like to give back. At the same time, they are a little concerned because when they are engaging in charitable donations often times there is that fear that you are creating a dependent charity. So let me set a scenario for you:
Imagine one of your clients comes in and says: you know I just got another donation letter in the mail and a voice message from the director of giving that I spoke with in the past. They’re having an annual Gala and they’re struggling with finding donors and people to fill tables. I’m being asked to bring my friends and to contribute about fifteen thousand dollars. I don’t want to say no. They’re doing good work. At the same time, I hate being forced to say yes all the time. So for our listeners, tell us what happens when someone says I want to give back to my community but I don’t want to create a dependant charity.
Doug: That’s a good example because that occurs. One advantage of creating a family foundation is a lot of my clients like simplicity when confronted with that question and respond:
“Listen all of my family giving is done through my family foundation and we meet once a year to make grants. I’d love to get your information but I just want you to be aware of that.”
So, sidebar, families like the ability to funnel everything to a third party family foundation and make that decision one time a year. When the family foundation becomes a standard answer, the community sort of knows that over time so sometimes it helps lesson the barrage of requests. As folk season or age in life, I found with most first generation wealth creators there is that feeling of leaving a legacy that enters their mind and the desire to give back. Whether it’s to the community where they grew their business or whether they’ve always had a heart of charity and now they have some excess assets or excess income in order to leverage that to charity. It’s just a natural progression that you see a lot in families of wealth.
Enpo: So you brought up something earlier: A family foundation, could you explain the family foundation a little bit more? Maybe clarify some of the mechanics of it and where you see it being very helpful?
Doug: Okay sure. I like to educate my families of wealth that there is five different types of family foundation and the distinction between the five deals with control. So most of the first generation wealth creator/ successful businessman desires control and may be control freaks. So the classic 100% control family foundation is the true private family foundation. With that there is a degree of governance and compliance with the I. R. S. over dollars you’re expensing dollars as well as a cost on the front end. I usually counsel my clients where unless you’re serious about two to three million dollars of donations that there’s alternatives to a private family foundation because of the cost. In
addition there is a requirement of a five percent minimum distribution of the fair market value on each and every year. There’s also an excise penalty tax so there is overhead built in and your family’s wanna give while they live. They must remain actively engaged in making grants from their family foundation and the original contribution must be a large donation.On the other extreme, we are giving up the most control and there’s a family foundation structured as a donor advised fund. There’s a public charity behind it. As an example, my last name is Hostetler I happen to have the Hostetler family foundation as a donor advised fund within Howard County Community Foundation. That’s our family foundation and we’re giving up control even though technically when I request the public charity to make a grant out of my family foundation to X. Y. Z. 501(c)3 or X. Y. Z. charity they’re in the business of usually doing their own due diligence and agreeing to that grant. However they could reject it.Whereas on the other extreme, in the private foundation you can approve all your grants because it’s 100% in your control. Then the second third and fourth type of family foundations are what are known as a type one SO, type two SO, type three SO. SO stands for supported or supporting organizations and the distinction between these are the degrees of control. You might have an outside board of directors of an odd number of five or seven. The family can appoint three of the five to the five person board and the public charity can appoint the remainder places on the board.
But most of these families stick to either a donor advised fund or a family foundation. Years past type three SOs were very prevalent because you can informally control them pretty easily but not as easily anymore. I found that a lot of folks when they come into a lot of quick cash, donor advised funds can be terrific because you can get a tax deduction today, and it buys you time because you don’t have to do all the due diligence as to where you would like your charitable dollars to go tomorrow. So professional athletes, lottery winners, someone with a liquidity event for a business, many times for income tax planning and charitable causes planning, may make a donation today into a family foundation structured as a donor advised fund. This can give you a tax deduction today and no minimum required grants to be made. It allows you to do your research over time before you request grants to be made.
Enpo: Absolutely so Doug you’ve obviously worked for a few different families on their charitable giving. Of course not revealing any names or private client data, could you give us an example of when you found someone who did giving well as well as an example of someone who didn’t do giving just quite right.
Doug: Yes, if you do the due diligence on the front end well. There is this old Hebrew scripture that says the heart of a man is a deep wellspring but a man of understanding draws it out. So if I’m doing my job in drawing out the family objectives, what mom and dad want to accomplish and do the proper due diligence then you minimize expense and you minimize mistakes. So let me give you an example where we implemented, with a very wealthy family, a family private foundations where a hundred percent we were in control.
The objective on the front end was to build an endowment and just make grants with the five percent minimum distribution. But what we found was every year we were continuing to make large donations to the family foundation and turn around and distribute out all of the money contributed as quickly as were donated. So we weren’t building any endowment and it was large gifts going in and large gifts going out in the same calendar year so we had to go back in planning and ask questions.
Why should we keep expensing all these annual expenses and deal with the findings with the I. R. S. when the fund is basically a pass-through. So we ended up terminating the family foundation and creating a donor-advised fund family foundation. So that’s one example where we had to modify an existing plan.
There are a lot of times in family foundations especially with business owners, where they may gift S. stock and this gets into sophisticated planning because you need to find a public charity that will accept non-liquid assets, such as shares of stock or real estate, and they exist and they’re very good partners in holding these non-liquid shares into the future. We just completed a transaction this past year where fifty million dollars of S. non-voting stocks were contributed to a public charity and we retained the voting shares and continue to operate the company. It worked out extremely well so it just depends on the objective.
Enpo: All right, excellent thank. Could you maybe give me an example where maybe some planning could have been more helpful. You may have been asked to come in but maybe some of the groundwork that should have been laid out was not done.
Doug: Yeah there are a lot of times where I’ll be referred into a wealthy family that already has a family foundation or they’re just haphazard in how they are using it. I like to start with the art of the question and digging in and pulling out what the objectives are for the family. Earlier you brought up the concept of shirtsleeves to shirtsleeves, and one of the ways that we counteract this is we use philanthropy and family foundations to build the family values and the interdependence and inner workings between generation one, generation two, and generation three. Many times, there’s already a charitable intent and its scattered around so I like to start with crafting a family foundation mission statement. This brings clarity to what’s our purpose with our charitable causes.
I’m always surprised how often these very successful business folks who’ve expensed millions of dollars over time or hundreds of thousands of dollars in professional fees to build the value in their business and have a business mission statement, have corporate values that permeate the organization, that have training programs for everybody in the organization of off site retreats, that handles an advisory board of border directors. Yet, when we look over to their family balance sheet, there’s no family mission statement, and they’re giving ten grand here, thirty grand here, or a grand here, and there is no clarity on what our philosophy is on our charitable giving.
So I’d like to bring organizational development for the family philanthropy and craft a charitable family mission statement which should govern it and then have some guiding principles and strategic plans underneath. We then weave in generation two, generation three. I have families that the grandchildren will put on a suit and tie and make a formal presentation for their charitable causes to generation one and generation two. It’s really sweet but also very educational and it melts the generations for a common good.
Enpo: All right, so just so I can clarify it sounds as if, when you take control of the situation you’re able to analyze that situation on its own merits. Then after that you can develop a strategy that the family can build around but not necessarily going in and specifically having any checkbox item that just needs to be done. It’s really on the family to decide what their charitable strategy is and a lot of it is going to be on what matters most to them.
Doug: That’s correct and again my reference point is the majority of my practice which is the twenty million and up family of wealth. Underneath that dollar amount, people should be focusing on the causes themselves and the dollar amounts they want to donate. Usually donor-advised funds fit really well with this segment and it buys them time. So it also depends on the net worth, the objectives, the income, surplus assets and surplus income.
Enpo: All right excellent well thank you so much for all your help. I think that our listeners are well serviced by the conversation we just had it and thank you very much for taking my call.
We assemble only the most useful and practical resources on financial guidance for your education and convenience.