Jewish Community News

News: May 2008

Cotton family leaves $1 million endowment as a permanent legacy to the Jewish community
Longtime benefactor of the Jewish community Mel Cotton recently passed away. In his will, he left a $1 million endowment to the Jewish Federation of Silicon Valley. Below, his family friend and financial advisor Alan Werba tells of how Cotton came to make this generous gift.

By Alan Werba CPA/CFP

    Throughout their lives, Mel and Dorothy Cotton supported many organizations both with their time and their financial resources. Instead of making pledges and mailing in checks, Mel preferred to drop by the Jewish Federation office on Oka Road regularly to donate funds and at the same time check up on the staff. When it was time to support Hillel of Silicon Valley, a breakfast or lunch meeting was arranged so the executive director could give Mel a status report. And of course Congregation Sinai and the Addison-Penzak JCC could also count on the Cotton Family for this same hands-on style of support.
    Not surprisingly, Mel approached me in 2004 to help him develop a plan to perpetuate his family’s typical annual giving levels. Mel showed me a list of his favorite charities that included several charities in Israel in addition to the local organizations which annually counted on his support. The average annual giving came to roughly $50,000, excluding capital campaigns.  How much capital would it take to continue his annual level of giving at $50,000 in perpetuity?  Mel and I set ourselves to the task of finding out.
    Mel decided the best way to achieve his philanthropic goals was to establish an Endowment Fund with the Jewish Federation of Silicon Valley.  Generally, endowment funds offer the ability to pay out a specified amount annually, typically 5 percent of principal. The intention is for the fund to be sustained indefinitely.  Together we determined that by using this 5 percent pay out rule, the Cotton family would need to endow $1 million to provide a $50,000 annual gift to the community.  The next question for us to answer was how could we structure the Cotton family estate to adequately provide for the heirs and this gift?
     As fate would have it, not only could the Cottons afford the $1 million gift, they almost could not afford  to NOT make the gift once they understood the ramifications of the estate tax on the wealth bequeathed to their heirs. In 2004, estates greater than $1.5 million were subject to a tax rate starting at 40 percent. Today the lifetime exemption is up to $2 million, but the tax rate is a whopping 45 percent once there are taxable assets. In addition, certain assets (such as retirement accounts and deferred annuities) are not only inclusive for estate tax, but also subject to income tax on the heirs receiving these assets.
    Mel and Dorothy had purchased three annuities and Mel had an Individual Retirement Account (IRA) as part of the family’s balance sheet. When I helped Mel compute the combined impact from the estate tax and income tax, he realized that his children and grandchildren would net only 30 percent of these double-taxed assets while the government claimed more than two thirds. On the other hand, by leaving the annuities and IRA to his favorite charities, the government could be disinherited. After weighing the cost to his family versus the benefit he could deliver to the community, the seeds for the Cotton Family legacy were sown.
    The Cotton Family Endowment will be funded with assets exceeding $1 million and will generate a perpetual income stream that will begin at more than $50,000 per year. The endowment fund will be managed by the Jewish Federation of Silicon Valley’s Investment Committee for the benefit of the following charities:
Jewish Federation of Silicon Valley 40%
Congregation Sinai 15%
Hillel of Silicon Valley 15%
Addison-Penzak JCC 10%
Israel-based non-profits (4) 20%
    Federation chief executive Jyl Jurman is touched by the thoughtfulness and generosity that led to this endowment. “This gift helps insure a bright future for these eight organizations. The Cotton Family understood the need to endow their lifetime giving levels and they found a very tax-efficient way to accomplish their goal. I hope Mel and Dorothy’s gift inspires other leaders in our community to review their estate plans to find a way to leave their own legacies.”