N O R T H E R N T R U S T
© 2015 Northern Trust Corporation
June 2, 2015
Catholic Charities and the Archdiocese of Chicago
11th Annual Tax and Estate PlanningSeminar for Professionals
“The Good Giver: An Exploration of Tax-Wise Charitable Giving”
Suzanne ShierWealth Planning Practice Executive andChief Tax Strategist/Tax [email protected]
Rev. 6-1-15 (v13)
2
The Good Giver
“To give away money is an easy matter and in any man’s power. But to decide whom to give it and how large and when and for what purpose and how, is neither in every man’s power nor an easy matter.”
Aristotle
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The Good Giver
Giving TodayGiving TomorrowGiving Choices – Donees and DonationsGiving Choices – National and InternationalGiving Choices - Giving VehiclesGiving Choices – Transmitting Value(s)
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The Good Givers’ Giving
Source: Giving USA 2014, The Annual Report on Philanthropy for the Year 2013
Giving by individuals is the greatest source of giving
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The Good Givers’ Recipients
Source: Giving USA 2014, The Annual Report on Philanthropy for the Year 2013
The majority of giving recipients are religion, education and human services
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The Good Givers’ Level of Giving
Giving levels are once again increasing
Source: Giving USA 2013: The annual Report on Philanthropy for the Year 2012 (Chicago: Giving USA Foundation, 2013), p. 26
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The Good Givers’ Generosity
Giving among income groups is greatest at the highest and lowest income levels
Source: IRS 2011 Statistics of Income (SOI)
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United in Giving
Social Value: Charities provide essential services, often more effectively than government ever could.
National Character: As a people, Americans are uniquely benevolent; the charitable deduction simply reflects this element of the American character.
Limited Government: Government will do what charities cannot; in the absence of a well-funded nonprofit sector, government will expand its social, political and economic ambit.
Fairness: Charitable deductions are consistent with the core principle of tax fairness, since taxpaying capacity is directly affected by the amount of charitable giving done by a taxpayer.
There are multiple rationales for the charitable deduction
See: J. Thorndike, Making the World Safe for Philanthropy (Urban Institute, April 2013), pp. 5-6
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The Good Givers’ Heritage of Giving
1917 – War Revenue Act of 1917Enacted the individual charitable deduction
1944 – Revenue Act of 1944 1981 – Economic Recovery Act of 1981
Expanded the charitable deduction to non-itemizer individuals 1986 – Tax Reform Act of 1986
Charitable deduction escaped the 2% floor 2006 – Pension Reform Act of 2006
Temporary direct contribution from IRA
The charitable deduction has a long standing history in the tax code
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What the Good Giver Gives
Non-cash contributions$49 billion in non-cash contributions (22.2 million returns) in 2012One-third of the returns (7.6 million) report $42.9 billion in
contributionsTaxpayers age 65+ gave the most (cash and non-cash)
Asset Value Share
Corporate stock $16.8 billion 39.1%
Mutual funds $1.7 billion 2.8%
Clothing $9.3 billion 21.8%
Household items $3.7 billion 8.7 %
Art and collectibles
$1.2 billion 2.8%
Non-cash contributions remain popular for donations
Source: IRS Statistics of Income, Spring 2015
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What the Good Giver Gives
Art and collectibles“Making Charitable Gifts of Art – A Primer for Donors”Capital gain or ordinary income propertyUse for a related purpose
Art for a medical school or for liberal arts college?
An income tax deduction consideration, but not a gift or estate tax issue
Art Advisory Panel
344 items reviewed with recommended adjustments for 56%
Giving of art and collectibles is of particular interest
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What the Good Giver Gives
Individual Retirement AccountsOptimal testamentary giving vehiclePension Protection Act of 2006 direct IRA gift provision
Temporary
Age 70-1/2 or older
Owner’s or inherited IRA
Only IRAs, not 40(k)s
$100,000 maximum per taxpayer per year
Direct to qualified charity
· Public charity (but not donor advised funds or supporting organizations)
· Private operating foundations
Increased income tax rates makes giving from retirement assets even more attractive
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What the Good Giver Gives
Split-interest charitable trusts and pooled income funds in 2012113,688 split-interest trust returns$11.7 billion in gross income$4.3 billion in charitable distributions93% charitable remainder trusts
80% CRUTs (majority 5-6%)
14% CRATS6% charitable lead trusts1% pooled income funds
Many donors continue to favor giving in trust
Source: Rosenthal, Lisa, Split-Interest Trust, Filing Year 2012, Statistics of Income Bulletin 51 (Winder 2014)
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The Global Good Giver
Income tax charitable contribution deductionLimited to donees organized within the USQualifications
US charitable donee may use funds abroad for charitable purpose
US charity may make donations to a foreign charity
· “Friends” are permitted· “Conduits” are not
Giving globally is an increasing priority, but it has limitations
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The Global Good Giver
Gift and estate tax charitable deduction
There is no (US) place of organization requirement
But, there is a Section 501(c)(3) status notice requirement
Exception if foreign organization receives less than 15% of its support from US sources
The estate and gift tax rules for global giving are broader
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Reforming the Good Giver
RecapTotal gifts in US $335.17 billion in 2013
$240.60 billion from living individuals
· $196.21 billion (81.6%) from taxpayers who itemize deductions
Deductions are regressive, credits are not
For example
· The “cost” to the government (the “subsidy” to the taxpayer) of a $100 itemized charitable deduction for a taxpayer in the 35% tax bracket is $35
· The “cost” and “subsidy” of a $100 gift by a non-itemizer is $0
· A credit of $xx is of equal cost and subsidy to all taxpayers
Tax reform proposals affecting the charitable deduction have various rationales
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Reforming the Good Giver
Proposals
Administration
Cap the value of all itemized deductions at 28%
Camp proposed Tax Reform Act of 2014
Increase standard deduction
2% floor on itemized charitable deduction
Simplify the rules on deduction limitations
Various reform proposals have been suggested
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Reforming the Good Giver
Proposed limit of the deduction for the appreciated value of propertyLimit the deduction to the adjusted basis of property
· Similar to the current limit for contributions to private foundations
· Recommended by the Joint Committee on Taxation in 2005
· Part of the proposed Tax Reform Act of 2014 (with exceptions)
Limiting the deduction on appreciated assets has garnered interest
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Reforming the Good Giver
Recent headlines ask “Who will watch the charities?”
David, Callahan, New York Times, Sunday, May 31, 2015The transparency and accountability of charitable organizations
(private foundations in particular) is under public scrutinyProposed focus of reformsTransparency of charitable donations
Narrower definition of charitable philanthropy focusing on public benefit
Emphasis on the timely use of tax-exempt dollars
· Example – Payout of donor advised fundsBetter accounting of effectiveness of philanthropic dollars
Federal oversight akin to British national Charity Commission
Some have questioned the degree of transparency and accountability of charitable organizations
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Reforming the Good Giver
Does the income tax deduction for charitable giving impact giving?
The lower the price of giving, the more that is given
The “wealthier” the environment, the more that is given
The exact relationship (elasticity) of giving and deductions is undetermined
Does the estate tax and the charitable deduction impact giving?
In 2010 (the year of estate tax repeal) for estate worth more than $10 million
· 30% of value ($3.5 billion) to charity
What impact any changes will have on giving is unclear
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Direct Donation to Charity
Donor Advised Fund
Supporting Organization
Private Foundation
Charitable Remainder Trust
Charitable Lead Trust
Least Complex Most Complex
The Good Giver’s Giving Options
There are many ways to give, with varying degrees of complexity
Revised April, 2015
Donor Advised FundA Simple and Flexible Way to Promote Family Giving
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At a Glance: Donor Advised Fund
A donor advised fund (DAF) provides an attractive alternative to establishing a private foundation.
A DAF is a charitable giving vehicle that allows you to maintain discretion over your charitable giving without the administrative and financial burdens associated with a private foundation. You can transfer assets to a DAF account during life or at death, and you will receive an immediate charitable tax deduction . You may also appoint family members and friends as "advisors" to the account, thereby promoting family philanthropy and/or charitable giving circles.
Uses: DAFs are less expensive to administer than a private
foundation, and offer a higher income tax charitable deduction
Grants may be made in the name of the DAF account or anonymously
How does it work? Accounts and assets (cash, securities, etc.) are held
by a sponsoring charity, often a community foundation
In year 1, you transfer assets to the DAF
You may be entitled to a charitable income tax deduction in year 1, even though the property may or may not be distributed to charitable organizations in that year
You may make recommendations to the sponsoring charity to make distributions to select charitable organizations
What are the complications? Loss of access to assets for personal needs
Distribution only for the benefit of public charities
While rare, a situation could occur whereby the sponsoring charity may deny a request to direct a charitable gift**
For illustrative purposes only. Not legal or tax advice.
**All DAFs are legally prevented from making certain grants. For more information regarding prohibited grants, please consult a Northern Trust advisor.
DAFYear 1*
Year 2 and beyond:Distributions to Charity
CHARITIES
*Current income tax deduction, subject to deduction limitations
Contribution
Donor Advised Fund Strategy
YOU
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Example: Donor Advised Fund
For illustrative purposes only. Not legal or tax advice.
Sample Profile:
You have a high income year and are not subject to the alternative minimum tax
You are charitably inclined, but currently unsure of the charitable organizations you want to support
Anticipated Results:
You receive an income tax charitable deduction of up to 50% of adjusted gross income
You can deduct the entire $250,000 from your itemized tax return, subject to applicable IRS deduction limitations
Assumptions:
$250,000 cash contribution to initially fund the donor advised fund
Donor’s adjusted gross income is $1,000,000
DAFYear 1*
Year 2 And Beyond:Donor Advises on Distribution to Charities
CHARITIES
*Current income tax deduction, subject to deduction limitations
ContributionYOU
$250,000
Revised April, 2015
Charitable Remainder Trust – "CRT"Fulfill your philanthropic intent while retaining cash flow and deferring capital gains tax
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At a Glance: Charitable Remainder Trust
A charitable remainder trust (CRT) is an irrevocable trust established to provide annual payments to current beneficiaries with the remainder balance distributed to charity. A CRT is typically funded with appreciated assets. You, the grantor, are eligible for an income tax deduction and perhaps a gift or estate tax deduction for the present value of the remainder interest, which will pass to charity.
Payments from the trust may be made to an individual or individuals over time, either for life or for a defined term not to exceed 20 years. Your designated charity (or charities) receives the remaining principal (remainder interest) at the end of the trust term.
Uses:
Appropriate for charitably-inclined persons with highly appreciated assets who desire a defined stream of cash flows for themselves or their beneficiaries
Also provides a method of diversifying appreciated assets while deferring the income taxation, potentially increasing the yield from the assets while gaining a current income tax deduction
How does it work?
A CRT is created in the form of a unitrust (fixed percentage of the trust assets determined and distributed annually) or an annuity trust (fixed dollar amount distributed annually)
Your choice of the term and payout percentage determines both the income tax and gift or estate tax deduction
You and/or your beneficiary(ies) take annual distributions based on the annuity or unitrust amounts
These payments are subject to income tax based upon the character of income earned by the CRT
What are the complications?
Underperforming assets may deplete the trustLoss of control over the contributed assetsGrowth on assets exceeding annuity or unitrust
passes irrevocably to charity If you irrevocably name a beneficiary other than you
or your spouse, the present value of that beneficiary’s interest will be considered a gift for gift tax purposes
Consider generation-skipping transfer tax issues before naming a grandchild or other "skip" person as a beneficiary
For illustrative purposes only. Not legal or tax advice.
CRT
CHARITY
Remainder to charity
CRT Strategy
YOUContribution
ANNUITY OR UNITRUST PAYMENTS
BENEFICIARY
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Choosing the Charitable Remainder Trust
Charitable remainder trust design presents a number of options
Revised April, 2015
Charitable Lead Trust – "CLT"A Deferred Gift to Minimize Transfer Taxes While Optimizing Annual Charitable Gifts
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At a Glance: Charitable Lead Trust
A Charitable Lead Trust (CLT) makes annual payments to a charity or charities for a term of years, or for a lifetime, before the remaining principal is made available to trust beneficiaries such as children. A CLT can either be testamentary (created by your will or trust upon your death) or inter vivos (created during your lifetime).
Uses: CLTs typically make sense if you want to minimize gift and
estate tax by delaying the transfer of wealth to children or grandchildren, and if you are already making or would like to make annual gifts to charity
How does it work? A CLT is an irrevocable trust with specific annual payments to
charity. Remainder interests pass to or are held for the benefit of non-charitable beneficiaries (typically children)
A CLT is created in the form of a unitrust (fixed percentage of the trust assets determined and distributed annually) or an annuity trust (fixed dollar amount distributed annually)
If structured as a grantor trust, you will be entitled to a current income tax deduction for the present value of the current interest going to charity
You will be taxed on the taxable income during the charitable term
Alternatively, a non-grantor CLT will not tax the grantor on the trust’s income, resulting in the grantor foregoing a current income tax deduction
The CLT, however, will be entitled to a charitable income tax deduction for the amounts passing to charity annually
What are the complications? Loss of control over gifted assets
Loss of access to assets if you or your family have a future need prior to the expiration of the trust’s lead term
Under-performing investments could exhaust the CLT such that the charity may not get its full series of payments and then there will be nothing to pass to the remainder beneficiaries
For illustrative purposes only. Not legal or tax advice.
Charitable Lead Trust Strategy
CLT
TRUST BENEFICIARIES
CHARITY
Annuity Payments to
Charity
Term of Years
Remainder End of Term
YOUContribution
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Choosing the Charitable Lead Trust
Choice of the type of charitable lead trust determines the tax benefits
Revised April, 2015
Private Family FoundationMaintain Control of Your Charitable Giving While Promoting Family Philanthropy
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At a Glance: Private Family Foundation
A private family foundation is a tax-exempt charitable vehicle that may be organized as a corporation or a trust. Private family foundations are usually grant-making foundations that make grants to public charities chosen by the foundation’s trustees or directors. A private foundation allows the donor the maximum amount of control and flexibility over a donor’s tax-deductible charitable giving during life and after death.
Multiple generations of family members may be involved in the charitable giving process. Contributions to private foundations are generally deductible for income tax purposes, subject to some limitations.
Uses: A private foundation is effective when you want to
maintain the maximum amount of control over your charitable giving while teaching younger generations about the importance of charitable giving and promoting a family giving legacy
How does it work? A non-profit corporation or a wholly charitable trust
is created Contributions are made to the foundation for future
distributions to charitable causes Private family foundations are generally exempt from
income tax, but must pay an excise tax of 2% on net investment income
Private family foundations must distribute at least 5% of the value of its net assets annually
The donor can maintain control over grant making and investment decisions
What are the complications? Assets must be used for charitable purposes Loss of personal access to assets after transfer to
private foundation Administratively complex Potential loss of privacy due to tax returns being
publicly recorded Subject to complex Internal Revenue Code rules and
close scrutiny by the IRS, particularly as it relates to prohibited transactions
For illustrative purposes only. Not legal or tax advice.
Private Family Foundation Strategy
CHARITIES
AnnualGrants
YOUContribution
PRIVATE FOUNDATION
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Example: Private Family Foundation
For illustrative purposes only. Not legal or tax advice.
Sample Profile:
Your family would like to contribute $5,000,000 to a charitable giving vehicle to consolidate your charitable giving activities and encourage younger family members (children) to participate in philanthropic activities
Results:
You create a family charitable legacy through the creation and management of the private foundation
You and your spouse/partner and adult children can serve as directors for a corporation or as distribution committee members for a trust and be actively involved in the grant-making process
From a tax perspective, a $5,000,000 income tax charitable deduction is available in the year the contribution is made, subject to the applicable adjusted gross income limitation of 30% for gifts of cash and 20% for gifts of long-term appreciated securities
Assets of the foundation will be subject to the 2% annual excise tax on the net investment income
Assumptions:
Total family assets of $20,000,000
Family is charitably inclined
Family is willing to commit up to $5,000,000 in cash to fund the foundation
CHARITIES
Grants
YOUContribution
FAMILY PRIVATE FOUNDATION$5,000,000
At Least 5% Annually
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Choosing Between a Private Foundation and Donor Advised Fund
Aligning the type of vehicle with the donor’s goals is essential to planning
Revised April, 2015
Supporting Organizations
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At a Glance: Supporting Organizations
How does it work? A supporting organization is established as either a
nonprofit corporation or a trust One or more donors make contributions to the
supporting organization, making them eligible to take an income tax charitable deduction
The supporting organization makes financial contributions to, or supports the programmatic work of, one or more specified domestic public charities
The donor may continue to have a limited role in the oversight of the supporting organization, including governance and investments
Special Considerations: The rules that govern supporting organizations are
complex The donor(s) and certain related parties (known as
"disqualified persons") may not maintain control over the supporting organization
The supporting organization’s public charity status depends on the involvement of the public charities that are benefitted by the supporting organization. Thus, based on their governance structure, certain supporting organizations are subject to extensive administrative requirements, including minimum required distributions and additional reporting.
For illustrative purposes only. Not legal or tax advice.
Supporting Organization Structure
SPECIFIED CHARITY
Financial or programmatic
support
DONOR(S)
Contribution
SUPPORTING ORGANIZATION
SPECIFIED CHARITY
A supporting organization is a tax-exempt, wholly charitable entity established by one or more donors which provides support to specified public charities. Based on its special relationship to the public charities it supports, the supporting organization is classified as a public charity (rather than as a private foundation).
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Comparison: Supporting Organizations vs. Private Foundations
Advantages of Supporting Organization Status over Private Foundation status
Tax-free investment income: Because they are classified as public charities, supporting organizations do not pay tax on investment income, whereas private foundations pay a 1-2% excise tax on investment income.
Increased income tax charitable deductions: Contributors to a supporting organization are entitled to greater income tax charitable deductions for such gifts than they would be for identical gifts to a private foundation.
Decreased IRS oversight: Supporting organizations are not subject to the private foundation laws of the Internal Revenue Code, which impose strict rules covering self-dealing, timing of distributions, and types of investments. Failure to fully comply with these rules subjects a private foundation (and, in some cases, its donors or managers) to large excise taxes.
For illustrative purposes only. Not legal or tax advice.
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Comparison: Supporting Organizations vs. Private Foundations
Disadvantages of Supporting Organization status relative to Private Foundation status
Loss of donor control: The donor of a supporting organization cannot retain control over the entity and may only appoint a minority of the trustees or board of directors.
Loss of grant-making flexibility: A supporting organization is limited to supporting specific public charities that are identified by name or class under the governing instrument, and which cannot be changed at the will of either the donor or the trustee of the supporting organization. By contrast, a private foundation may be established with broad charitable purposes, permitting the trustees to change its grant recipients every year
No compensation to donors or related parties: Disqualified persons related to the donor of a supporting organization may not receive any grant, loan, payment of compensation or similar payments, whereas a private foundation may provide reasonable compensation to such disqualified persons.
For illustrative purposes only. Not legal or tax advice.
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Comparison of Giving Vehicles
Tax Implications Lifetime gift: Immediate income tax deduction
Cash: up to 50% of AGI Securities: up to 30% of AGI
No capital gains tax on properly structured gifts of
appreciated securities
Bequest: Estate tax deduction for full market
value of donation at death
Lifetime gift: Immediate income tax deduction
Cash: up to 50% of AGI Securities: up to 30% of AGI
No capital gains tax on properly structured gifts of
appreciated securities
Bequest: Estate tax deduction for full market value
of donation at death Investment income is not subject to tax
Lifetime gift: Immediate income tax deduction
Cash: up to 30% of AGI Securities: up to 20% of AGI
No capital gains tax on properly structured gifts of
appreciated securities
Bequest: Estate tax deduction for full market
value of donation at death
Disadvantages Gift acceptance policies vary among charities and may restrict type of
donated property One-time gift vs.continuous grants
Sponsoring charity has final say on grant recommendations and investment
of fund assets
Subject to annual excise tax, quarterly estimated excise
tax payments Annual tax returns
Substantial set-up and ongoing expenses
Complex self-dealing and other private foundation excise tax rules
Outright Donation to Charity Donor Advised Fund Private Foundation
Advantages Immediate benefit to charity No front-end costs or expenses Keep assets until you donate,
investing them as you choose
Contributions deductible in current year Ability to recommend investments
and grants over time Flexible, convenient giving Minimum cost to establish
Involvement of family members and friends
Anonymity, if desired
Contributions deductible in current year
Ability to make grants over time Full control over charitable
distributions Involvement of family members
and friends Anonymity, if desired
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The Good Giver’s Legacy
$400 billion in taxable gifts were made in 2012Compared to $25 billion per year from 2002 to 2009
Generational wealth transfer over the next 20 years will be unprecedented
Giving the gift of giving has never been more important Positioning as
An heir – to wisdom as well as wealthA steward – responsible for passing the value of generosity
on to the next generationA participant – modeling generosity, as those who follow are
more likely to do as we do than to do as we say
The Good Giver’s greatest gift is transmitting the value of giving
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The Good-Giver’s Tax-Wise Legacy
Consider a married couple living in Florida with $10 million in assets and two successful children who intend to make a $1 million charitable gift
Alternatives Testamentary charitable gift of $1million and $4.5 million to
each child or $5 million to each child and children make gifts of $500,000
each Assume the children each have $500,000 ordinary income in 2015
and 2016 Estate tax parents
$0 under both alternatives Income savings children
$0 under testamentary gift alternative In excess of $150,000 for each child over two years
Giving with increased estate tax exclusion, portability and higher income tax rates
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A Closing Thought for the Good Giver (and their Counsel)
The desire of power in excess caused the angels to fall;
the desire of knowledge in excess caused man to fall;
but in charity there is no excess;
neither can angel nor man come in danger by it.
Sir Francis Bacon
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