Without question, our society would be so much poorer in every way without the good work of private foundations and family philanthropic organizations. And for many families with significant means, giving back to the local community and even to society at large is a core value and a significant part of their identity.
But for individuals and families who are considering such efforts, some important decisions need to be made at the very beginning. Meaningful philanthropy intended for multigenerational impact involves integrating philanthropic wealth planning with overall financial planning and governance structures. It also requires inclusion of tax-efficient giving strategies in order to preserve and prolong the impact of wealth aimed at charitable ends.
Of course, giving isn’t solely concerned with tax efficiency. It’s also about using resources in a way that reflects the values of the donor without sacrificing confidence in the soundness of the family’s financial future. A well-constructed plan can enable legacy giving without compromising the wealth-building engine that sustains it.
Philanthropic wealth planning starts with intentional communication.
Intentional, focused communication with rising generations is the foundation for any multigenerational philanthropic legacy. Openly discussing the values, goals, and intentions for family wealth, the roles and responsibilities of different individuals (including the heirs), and involving the next generations in conversations with trusted family advisors can all be effective ways to solidify both understanding of the mechanics of wealth creation and sustenance and commitment to the family’s philanthropic goals and values. In fact, these conversations can start early; many of the foundational concepts, including the importance of thrift and the rewards of generosity, are readily learned by children as young as 3–5. Indeed, most of a child’s core financial habits are ingrained by the age of 7. An organized approach to family conversations around wealth and its responsibilities is an essential component for effective governance of a multigenerational financial legacy. Especially for high-net-worth multigenerational family enterprises, it is important to create continuity around core values and mission. Because the understanding of these values needs to span two and often three generations, such a plan needs to be tailored to the sensibilities of each generation, and it needs to be revisited and updated, probably at least annually. Attention to “telling the story” to each generation ensures that family leadership continues to grow out of a shared set of priorities, even as its style and expression changes over time—as it must, in order to remain relevant.
Integrate tax-efficient tools with estate planning.
Incorporating charitable giving into your financial plan means looking beyond a single donation and thinking holistically. How does giving fit alongside your income, investments, taxes, and long-term goals? When philanthropy is integrated in this way, it can support the causes you care about while also reducing tax friction.
Donor-advised funds. One of the most flexible and simple tools for charitable planning is a donor-advised fund (DAF). A DAF allows you to make a charitable contribution in a high-income year, receive the tax deduction immediately, and then distribute grants to qualified charities over time. DAFs offer structure while maintaining the donor’s ability to allocate gifts over time and in accordance with the family’s philanthropic interests. Additionally, DAFs have the capability to accept gifts in a variety of forms, not limited to cash. Appreciated securities or real estate, privately held business interests, collectibles, and other asset types may often be accepted by the DAF, which can convert them to whatever form needed for the best benefit of the charity.
Charitable trusts. High-net-worth families who are establishing a family giving legacy of philanthropy may wish to work with their estate planning professionals to design trusts and other legal entities that can both facilitate and systematize the philanthropic efforts of the multigenerational organization. Properly designed and organized trusts can help philanthropically minded families maximize their impact for generations and, at the same time, provide benefits of tax efficiency and professional management.
Private foundations. For more complex or larger estates, setting up a charitable foundation may be an appropriate answer. While more expensive and requiring more involved administrative structures, a private foundation can provide the permanence and continuity needed to carry out a more extensive philanthropic vision. Several important questions should be answered at the outset:
- What need are you trying to address? Many founders of philanthropic organizations may spend months or more performing a detailed needs analysis for their intended area of impact, including a survey of other organizations that might have similar missions and objectives. If someone else is already doing a good job at what you’re interested in, supporting their efforts might make more sense, rather than “reinventing the wheel.”
- What is your purpose? A concise, carefully worded mission statement will help you crystallize your goals and methods, including your granting guidelines and target sectors.
- What is your business plan? Even though they are non-profit enterprises, charitable organizations need detailed operating plans and procedures to function efficiently.
- How is your organization governed? Aim to recruit the most qualified people you can find—preferably those who share a passion for your desired objectives—to serve on your board of directors.
At GEM Asset Management, we work with high-net-worth individuals and families who are managing their wealth to make a positive, lasting impact for good. But each situation is different, requiring nuanced solutions for maintaining and growing wealth while extending the philanthropic benefit. Let us help you explore solutions that are right for your family’s vision.
