the well-th report
living well-thy
philanthropic planning:
a strategy for giving back
Each December, the race to a new year inspires a rush of charity that sweeps the nation. Gleaming moments of generosity glitter from family to family, household to household.
These philanthropic urges embody a distinctly American spirit; indeed, America consistently ranks as the most generous country in the world. Philanthropy is an integral trait of the families that comprise the nation.
Generosity delivered solely ad hoc, however, is neither as effective nor as potentially rewarding as strategically planned charitable giving. In the financial planning industry, we’re seeing an emerging trend: philanthropic planning as a key component of wealth management. A growing number of families now incorporate charitable giving into their holistic financial plans.
Philanthropic planning can and should be an integral part of your financial planning strategy. Strategic charitable giving presents a smart way to allocate assets, maximize impact and unite a family.
A Growing Trend
Charitable giving is on the rise in the United States. According to Giving USA, “American individuals, bequests, foundations and corporations gave an estimated $449.64 billion to U.S. charities in 2019, placing it among the highest years ever for charitable giving.” Indeed, that sum represents a 4.2% increase from total charitable contributions made in 2018.
What’s more, 2020 may ultimately see even greater volumes of giving. The COVID-19 pandemic has prompted a heightened philanthropic spirit among those with the means to give. According to Fidelity Charitable, 25% of donors planned to increase their donations in 2020, and the majority (54%) planned to at least maintain their giving levels.
With so many families inclined to give, financial planners and wealth advisors should encourage philanthropy as a key element of strategic, long-term financial planning.
“As wealth managers, it’s part of our DNA to understand our clients on a financial, quantitative level,” says Peter J. Klein, founder and chief investment officer of Aline Wealth based in Melville, New York. “It’s also important to make sure we understand our clients at an emotional level. That brings us to the importance of legacy.”
how much American individuals, bequests, foundations and corporations gave to charity in 2019
Source
Defining a Family's Desired Legacy
Paradoxically, one of the greatest barriers to a strategic philanthropic plan is another kind of charitable impulse: the desire of individuals to leave material funds to their children and grandchildren.
“People really get stuck when deciding how much should go to their kids,” says Glenn Frank, director of investment tax strategy at Lexington, Massachusetts-based Lexington Wealth Management. “They want their kids to have enough money that they can do anything they want in life, but not so much money that they don’t want to do anything meaningful at all.”
Peter agrees. “There’s an old story in family wealth management called ‘shirtsleeves to shirtsleeves in three generations,’ he says. “One of the things that keeps a family together to prevent that cycle of boom and bust is a legacy or philanthropy. If the family is geared to have a sense of responsibility for society and their interests or goals, they can help mitigate that dynamic.”
Families that make charitable giving a core part of their legacies actually preserve wealth better than those that plan for most or all of their funds to pass to the next generation.
“Most of the time, wealth doesn’t successfully pass to the next generation,” says Brian Friedman, managing director of Wellspring Associates, based in Atlanta. “Families that are the most successful at maintaining wealth are the ones that are outward-focused rather than inward-focused.”
Why is that? A common purpose unites fragmented families. “I like calling it a legacy-builder,” says Peter. “[A common purpose] allows future generations to say: This is what our family does. My grandparents started this foundation, and now I’m continuing it, and my kids will continue it. They have more of a connection to that capital, and they’re less likely to fall into that trap of unwise spending.”
Maximizing Impact
Another reason to consider charitable giving? By donating, families can effectively “stretch” their money by avoiding substantial tax bills.
“A subtlety many people don’t think about is that the decision between giving to kids and giving to charity is not a dollar-for-dollar comparison,” explains Glenn. “When you give to charity, you get a tax break and a charitable deduction. You may be able to give a lot more charity than you could to your children due to the tax subsidy.”
Often, financial planners find, children are receptive to the idea of maximizing the impact of family funds by charitable giving. An integrated philanthropic plan allows families to have these important conversations and collectively decide what matters most to them.
Getting Started
As a client, the first step in developing a cogent and strategic philanthropic plan is to define your desired legacy. “A big part of what we do is to determine goals and values and what we call a client’s ‘wealth philosophy,’” says Brian. “Based on that, we can figure out how to integrate their philanthropic planning with their income tax, trust and estate tax planning, with all the advisors working together.”
Once a family has defined their wealth philosophy, they have several options for how to give. Families can create private foundations, give via donor-advised funds or even design charitable remainder trusts that continue to generate income for themselves and beneficiaries. Many families employ a combination of these vehicles to diversify their giving.
VEHICLE
Private Foundation
DEFINE
“A nonprofit organization that is usually created via a single primary donation from an individual or a business and whose funds and programs are managed by its own trustees or directors. As such, rather than funding its ongoing operations through periodic donations, a private foundation generates income by investing its initial donation, often disbursing the bulk of its investment income each year to desired charitable activities.”
[Source]
BENEFITS
  • Autonomy
  • Family unity for a common goal/purpose
  • Funds can be invested tax-free (except for an annual 1.37% excise tax)
  • Can give loans vs. grants, the interest of which can fund other charitable initiatives
  • Can employ family members to manage the foundation
  • Giving and operations are 100% in the public domain (could be a pro or con, depending how you look at it)
[Source]
VEHICLE
Donor-Advised Fund
DEFINE
“A private fund administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family or individual.”
[Source]
BENEFITS
  • Acts like a “charitable investment account”
  • Contributions of cash, securities, etc. result in an immediate tax deduction
  • Funds can be invested tax-free
  • Giving is private even though the fund’s assets are still “public”
[Source]
VEHICLE
Charitable Remainder Trust
DEFINE
“A tax-exempt irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time and then donating the remainder of the trust to the designated charity.”
[Source]
BENEFITS
  • Generates income for the donor and/or beneficiaries
  • Allows donors to give while ensuring the payment of living expenses
  • Flexibility
  • Income tax deductions
  • Tax-exempt income
[Source]
“From a practical perspective, most successful families should at least consider having a donor-advised fund,” says Brian. “Basically, it’s a non-profit that acts as an umbrella organization overseeing funds directed by the families who created them. It’s a way to create the fund, then direct the non-profit on where the charitable gifts should go now or in the future.”
Donor-advised funds also allow donors to extend the benefit of their dollars. “While funds are sitting in the donor-advised fund, it’s a great idea to invest in an ESG (Environmental, Social and Governance investment),” says Glenn. “That way, clients are doing good with [their money] until they do good with it.”
Families that want more control over their funds may create private foundations. “Some families like [foundations] for the ability to be innovative,” explains Peter. What’s more, foundations provide opportunities for next-generation family members to volunteer and learn more about the family’s philanthropic mission and philosophy. “Now the family is not only giving to the organization, but they’re also actively involved,” says Peter. “Kids and grandkids are learning about budgeting, operations and philanthropy.”
The best vehicles provide these dual opportunities for giving and personal familial development. With the right mix, families can maximize their impact while strengthening their legacy.
SPONSORED CONTENT
Nuveen finds that performance and risk management are top motives for responsible investing
Whether you call it socially responsible investing, responsible investing or sustainable investing, one thing is sure, demand for investments focused on environmental, social and governance (ESG) themes continues to grow rapidly. And although investing along with one’s values is nothing new, the practice has moved into the mainstream, and now, investors and advisors alike are recognizing the potential performance and risk mitigation benefits of responsible investing (RI).
Performance priorities prevail while risk reduction resonates
The desire to make a material impact is still top of mind for investors, but for the first time, Nuveen’s 5th Annual Responsible Investing Survey found that a majority of investors (53%) cited performance as their main motivation for investing in RI. Clearly, performance is top of mind for investors, as 85% indicated that they will only invest responsibly if returns are the same or better. And ranking just behind aligning with their values, over one-third (38%) of investors indicated better risk management as a top factor driving them to responsible investing
Just as investors are understanding the performance benefits of RI, so too are their advisors, as nearly one-third (32%) believe portfolios with RI have yielded above market-rate returns in the past year, compared with just 12% and 4% in 2018 and 2017, respectively. Even more striking is the increase in advisors who say that investors incorporating RI in their portfolios typically outperform those without responsible investments.
Which generation is leading the way in RI? Spoiler alert: It’s not millennials.
There is one segment of the population that is currently taking the lead in interest in RI. And it might not be who most would think. Millennials have long held the spotlight in driving awareness of ESG factors in investing, but we found that greater interest in RI is coming from an older slice of the population — Generation X.
Despite the differing terms and investor rationale for investing, responsible investing is clearly here to stay. However, as conversations about responsible investing increase, it is important to partner with an investment manager with a proven history of incorporating ESG factors into portfolio construction. For additional information about our survey or for resources about responsible investing, please visit our website.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
A word on risk Investing involves risk; principal loss is possible. There is no guarantee an investment’s objectives will be achieved. Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.
Nuveen provides investment advisory solutions through its investment specialists.
This information does not constitute investment research as defined under MiFID.
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