Scholars, philanthropic advisors and wealth planning experts have described the early 21st century as the “golden age of philanthropy.” Indeed, it seems as if each day brings a new headline touting the latest charitable activities of the rich and famous.
As wealthy households increase their contributions, the growing number of worthy causes to support can be overwhelming. There is currently more than one million charitable organizations to support in the United States, each with their own mission and method for addressing issues such as social justice, education, health and human services. With so many causes to choose from, deciding where and how to give has become a daunting task, even for those who have been making gifts for many years.
Potential donors should examine three key aspects of philanthropy to help direct their chartable endeavors and keep them confident in their giving.
Motivations for giving
Understanding the factors that influence your giving, as well as the goals that are significant to you and your family, is crucial to ensure that your philanthropic activities are effective and your giving is aligned with your overall wealth transfer planning. The decisions regarding how much to give, when and to which causes, are all closely intertwined. Determining why you are motivated to give is the starting point.
Ultimately, your decision to give will be based on several factors including, your goals for transferring wealth to future generations; your desire to support charitable causes you feel are worthwhile; the income and tax benefits you will receive from making a gift; the performance of the financial markets.
Experience shows that philanthropy is more meaningful and productive when you first consider your reasons for giving. With forethought and deliberation concerning your motivations for giving, you will be in the best position to maximize the impact of your charitable efforts.
One size does not fit all. In fact, for many donors, it is a surprise to learn that charitable gifts can be structured in many different ways – and that the size of the gift may or may not influence the choice of charitable vehicle. For example, for individuals wishing to make an immediate impact, direct contributions to charity may range from a modest check to very substantial asset donations. Similarly, one donor who wants to involve his or her family in philanthropy may choose to make a sizeable contribution to a donor-advised fund, while another chooses to establish a substantial private foundation. The various methods of giving can be placed into four broad categories (1) Direct gifts: these may consist of giving cash, real estate or other assets directly to the charity of choice; (2) Split-interest vehicles: charitable lead trusts and charitable remainder trusts allow both the charity and family heirs to benefit; (3) Philanthropic structures: donor-advised funds and community foundations can assist in guiding donors through the philanthropic process and provide research on local charities; (4) Private foundations: these provide the most flexibility and can help in getting family members involved in the giving process for generations to come.
From the donor’s viewpoint, it is important to recognize that many factors are involved, including your motivations, objectives and financial situation. Once you have considered the range of issues that affect philanthropy, the best choices emerge after a thorough evaluation of the relevant alternatives.
There are many reasons for making philanthropy an integral part of your personal wealth transfer plan. For example, you might have a unique family situation, an upcoming liquidity event or a special commitment to the community that prompts you to contribute.
Having made the decision to contribute to a charity and identified the solution that best meets your needs, there still remains the question of what to donate, such as the financial vehicles listed previously. This choice depends not only on your net worth, but also on the nature of the assets you may have worked a lifetime to accumulate. The decisions made here will directly impact the effectiveness of your philanthropy.
Whatever your particular situation, choosing wisely among a broad range of asset choices is an important part of making a significant charitable donation. Whether you have a concentration of highly appreciated stock, a family business or an art collection, it is important to understand the implications (i.e.: acceptance, tax, valuation) of each potential funding source (real estate, cash, business). To the extent that your assets are complex or unusual, you will want to involve the recipient charities. Good communication helps ensure that your expectations will be fulfilled and that your funding choices will not create unanticipated problems.