Charitable giving is not the main focus of most advisors’ work with high-net-worth clients. When it is addressed, it’s often part of estate planning. Thus, little time is spent talking with clients about various philanthropic giving vehicles and options.
Yet according to a recent study, many high-net-worth clients have a strong desire to become more educated about their options. That’s an opportunity for advisors to expand discussions about their families’ needs, wants and desires.
Ninety-one percent of the high-net-worth households surveyed in the “2016 U.S. Trust Study of High Net Worth Philanthropy” donated to charity in 2015. They gave an average of $25,509, and 83% of them said they planned to give as much, if not more, in the next three years.
Almost all those surveyed (94%) said they wanted to learn about one or more aspects of charitable giving. But only about one-third said they had actually discussed giving with an advisor, accountant or attorney.
So the onus is clearly on advisors to make sure these topics are being addressed adequately. In most instances, the advisor may need to initiate the discussion to understand a client’s true intentions.
Take the subject of restricted and unrestricted giving options, which donors might not completely understand. They might be surprised to learn that an outright bequest to a charity is unrestricted, meaning the charity’s use of the funds is not limited to any specific purpose. If the assets are given instead to a large charitable restricted endowment, it gives the donor far more control and oversight over the use of the funds than an outright and unrestricted bequest.
A knowledgeable advisor or team of advisors can help both budding and relatively sophisticated philanthropists avoid problems later and ensure that the clients’ wishes are truly honored.
There are three ways advisors can help clients develop and facilitate their philanthropic plans.
1. Educate
First, they can educate clients about the nuts and bolts of philanthropic planning—including outright or restricted gifts, lifetime or testamentary gifts (gifts made in a will) or more sophisticated plans—to help them decide which vehicles are right for them. The majority of high-net-worth individuals surveyed (88.7%) tended to rely on their personal assets and income to make outright charitable contributions. Only around 10% set up charitable trusts, donor-advised funds, family foundations or other non-outright methods, according to the U.S. Trust study.
Advisors should explain to clients the income and estate tax benefits and implications of philanthropic giving (as well as other tax issues related to giving). Outside of outright and unrestricted gifting, high-net-worth clients have a variety of complex options to choose from to fit their specific situations and goals.
Charitable remainder trusts, for example, allow a donor to provide an income interest to a non-charitable beneficiary (including himself or herself) while the remainder of the trust goes to a charitable organization. A charitable remainder unitrust (CRUT) provides a variable and annually revalued income stream to a non-charitable beneficiary, and the remainder goes to a charity. A charitable remainder annuity trust (CRAT) is one that is funded with an initial charitable contribution to provide a fixed-income stream to a non-charitable beneficiary while the remainder goes to a charity.
Then there are the charitable lead trusts, such as the charitable lead unitrust (CLUT), which allows the donor to give a variable and annually revalued income stream to a charity for a limited time and the remainder to non-charity beneficiaries. A fixed-percentage payout is used to calculate the amount distributed to the charity each year. However, because the value of the investments in the trust will fluctuate, the payment is recalculated annually using the current value of the trust.
There’s also a charitable lead annuity trust, which allows a charity to receive a fixed annual income stream for a set number of years while the remainder is allocated to beneficiaries other than the charity.
There are various income and estate tax considerations that accompany all these options and must be presented to the client. Therefore, it is important for advisors to either be well-versed in the subject matter, or able to refer the client to somebody who is. The right vehicle will depend entirely on the client’s situation.
A client might consider establishing a private foundation—a nonprofit organization created through an initial donation. This is not the same thing as a public charity. In its simplest form, the charity performs charitable work, while a private foundation mostly supports and funds the work of public charities. The foundation is managed by its own board of trustees, officers or directors, all of whom can be related parties. It can be funded by one or more persons and can be established with a relatively modest initial contribution. In many cases, a donor will create and fund a private foundation not only to obtain certain tax benefits but also to provide more control and oversight over the funding of various charitable causes and perhaps also to allow his or her family or friends to have more involvement in selecting the charitable causes.
A client may also opt to create a donor-advised fund, which is less complicated than a private foundation. It allows a third party to administer and manage charitable donations on behalf of an individual, family or organization.
An endowment is another option. This donation of funds or property to a nonprofit institution for specific purposes is often intended to keep the principal intact so it will generate a prolonged stream of income for charitable purposes.
Various types of endowments exist — unrestricted, term, quasi and restricted.
2. Elicit Information From Clients
It’s important to discuss with clients their charitable interests and expectations, help them identify causes that align with their philanthropic and tax-savings goals and encourage them to communicate with charities and family members.
Advisors should learn what their clients are passionate about, what they are interested in funding and how much they want to give. Less than half of high-net-worth households in the U.S. Trust study reported any kind of giving strategy or budget. Advisors need to learn how their clients’ minds work in order to help them achieve their philanthropic goals.
The study noted that, in deciding which organizations to support, individuals tend to rely most on their own values, interests and firsthand experience with an organization. They are also motivated by their faith and desire to help others.
Advisors should foster open and clear communication about their clients’ expectations and help clients open a dialogue with possible charities. The U.S. Trust study found that wealthy individuals wanted charities to spend less on general administrative and fund-raising expenses (one of the reasons they might not like unrestricted gifts). Donors also favored organizations that showed sound business and operations practices—and did not reveal the donors’ names.
Advisors should also encourage clients to discuss charitable giving, their family legacy and inheritance issues with younger family members, who are often less likely to be included or express interest in the process.
Surprisingly, most parents do not involve their children or grandchildren in philanthropic decisions, according to the U.S. Trust study, even though most of the high-net-worth households surveyed had children, grandchildren or other younger relatives. Of those households, nearly 80% had established no family traditions with charitable giving and more than 70% left younger relatives out of charitable giving. According to the study, donors did not think their children would be interested in the philanthropic process or they felt that involving the children would burden them. Yet having discussions can build family traditions and values.
3. Focus On Females
Women are more involved in philanthropy than ever before—89% of all high-net-worth household philanthropic decisions are made by women, either individually or jointly with a spouse or partner, according to U.S. Trust.
Female philanthropists were behind three of 2017’s biggest bequests, according to The Chronicle of Philanthropy. Earlier this year, the Helen Diller Foundation gave $500 million to the University of California at San Francisco, with $100 million earmarked for biomedical research and the rest for support of faculty, staff and students in various medical fields. Diller, a longtime supporter of the school, died in 2015. Art collector Agnes Gund gave $100 million to establish the Art for Justice Fund, which will support groups addressing the issue of mass incarceration. Gund sold her Roy Lichtenstein painting “Masterpiece” to finance the gift.
Brandeis University received $50 million from Marcia Cohn for its Jacob and Rosaline Cohn Endowed Scholarship and Fellowship Fund. Cohn, who died in 2015, is the daughter of Jacob Cohn, who owned and sold the Continental Coffee Co.
The U.S. Trust study demonstrates that female donors are passionate about the causes they support—many of them are already involved in some volunteer capacity. They are also more likely to give to women’s and girls’ causes.
Advisors must be cognizant of the significant role that women play and will continue to play in the philanthropic sector.
Not Just A Check
Charitable giving can be so much more than simply writing a check. Donors aren’t sure how to properly plan so that their money is used in a way that achieves their goals. So advisors have a clear opportunity—and perhaps a responsibility—to fill the education gap. As they take a more active role in facilitating clients’ giving strategies, they will not only strengthen the community, but also shape the next generation of donors and philanthropic causes.
Amanda K. DiChello is a partner at Saul Ewing LLP in Philadelphia and chair of the firm’s private client services group.
