Private Wealth magazine's recent roundtable on philanthropy, detailed in "The Legacy Factor", gave four industry leaders the opportunity to share their experience and perspectives on charitable giving with the ultra-affluent. Those same professionals – Kim Laughton from Schwab Charitable, Rob Francais from Aspiriant, Jose Reynoso from Clarfeld and Nancy Bergstrom from Meristem – also have some valuable insights on what the future holds for the charitably inclined and the advisors who help them.
Hannah Shaw Grove: Rob, can you talk about the big trends in play now that have the ability to impact the future of giving and the business of philanthropy?
Francais: Based on demographics, there is expected to be a record wealth transfer over the next few decades. While our client base is doing a lot of lifetime giving, in many cases it’s still just a fraction of what will be given at death based on estate and financial plans. It could easily be considered a growth industry, and, I would assert, that it’s underserved today.
We’re also seeing increased collaboration between governments, high-net-worth individuals and corporations in a mission to bring disparate organizations together and aggregate resources to solve problems. I think some of this is driven by the energy and priorities of Next Gen, many of whom have structured their lives around making an impact and changing the world.
Which leads me to my final thought – there is much greater emphasis now on really leveraging dollars to effect change rather than simply gifting them as a transaction and forgetting about it. The need for accurate and ongoing reporting about how the assets are working and ensuring a return of capital, whether it’s in the form of new schools, small businesses or clean water. Some very sophisticated and high-level resources are being applied to this area right now. It’s that combination of impact investing and technology that has the ability to accelerate philanthropy and attract more dollars and better resources over time.
Grove: Jose, you mentioned that Clarfeld does a lot of cross-border tax work. What are you seeing on the international front when it comes to charitable giving?
Reynoso: I believe we’re going to continue to see philanthropy become a more global enterprise. The tax attributes of the U.S. economic system are such that charitable contributions are given a preference via the charitable deduction. This, of course, encourages giving in the U.S. But wealthy families tend to be global by nature and I think the U.S. mentality and culture with regard to giving will begin, and is already beginning, to take root in other regions around the world, like Latin America, Europe and Asia. In places like Latin America, for instance, charity tends to start at home. So what may have begun on a family, local and community level has the potential to ripple out more broadly as more people begin thinking about making an impact on the larger society and younger generations use technology to engage directly with other parts of the world. At the same time, organizations like Schwab continue to advance and accommodate more global thinking and giving, which helps fuel the trend.
Grove: Are you witnessing other trends, perhaps close to home or in your own client base, that can shape philanthropy?
Reynoso: Yes, the goal of fostering a legacy may impact continued growth in philanthropy among wealthy individuals and families. As boomers age, they’re challenging the construct of traditional retirement. Many of our clients are looking for something new and challenging to focus their attention on — areas where they can channel their passion and experience. We’re seeing more testamentary and, even more so, inter vivos charitable giving, more executive positions at non-profits and other causes that can provide a sense of purpose and self-fulfillment that contributes to building a personal legacy. These same families often use philanthropy as a vehicle to transmit their values to younger generations. It provides the dual benefit of reducing taxes /saving money and perpetuating those values. With these conditions in place, the future looks promising but any changes in tax rules could certainly have a significant impact on the future of philanthropy.
And, finally, I’ll expand on Rob’s comment regarding public benefits. Areas like education and the arts, which once received primary or significant government funding, have been negatively impacted by the political and economic environment. These areas are now getting more and more support from private philanthropic concerns. The big questions in philanthropy today include: what exactly is a public benefit anymore? And what is the role to be played by private philanthropy in the traditionally public domain? The Gates Foundation and other large philanthropies are pushing for more dialogue and collaboration with governments and their peers around solving macro global problems like clean water, poor education and disease.
Grove: Nancy, have you seen charitable giving change over the course of your career? And what will that mean for the ways families give in the future?
Bergstrom: From an advisor’s perspective, I’ve seen philanthropy shift from something that was more transactional in the ‘90s to donors working alongside non-profits to see how their contributions are being used and where impact is being made. That trend is helping to bring more transparency to the process overall, which, in turn, is allowing for more transparency within families. A few generations ago, children of wealth weren’t always aware of what their families were giving. I heard a great story about a family that only learned about the tremendous generosity of its hard-driving, serious patriarch after he passed away. So many people came forward to tell his adult children about what he had done for them. They were proud, but upset, because it made them feel like they didn’t know who he was or what he was all about.
These days, we see more involvement from two and three generations within the same family, often adults, children and grandchildren who have the benefit of seeing different sides of their parents and grandparents through the prism of philanthropy. And, as clients age, they begin to give more thought to what defines success in life. When they choose to communicate that to the younger members of their family, it can guide them and help them find their role in life. It’s very helpful for them to realize where they can add value and not be so confused by the money. More families and more advisors realize this and things are becoming far less transactional, with more opportunities to share, teach and grow.
Philanthropy also creates an opportunity for collaboration and leverage within family units. When people at different stages in life come together, they can draw on the strengths and interests of other family members. Young parents with the responsibilities of young children can work alongside the first-generation wealth creators to learn about each other, split the work load on things like due diligence, and come up with a solution that meets everyone’s needs. In that respect, there is a more open environment about values and giving and collaboration that drives better relationships, more thoughtful giving.
Grove: Kim, you mentioned that Schwab Charitable works with a pretty broad range of donors. Can you discuss some of the factors that are influencing how and why they give, especially in the current environment?
Laughton: Assuming there are no substantial changes to the deductibility of charitable gifts in the tax code, which we don’t expect, the future for philanthropy is very bright. Rob, Jose and Nancy touched on some overarching trends, so I’ll focus my remarks on the near-term environment for charitable giving. Over the past few years, we’ve seen a substantial increase in the volumes in calls, new accounts and contributions to charitable accounts and overall giving has grown accordingly. There are a number of things driving this: first, we’ve had a robust stock market so people have appreciated securities and a sense of well-being that they didn’t have five years ago and that drives more giving. Second, higher-income earners have seen their tax rates go up and they‘re looking for ways to defray both income taxes and capital gains taxes, both which may have jumped for many. Third, the IRA charitable rollover has been renewed by Congress for the past few years, so people who don’t necessarily need their mandatory withdrawals can give directly to charity from their IRAs. Finally, both IRAs and 401(k)s are now eligible to be converted to Roth IRAs. The conversion creates a taxable event, which can be partially offset by charitable giving. Each of these factors would be influential on their own, but in combination are very powerful drivers of giving.
Grove: Any final thoughts you’d like to share with our readers?
Francais: There are a few other near-term trends coming out of corporate America that can spur charitable giving. The increase in consolidation and M&A activity leads to lots of taxable events that get sheltered. And a lot of corporate executives got their options re-priced during the depth of the financial crisis. Now it’s almost five years later and, if the vesting schedule fits, those people are diversifying out of those stocks because it’s been a pretty good bull run. There are a lot of interesting factors coming together this year.
Laughton: It’s hard to predict what Congress will do, so a lot of our clients like the certainty of taking a current-year deduction rather than wondering what the tax situation may be in the future. We have seen that mindset become increasingly common and lead to a bias towards action around charitable giving.
