In a previous article, we discussed the longer-term, strategic considerations around building a lasting philanthropic legacy for your family. We stressed the importance of including your family’s most important values in governance structures, charitable strategies, and the all-important multigenerational education plan central to preparing rising generations of leaders who understand and uphold the family’s guiding values.
Having a long-term strategy and the proper “architecture” for your family’s philanthropy is indispensable. And once that foundation is in place, it’s time to consider the most efficient ways to accomplish family giving. We’ll briefly cover several tactical aspects that may have a place in your family’s charitable strategies and values.
1. Family size and geographic considerations
Many multigenerational family philanthropic efforts face complications imposed by the number of family members and their spread across not only generations but also widely separated locations. Especially for families who value consensus and broad-based input across the organization, family giving may be facilitated by having a centralized repository for assets devoted to charitable giving.
2. “Hands-On” tactics
Families who place a high value on empathy and stewardship may wish to employ an approach that combines financial support with experiential engagement. This could take the form of direct volunteerism, or it could also involve a family “giving circle,” where members meet to discuss the merits of various charities and even vote on how gifts will be distributed. Both of these are ways to involve family members more directly in the workings and goals of the charitable organizations being supported, making efforts more meaningful and personal.
3. Creating opportunities for others to give
Some families may value efforts that broaden the opportunity for giving beyond the borders of the family. With careful adherence to IRS guidelines, a family corporation might, for example, create a matching fund that enables employees of the company to have donations to various charities matched by the corporation. Or, a family philanthropic organization could structure itself as a public charity, specifically designed to accept support from the general public. Such efforts, of course, involve a number of legal requirements that must be carefully followed to maintain compliance with tax and other laws.
Finding the Right “Container”
Another tactical consideration involves the type of conduit or “container” that best suits the family’s methods and values. Some of the options include:
- Donor-advised funds. DAFs can generally accept a wide variety of asset types beyond cash, including appreciated securities, real estate, and non-traditional assets such as collectibles or private equity and business interests. When the assets are deposited with the fund, donors receive an immediate charitable deduction for the fair market value, and the fund can then liquidate and distribute assets according to the direction of the donor over several years, if necessary. DAFs offer a convenient way for the family organization to pool assets from a number of sources and distribute to charities matching the family’s principal philanthropic interests. Using a DAF can be a simple, low-cost way to receive and direct charitable gifts over as many years as needed, and donors can also remain anonymous, if they wish.
- Charitable remainder trusts. A CRT is designed as an irrevocable trust that receives assets, generating a partial charitable deduction upon establishment and funding. The trust may then liquidate the asset as needed (with no capital gains responsibility attributed to the donor) and provide an income to the donor or a designated beneficiary for either a set period of time or for the life of the donor or beneficiary. Upon the termination of the income period, the remaining balance of the trust is given to a qualified charitable recipient. CRTs can be very useful for those who need to retain an income from their assets and also provide a major philanthropic benefit. CRTs can be structured to receive recurring contributions over a period of years (a “unitrust”) or one-time-only contributions (an “annuity” trust).
- Charitable lead trusts. CLTs are another type of irrevocable trust that permits “splitting” benefits between the donor’s beneficiaries and charity, but in a different order than with CRTs. When a charitable lead trust is established, the interest is divided into a “lead” portion that is distributed to charity and a remainder that is reserved for future distribution to the donor’s chosen beneficiaries (usually children or grandchildren). The “lead” portion is paid out over a designated period, either a fixed number of years or the donor’s lifetime. At the end of that term, the remainder interest is paid to the beneficiaries. Like CRTs, CLTs can be structured either as unitrusts or annuity trusts.
- Private foundations. For those who intend to exercise maximum control over philanthropic efforts, private foundations may be an appropriate consideration. While the most expensive to establish, maintain, and govern, private foundations may be the best choice for donors who want to control most aspects of investments, grantmaking policy, and multigenerational governance. Private foundations typically have their own charter, board of directors, and documented procedures. They are also subject to public disclosure requirements, tax filings, and payout rates.
Optima Asset Management works with families and individuals who want to multiply the value of philanthropy for years to come. If you could benefit from our advice, we would enjoy the opportunity for a conversation.
