Without question, the generosity of those “to whom much has been given” is an important ingredient of the glue that helps hold society together. Through the decades, names like Rockefeller, Carnegie, Getty, Gates, and others have become deservedly associated with their efforts to fund countless worthwhile social and cultural causes that continue to enrich our nation and the world.
One factor that unites each of these organizations—in fact, any philanthropic organization that desires to remain effective over the long term—is that they all began with a carefully defined strategic vision. The key to the effectiveness of such a vision is its inclusion of appropriate legal structures, attention to the most useful funding tools, and perhaps most crucial of all, a clear understanding of the types of efforts that coincide with the organization’s core values and priorities. Additionally, successful philanthropic organizations are highly intentional about how those values and priorities are communicated to succeeding generations.
Are the Kids Ready to Lead?
In our work with family stewards, we often hear concerns, expressed either directly or indirectly, about the commitment of “the kids” to charitable and philanthropic goals that are important to our clients. Typically, these are families who have done well, and giving back to others is a core value for them. Sometimes, though, these clients worry about the next generation’s ability or commitment for carrying on what the client hoped would be a family legacy of doing good for others.
So, perhaps one of the first steps toward making philanthropy intentional is ensuring that the future leaders are equipped with the knowledge and support they need to carry the family’s intentions forward into future years. Especially as family stewards age, it is typically important to engage in purposeful communication around family philanthropic goals and efforts. Those with higher levels of resources may even want to arrange a meeting with a trusted financial advisor or consultant to discuss estate planning, trusts, donor-advised funds (DAFs), and other matters. Clear communication with adult children about the importance of philanthropy to aging parents provides the foundation for the understanding of the next generation of family leaders and their commitment to a philanthropic legacy.
Is the Focus Clear?
To be effective, charitable giving should also reflect a focus that matches the organization’s core values and priorities. Whether that includes improving health outcomes for disadvantaged populations, advancing career or educational opportunities for an underserved group, supporting the arts, or some other goal, the core values of the organization should determine the focus of giving efforts. Certainly, organizations may have more than one area of interest. The important thing is that the area(s) of interest have been clearly communicated, documented in the organization’s legal and narrative structures, and carried through in the gifts and other efforts the organization undertakes.
As the organization is formed and the vision is refined, other important factors should be considered:
- Need. Many founders of philanthropic organizations will spend months or more performing a detailed needs analysis, including a survey of other organizations that might have similar missions and objectives.
- Purpose. A clear mission statement will help crystallize goals and methods, including granting guidelines and target sectors.
- Business plan. Just like a for-profit enterprise, charitable organizations need detailed operating plans and procedures in order to function efficiently.
- Governance. You should recruit the most qualified people you can find—preferably those who share a passion for your desired objectives—to serve on your board of directors.
Finally, the services of a qualified legal professional with experience in working with charities, nonprofits, and private foundations will be required as you file the proper applications for tax-exempt status, draft a corporate charter, and proceed with other legal matters that must be in place as your launch your organization.
Should I Form a Foundation?
No two philanthropic organizations are identical, and a variety of approaches are available. A charitable foundation is one tool that is often used, but there are a number of things to consider. First, you should consider whether your organization will better serve your vision as a true private foundation or as a public charity. For organizations that are primarily funded through the gifts of a particular individual, enterprise, or family, a private foundation may be a good choice. A good example is the Bill and Melinda Gates Foundation, which is funded almost entirely by a particular group of individuals and the corporation with which they are associated. Public charities, such as the Make-a-Wish Foundation, on the other hand, are funded mostly by public gifts that can come from almost anyone, anywhere.
In fact, the source of funding and the means of fundraising for your foundation is a central consideration in terms of registration and legal structures. A public charity must typically be registered in every state where donations are solicited. Additionally, public charities usually spend a lot more time and effort on fundraising, partly because they depend on a large quantity of smaller gifts, as opposed to private foundations, which usually receive large sums of funds on fewer occasions.
Are There Other Tools for Philanthropy?
Other than foundations, there are other methods that can provide both meaningful support for important causes and tax benefits for the individuals and families who support them.
1. Pooling multiple gifts in the same year with a donor-advised fund (DAF)
Some benefactors may wish to provide a large, one-time gift that consists of several years’ worth of normal payments. Depending on the size of the gift, the donor may wish to spread the benefit over several years, and this can be accomplished by the use of a DAF. The DAF may be sponsored by a local charitable umbrella organization such as the United Way, or it may be offered by a financial institution. The DAF holds and administers donated funds, distributing them to charities in subsequent years. While the DAF is not legally required to disburse gifts to any specific charity, most will follow a donor’s wishes as long as the receiving charity fits within the scope and focus of the DAF.
2. Charitable lead annuity trust (CLAT)
In this strategy, a grantor establishes and funds a trust that will make periodic (usually annual) payments to one or more charities designated by the trust. The charities receive the payments for a number of years specified in the trust, after which annual payments are made to non-charitable recipients (usually, family members). In the year the trust is funded, an actuarial calculation determines the tax deduction generated by the annuitized payments. Because the grantor chooses the trustee, CLATs provide a bit more control over the disposition of the gifts than with a DAF.
3. An “almost-charitable” LLC
This approach was recently popularized by mega-wealthy donors like Facebook’s Mark Zuckerberg and his wife, Dr. Priscilla Chan; Laurene Powell Jobs, widow of Steve Jobs; and Pierre Omidyar, founder of eBay. The concept is to form a limited liability company (LLC) and fund it with cash or other assets that the donor ultimately intends to give to charitable causes. There is no immediate tax benefit, but the donor retains complete control of the assets until the LLC makes the donation, at which time the deduction for the gift passes through to the donor. This can be an effective means of segregating assets earmarked for future gifts and still retaining control until the time for the gift has arrived. However, because this strategy involves certain complex legal and tax issues, it typically requires the assistance of qualified, professional guidance.
At Optima Asset Management, we take great pride in providing professional, fiduciary guidance to families and individuals who are making a significant impact with their charitable giving. If you have questions or would like additional information, please let us know.
Show Me How to Reduce My Tax Bill before the End of the Year
Disclosure: All written content is for information purposes only. Opinions expressed herein are solely those of Optima, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
