Strategic Philanthropy: How to Give Smartly and Successfully

James Wilcox, Managing Director, Matthew Babrick, Senior Managing Director, First Republic Private Wealth Management
May 13, 2021

  • Charity matters: individuals in the U.S. accounted for 69% of all charitable donations in 2019, totaling nearly $310 billion.
  • So how can those with wealth make the most of their charitable gifts?
  • The keys: define your passions and get strategic with your giving plan.

For many wealthy individuals, philanthropy provides a way to support beloved causes and create some tax efficiencies. Often the process starts small — you may give your alma mater a gift or respond to a request for a donation. Such contributions are important and, of course, deeply appreciated.

However, creating a strategic charitable giving plan ensures you make the most of your gifts. Take the time to define the causes and organizations you want to support and then establish tax-efficient vehicles that enable you to invest and grow the money you plan to donate. The result is a thoughtful gifting plan that can ensure your charitable intent has a lasting impact.

Find your passion

Attending an annual auction. Writing a check to support a community after a natural disaster. Supporting the nonprofit work of a friend or colleague. It's not uncommon to make donations in response to a moment. If this sounds familiar, then you're in good company. In fact, individuals in the U.S. accounted for 69% of all charitable donations in 2019, giving nearly $310 billion.

But for high net worth individuals, a casual approach to giving can effectively leave money on the table. You're not taking full advantage of the available tax savings and investment vehicles designed to make your charitable dollars go that much further. And in responding to requests versus being proactive, you may be neglecting the causes that really matter to you.

For these reasons, the first step in creating a strategic charitable giving plan is to define your passions. Consider what truly moves and motivates you. Then investigate how you can turn those causes and motivations into giving opportunities. For instance, your passion for entrepreneurship could lead to supporting a small business incubator. Love farm-to-table cooking? Perhaps your gifts could transform a food and farm alliance.

There's no right answer, and your interests may evolve and change. But taking the time to set a general direction enables you to make intentional gifts that reflect what's important to you.

Get strategic about giving

Understanding where you want to direct your giving is one component. Creating a smart vehicle for doing so is another. 

Establishing a donor-advised fund can help you make the most of your charitable dollars. A donor-advised fund (DAF) is an investment account created with a sponsoring organization, specifically for charitable giving. Once you establish a fund, you can then make a tax-deductible donation to it each year. The money invested inside your fund grows tax-free, and you can make grants from the fund at your own pace. What’s more, the sponsoring organization takes responsibility for all due diligence related to grantmaking.

Donor-advised funds offer many other benefits as well, including the ease of choosing to give anonymously when privacy is desired.  For instance, one couple who lived under the radar in small town made a large gift to a local community organization through their donor-advised fund satisfying their values of giving back and keeping their finances private.   

Consult your tax advisors to understand the tax impact of charitable giving (e.g., how much income do you have that would otherwise be taxed at the highest marginal rates) and on the best way to structure your charitable giving.  For significant giving, gain an understanding of the fuller spectrum of giving vehicles such as Foundations and Charitable Trusts.

Revisit and revise

With your money growing in a donor-advised fund, you can take your time to plan a large gift or make smaller gifts each year. The funds enable a final and essential component to a strategic charitable gifting plan — flexibility.

As noted above, you want to set a direction for your philanthropy. But that direction will most certainly evolve as your passions — and financial circumstances — change. For example, sometimes individuals will make the mistake of pledging a significant portion of their wealth to a single cause or recipient and later wish they could have spread their wealth more widely. With a DAF, you can instead plan for your gifts annually and donate what makes sense for your financial situation.

To that end, meet with your wealth advisor to revisit and revise your plan every year. The amount you donate annually to your fund may shift, depending on your income and current tax policy. And you may discover wholly new interests or organizations worthy of your attention.

Charitable giving is a gratifying way to put your money to use. Be strategic about planning your donations, and you can significantly increase the benefits and impact of your gifts for years to come.

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