Posted on: April 1st, 2022
For a growing number of successful professionals, there’s a strong urge to “pay it forward” by financially supporting causes and organizations that are important to them. Many of you already make regular and sizable charitable contributions. And we know from our research that smart charitable giving is one of the key areas of importance for the affluent today.
Take entrepreneurs, for example. One key reason top entrepreneurs want to become even wealthier is to help other people increase their own success and advance in the world. Consider that more than 70 percent of successful business owners who say they want to be seriously wealthy are charitably inclined. By amassing greater wealth, they see themselves as being able to do more.
But ask yourself this: Have you gotten your family involved in philanthropy?
If not, you could be missing a truly massive opportunity to teach your children and other loved ones about smart financial decision-making and impart key financial values that can guide them throughout their lives.
Research into the affluent reveals that many high-net-worth individuals belong to a personality profile called the Family Steward. That means their deepest financial concerns are focused on taking care of their family and ensuring they enjoy lives that are financially stable and financially responsible. Chances are, you have some or all of the key traits of a Family Steward.
Family philanthropy is one great way to fulfill your Family Steward role. That’s because there are lots of benefits to engaging family in charitable giving, such as:
To decide how best to involve family members, consider factors such as their ages, levels of maturity and independence, and interests. For example, you might involve younger children only peripherally. But as they grow older and see more of the world— and if their interest grows with them—you might broaden their roles in and influence over the family giving. The point is that family members across the board can potentially be brought into your charitable giving to some extent.
One tool that can both maximize charitable giving options and engage family in philanthropy at a deep level is a private family foundation.
A private foundation is a not-for-profit organization (i.e., charity) that’s primarily funded by a person, a family or a corporation. The assets in a private foundation produce income. That income is used to support the operation of the private foundation and, most important, make charitable grants to other nonprofit organizations.
This approach to philanthropy is generally used by families with significant wealth, such as the Super Rich (those with a net worth of $500 million or more). While there are certainly costs associated with creating and managing a private foundation, there are distinct benefits of doing so. Three of the biggest—often interconnected—reasons why families with significant wealth often go the private foundation route are:
Note: Setting up a private foundation can be an intricate and involved process, as can its ongoing management. In this regard, running a private foundation can seem very much like running a business. Detailed accounting and the filing of tax returns are required. A variety of experts, such as legal and accounting professionals, are usually needed to handle regulatory and compliance matters. If you’re overseeing the assets of the private foundation, investment professionals will regularly be engaged.
To see why private foundations are especially compelling to wealthier families who are philanthropically inclined, consider the fundamental ways they differ from another, more commonly used charitable giving tool—the donor-advised fund—in the following key areas:
A private foundation enables you to make a wider array of grants than does a donor-advised fund. With a private foundation, for example, you can make pledge agreements to support one or more charitable causes over a period of time. The lack of personal control over a donor-advised fund makes that impossible. Private foundations also can make grants to specific individuals, something a donor-advised fund cannot accomplish.
How the assets are managed also differs between the two. With a donor-advised fund, the assets are managed by the firm you entrusted with your money—often a mutual fund sponsor or similar investment firm, or a community foundation. In a private foundation, you—or the investment advisors you select—get to manage the assets as you see fit.
Bottom line: Private foundations can be more creative than donor-advised funds in how they manage the endowment and how they give.
Bonus: With a private foundation, you can decide who sits on the governing board and how the funds are spent. In contrast, a board selected by the sponsoring organization governs the donor-advised fund.
Ultimately, if you’re motivated to have your charitable giving live on after you—including permitting your descendants to take the reins—private foundations tend to be the more effective choice.
None of this is to say that private foundations are the only way to involve family in your philanthropy. Getting your sons and daughters (and nieces and nephews) focused on giving back can occur even through casual conversations at family events. But we find that formalizing family philanthropy in some way—through a specific plan or via a specific type of giving vehicle—tends to create a deeper and more lasting love of giving that continues through the generations.
The upshot: If you have the resources to pursue a private foundation, it’s worth exploring—the benefits can be quite appealing. If not, you can still take a page from the playbook of the Super Rich by making philanthropy part of your regular interactions with your loved ones.
Important: As of the writing of this report, legislation introduced in Congress could significantly impact some of the features of private foundations. Consult with a financial advisor or philanthropic advisor to discuss the latest developments.
This report was prepared by, and is reprinted with permission from, VFO Inner Circle. AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.
Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.
Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures
VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
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