Posted on: January 1st, 2022
One of the top lessons that we have learned from working with extremely wealthy individuals and families—those with a net worth of at least $25 million, whom we call the Super Rich—is the importance of magnifying the positive impact of financial decisions. By regularly using certain high-value strategies, resources and tools, the Super Rich as a group do a great job of increasing the probability of generating bigger and better financial outcomes than they might otherwise achieve.
It’s advice we should all consider as we look to make smart decisions about wealth.
Take charitable giving, for example. The Super Rich we have worked with understand that direct “checkbook philanthropy,” while nice, can be too impulsive or inconsistent—and usually isn’t nearly as powerful as is implementing a more formal, organized and systematic approach to supporting important causes and charities.
With that in mind, here are two ways that we see the Super Rich amplify the power of their philanthropy—each with its own level of control, flexibility and other traits—and how you can utilize them if you want to use your wealth to improve your communities, or even the world.
A private foundation is a freestanding, tax-exempt legal entity—technically, a section 501(c)(3) nonprofit organization that isn’t a public charity—usually set up by an individual or a family, with a large initial donation, to support charitable activities. Future donations usually come from the family or from businesses, and the assets are managed by the foundation’s trustees, who may choose to invest in ways that can help grow the pool of assets to be given out as grants.
Families that are deeply interested in charitable giving tend to discover a lot to like about private foundations. For example:
Traits about private foundations that are often seen as negative or unappealing include:
Important: As part of the annual filing with the IRS, a private foundation must list its assets, contributors and grantees. In short, private foundations don’t provide for total anonymity.
Bottom line: A foundation may be a great tool for someone who wants a high degree of involvement in their charitable giving, is interested in creative grantmaking, highly values having control and flexibility, and sees the benefit of engaging family members and others in the process.
If you want something akin to a private foundation but don’t want the work it takes to operate one—or don’t have the assets needed to make it worthwhile—consider a donor-advised fund.
Think of donor-advised funds as a bit like a combination of a private foundation and a mutual fund. Instead of setting up your own legal entity and incurring the initial and ongoing costs of running it, you simply open a DAF account offered by an existing charity or other sponsor (such as a financial institution or a university). Your contribution—which is an irrevocable gift to the fund—is pooled along with others’ contributions into a fund that’s invested and maintained by the sponsor.
The result: You get professionally managed assets at a much lower cost than a private foundation. What’s more, some DAFs will let you open an account with no minimum required amount.
Other DAF benefits include:
On the flipside, you’ll find you have significantly less control, freedom and flexibility with a DAF. Some of the limitations you’ll encounter:
Bottom line: A DAF may be a great tool for someone who values convenience and ease of operation, wants a turnkey solution that allows them to act quickly, and wants to minimize administrative responsibilities.
It’s important to note that if you set up a private foundation, you can choose to convert it to a DAF down the road. This might occur if, for example, you decide to take advantage of the higher tax deductions offered by DAFs—or if heirs choose to pursue their own separate philanthropic endeavors. Of course, by doing a conversion, you’ll lose many of those unique advantages and characteristics of private foundations. What’s more, once you convert, there are rules that make it almost impossible to go back. The upshot: Make sure the advantages of a DAF are strong enough to warrant the switch.
If you have a strong charitable intent, it makes sense to consider strategies and solutions that can help you potentially magnify the impact of your giving and create a method for systematic giving over many years—or even generations. And if you want to be involved in those decisions during your lifetime, private foundations and DAFs should be on the short list of options. The good news: More advisors are focusing on charitable planning with their clients, and we’re seeing more specialty firms that can assist advisors and families in such planning.
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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