Posted on: April 1st, 2020
As investors’ net worth grows, it often fuels a rise in the desire to “do good” through charitable contributions.
Indeed, we find through our experience working with the affluent and their advisors that one of the five key concerns that the affluent tend to share is how to conduct charitable giving wisely and how to magnify the impact of their philanthropy.
Therefore, it may be helpful for you to examine some of the trends, patterns and preferences among the Super Rich—individuals with more than $500 million in net worth—when it comes to their charitable giving. Lessons from the Super Rich can often be incorporated into our own approach to various financial strategies and wealth planning.
Many Super Rich families hold a strong belief in giving back—seeking to make a difference in the lives of others, society and the world. Many strive to have a discernable and significant impact.
We make this conclusion by examining single-family offices—structures that many Super Rich families use to help them manage their financial lives. A significant majority of family offices (62.8 percent) are very or extremely involved in philanthropy (see Exhibit 6).
Interestingly, as seen in Exhibit 6, far more of the second-generation family offices have high levels of charitable involvement. (First-generation family offices generally are those controlled by the generation that initially created them—patriarchs and matriarchs; second-generation family offices are owned and controlled by the heirs of the original creators.)
This does not necessarily mean that roughly 40 percent of these Super Rich families are not extremely philanthropic. It could mean that their charitable activities are not run through their single-family offices. This tends to be more common with wealth creators than with wealth inheritors. Nevertheless, we see that the second generation is generally highly focused on philanthropy, and they tend to run the activities of their philanthropy in conjunction with (or through) their single-family offices.
Looking forward, nearly eight out of ten of the senior executives at these single-family offices who were surveyed said they expect the families to become even more involved in philanthropic pursuits than they are today (see Exhibit 7). Here again, there’s a stronger trend among the second-generation family offices.
The upshot: It may be that younger members of today’s highly affluent families are especially philanthropically inclined. Ask yourself how this dynamic plays out in your own family: Are the younger generations particularly interested in making a charitable impact?
We also see some clear differences in the extent to which the Super Rich seek help and guidance with their philanthropy.
For example, a sizable percentage—29.1 percent—of the senior executives at single-family offices engaged philanthropic advisors at one time or another. Philanthropic advisors are professionals who assist people and families in thinking through which charitable causes and nonprofits to support.
(Note: Philanthropic advisors are rarely the professionals who will help them address the tax implications of their giving. To deal with the tax considerations, wealth managers, accountants and attorneys are usually the go-to professionals.)
However, while more than two out of five (41.9 percent) senior executives of first-generation single-family offices have engaged philanthropic advisors, a mere 8 percent of senior executives at second-generation single-family offices are using these professionals.
Why the significant generational difference? Although it’s not entirely clear, it’s possible that many of the wealth creators—the founders of single-family offices—are more focused on creating the family fortune than on philanthropy. Therefore, they tend to enlist philanthropic advisors for guidance.
In contrast, the heirs—the second generation—may have had more opportunities to develop strong opinions about (and experience with) charitable giving. They may have even learned from the philanthropic advisors hired by their parents and decided to move forward on their own.
In our experience, a lot of people—including the affluent—engage in checkbook philanthropy, where individuals send cash or checks to the not-for-profits they care about. Often there is little to no planning surrounding this type of giving—donations are made sporadically and without regard to other financial issues and needs.
In contrast, we see that the Super Rich tend to be more formal and systematic about their giving.
Example: Nearly seven out of ten of the family offices surveyed have set up formal private foundations (see Exhibit 8). This is proportionately more the case for the second generation than for the first generation.
We see that people create private foundations for many reasons, including:
Note, however, that generational differences come into play here as well (see Exhibit 9). Both first- and second-generation family offices say that “caring” is a motivator for having a private foundation. But “influence” is a much more significant driver for second-generation family offices—while “legacy” and “permanence” matter more to first-generation family offices.
The takeaway from these findings is not that you need to set up a private foundation. The costs and ongoing management duties associated with private foundations make them unrealistic for most families.
Instead, consider your own reasons for wanting to engage in philanthropy. What is important to you in terms of your giving? Do you share some or all of the same motivators as the Super Rich?
Additionally, you can take a page from the Super Rich playbook by being highly organized and systematic with your own giving. Instead of giving when the mood strikes, consider adopting a giving strategy that is carefully planned. Giving options such as donor-advised funds and certain types of trusts can potentially enable you to make charitable giving a component of an overall wealth plan.
Finally, consider enlisting the help of a professional advisor who can provide insights and guidance into philanthropy in general and perhaps even assist in vetting specific charitable organizations.
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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