From the December 2008 issue of Investment Advisor • Subscribe!

December 1, 2008

On Philanthropy, Is Your Client a Dynast?

Some affluent households engage children in charitable acts

In last month's column, "The Fine Art of Planning with Collectibles," the discussion of valuable collectibles naturally led to the complicated issue of gifting to an appropriate institution versus transferring the items to the children. One innovative compromise solution has the client gift the collection to a family foundation, which then lends the pieces to museums or other facilities. The children, and later the grandchildren, can participate in the foundation and maintain a meaningful personal connection to the client. This approach fulfills many parents' drive to instill a sense of philanthropy in their children.

A certain type of affluent family in particular brings the children's participation in philanthropy to center focus--and that profile makes them distinct from others. When measured against other high-net-worth households, for example, so-called dynast families give a remarkable 70% more to charity, although their annual incomes and net worths are similar. At the same time, they report feeling more financially secure, according to Bank of America Study of High Net-Worth Philanthropy by The Center on Philanthropy undertaken last year. The study compiled responses from 1,400 households with the dynast households having a mean net worth of $17.8 million and annual income of $1.5 million.

In contrast to other types of high-net-worth households that make philanthropic donations primarily a parental exercise--such as those with a net worth above $50 million, strategic donors who support specific, narrow causes, or those that bequeath 25% or more to charity--dynast families give money to children who then make the donations to charity or they actively involve the children in family foundations. The children's regular participation is the key theme in these families' philanthropic activities--and philanthropy is a central driver in teaching children to become responsible about managing money.

Dynast households have other distinctions as well that may help advisors recognize this type of family and provide some guidance in developing an understanding of their motivations and goals. While dynast families give about the same amount to religious charities as other types of households, their secular giving is considerably more significant: $175,369 vs. $102,553. When compared to other types of affluent, philanthropic households, dynast families statistically have these additional unique characteristics, according to the study:

o They give significantly more to organizations supporting basic living needs, such as food and shelter.

o They give much more to arts and culture causes. Arts and culture organizations represents about 24% of their donations, while education accounts for about 22%, and religion comes in at only about 8%.

o They report a higher sense of financial security (at the time the data was collected in 2006), although their net worth and income was close to that of other households in the study.

Dynast Motivations

Many advisors launch into a discussion with affluent prospects about how advantageous it is to participate in charitable giving since the potential for reducing future tax obligations is so attractive. For many prospects and clients, the notion of cutting taxes can propel them through the long planning process and the many details of the implementation stage. For dynast families' affluent households, however, the potential to save on taxes doesn't necessarily have the same horsepower. Almost 60% of dynast households and 52% of others in the study report that their donations would remain the same even if they received no income tax deductions for their donations. Interestingly, 30% of the dynasts and 38% of the rest said they would somewhat decrease their donations if there were no tax deductions involved. Similarly, if the estate tax were repealed, about 34.6% of those surveyed said they would somewhat increase or dramatically increase the amounts left to charity in their wills. The dynasts' commitment to giving is another strong theme in their philanthropic portrait.

Dynast households reported greater motivation from these factors than did others:

  • o Interest in setting an example for their children by the act of charitable giving;
  • o Leaving a legacy;
  • o Giving because it makes good business sense;
  • o Giving because it was expected in their social network;
  • o Giving because they were asked to make a donation.

Role of Advisors

More than other households, dynasts seek outside advisors of various types when they are formulating their philanthropic plans. In fact, they were much more likely to consult with a financial advisor, attorney, accountant, peers, and fundraisers than other high-net-worth families.

"Philanthropy is an issue that has really increased focus on both the part of our clients and us as a firm over the past few years," reports Peter Carnathan, an advisor who is a senior VP at Fiduciary Investment Management International, in Washington, D.C. "I think people are realizing that it's a very big responsibility for the next generation to manage and live with this type of significant wealth. Also, they recognize that wealth is not just dollars and cents. We've been trying to focus more on assisting our clients with education for their kids and, perhaps, grandchildren through both formal and informal approaches. The formal method is to have events, seminars, and lectures and invite clients and their families--and their extended families--to attend. Often, however, the most effective thing is through more informal conversations to be involved with family as they work through some of these issues and questions."

Interestingly, when it comes to actually implementing plans, dynasts are more likely to use certain modes of giving, compared to other affluent households. For instance, they tend to give:

  • o Through a provision in their wills;
  • o By donating stocks;
  • o By creating a foundation;
  • o By using a donor-advised fund.

Of Kids and Money

By involving the children of affluent families in philanthropy, they better navigate the stages of development, according to psychotherapist Eileen Gallo and estate attorney Jon Gallo in their book Silver Spoon Kids (Contemporary Books, 2002). "Philanthropy helps build a sense of accomplishment...while counteracting the sense of superiority that can inhibit industry. In the teenage years, when children are dealing with 'identity versus role confusion,' philanthropy lets them know who they are and helps them to define their social roles...By giving of themselves and their time, children find a satisfying answer to the question 'Who am I without my family's money?' Equally important, philanthropy provides teenagers with an activity that can be shared with the entire family."

Among the most common questions affluent parents ask advisors are "What do we tell our children? How much do we let them know? When do we let them know it?" observes Carnathan. Dynast households, in fact, want their children to participate in family philanthropy to a much higher degree.

Developing a Sense of Responsibility

Certain key factors help determine whether wealthy parents do pass on a sense of financial responsibility to their children. The goal is to develop in children a notion of duty in relation to family money.

Concerned wealthy parents confront the delicate balance between wanting children to benefit from the family's comfortable circumstances and having them learn the responsibility of wealth. Part of that responsibility is not being so sheltered from the world that they can't comprehend the poverty that others endure. A related aspect is not providing the circumstances that allow an over-indulgence in consumption.

Some affluent parents insist that their children do chores to earn their allowances or work to earn spending money. Rose Kennedy, for example, insisted on keeping all of her children's allowances small in her very wealthy family. JFK, at age 10 however, thought he had learned a lesson about the value of money and wrote a formal note to his father Joe, "A Plea of a Raise":

My recent allowance is forty cents. This I used for aeroplanes and other playthings of childhood but now I am a scout and I put away my childish things. Before I would spend twenty cents of my forty cents allowance and in five minutes I would have empty pockets and nothing to gain and 20? to lose. When I am a scout I have to buy canteens, haversacks, blankets . . .and so I put in my plea for a raise of thirty cents for me to buy scout things and pay my own way more around.

Parents send powerful messages about philanthropy being a regular aspect of life by making sure the children are aware of such family activities, even if their level of engagement is low in the beginning.

The Ties That Divide

For advisors, the topic of philanthropy can raise surprising divisions within a family. Carnathan recalls one family where the household style of philanthropy couldn't be discerned since the husband and wife had very different views on the disposition of assets. The wife wanted the children to inherit significant assets, while the husband felt a large inheritance would be a disincentive to be productive. He wanted most of the money to go to charity. "We didn't resolve anything because they were waiting for us to say what was right or what was wrong," notes Carnathan. "This was a very hot issue and one that was going to be a source of some discomfort between them. They're still working on it."

Image is important to most affluent families, including the dynasts. Parents don't want their children to carry with them a sense of entitlement. The goal is not to raise rich kids but resourceful, successful, and charitable kids who have learned how to manage their considerable family wealth.

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