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.
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.”