Philanthropy: Tax Planning and Beyond

This “new breed” of philanthropist wants to be sure that their giving actually makes a difference. Unwilling to simply write a check to charity and hope that things work out, these donors are turning to professional advisors in the same way they look for advice regarding their business, retirement planning, taxes, and legal issues. According to an annual study by the Center on Philanthropy at Indiana University, as recently four years ago, high-net-worth donors cited nonprofit personnel and peers as their top sources for philanthropic advice. But today, these same donors say they most frequently consult wealth managers, attorneys and CPAs when they have questions about giving.

In response to this shift, wealth management firms across the country have rolled out various flavors of charitable advising services. But at their core, these programs are tax planning services that look to leverage the charitable tax code.

Donors want more
Donors want advice on how to make a difference. They want an advisor who will listen to why they want to give and help they figure out how they can best meet their goals. Martin Brookes, the chief executive of New Philanthropy Capital, a UK based philanthropy advising firm, puts it this way, “It is very much how to, rather than where to give, that I think is more in demand. What are the best ways to do their funding, what’s the best type of funds, the best types of grants?”

Unfortunately, many wealth managers don’t feel comfortable exploring these types of questions with their clients. Even though 98% of high-net-worth families donate to charity each year, many wealth managers believe that philanthropy is not an area in which their clients want advice. This disconnect has resulted in most advisors missing the paradigm shift going on in philanthropy.

Under the old paradigm, charitable giving advice was dominated by technical and negative language and moralistic rhetoric. With this approach, wealth managers wisely avoided conversations about philanthropy in the same way they avoid discussing politics and religion with their clients. But according to the book Philanthropy Reconsidered, by George McCully, (AuthorHouse, 2008), a new paradigm in charitable giving eliminates these conflicts.

“In the New Paradigm, philanthropic investments are seen as a natural extension of financial investments. Under the Old Paradigm, introducing philanthropy into a discussion with a client was to change the conversation diametrically. The New Paradigm not only eliminates this contradiction but provides a convenient bridge from one [conversation] to the next. Both are about maximizing returns on investments.”

Whether wealth managers respond to this growing client demand, or not, donors seem intent on adopting the language of finance in their philanthropy. From calling charitable gifts “investments,” to the rise of “venture philanthropy” to looking for philanthropic opportunities that offer a “high ROI,” donors find the framework of wealth management directly applicable to giving.

During the 1980s and 90s, the Baby Boomers were focused on saving for retirement. This megatrend led to an explosion in retirement planning services from forward-thinking wealth management firms. Today, those same Baby Boomers are retiring and entering their peak giving years.