Philanthropy’s Cutting Edge

4. Impact Giving

Many of today’s entrepreneurs — who are all about goals and achieving results over a certain time frame — are taking that same set of skills and thought processes and applying them to their philanthropic giving, according to Blessing. Their goal: to have an impact on issues that matter to them. “You have to set aside some time to talk about what’s been impactful in their lives. It often comes from hurt points — places of pain in their lives or loved ones’ lives. It all comes from personal experience,” she says. “It’s something they want to plug into because it’s really plugging into their hearts. It’s where they want to have maximum impact.” Impact givers also want to see results sooner rather than later.

5. Funder Collaboration

One easy thing an advisor can do to help clients is to connect them to other funders. “It can be beneficial because funders don’t have to go it alone. They can see how others are practicing philanthropy or running their foundations,” observes Meg Lassar, an analyst with Strategic Philanthropy in Chicago. “It’s also a good resource for advisors who themselves don’t have the expertise.” In Chicago, for example, there is a donors’ forum made up of family, private and corporate foundations as well as non-profits that convenes workshops and study groups. Lassar also suggests connecting clients to like-minded funders through peer funding networks such as Grantmakers Without Borders, for example, or the Environmental Grantmakers Association. “This is where you hear from people who are working on the ground,” she said. “It’s often how collaborations are formed.”

6. Giving Circles

Philanthropic investment clubs known as giving circles appeal to like-minded donors who wish to pool their resources in support of a particular charity. Contributors can open a donor advised fund or simply write a check to an organization, according to Ness. Giving circles have proven especially attractive to women, who often use a financial advisor or community foundation to guide them. “It’s all about joining together to make a difference with their money. The giving circle is a philanthropic outlet but it’s also a social gathering,” Ness says. “Like a sewing circle or a bridge club, it usually lasts as long as the friendships do.” He adds that giving circles are not well understood by many financial advisors, who might otherwise use them as forums for promoting philanthropy.

7. Perpetuity Reconsidered

The longtime default for foundations has been the perpetual model but it’s not always necessarily the correct choice. “It has been the working model, very often unquestioned by trustees and advisors alike,” notes Lassar. “Time horizon doesn’t come up often. Part of what we do is to encourage a conversation about time horizon to make sure that it is aligned with the donor’s mission.” The philosophy of so-called “spend down” foundations like the Bill and Melinda Gates Foundation is that some issues — like climate change, education, disease — can’t wait decades for a solution. In spend down situations, Lassar adds, investments typically become more conservative with the aim of preserving assets rather than growing them.

8. Spending Policies

Most foundations don’t have a spending policy, relying instead on the federally mandated 5 percent payout rate as the rule rather than a floor. “There are a lot of private foundations who believe they are required to spend 5 percent, no less and no more,” according to Brian Wodar, director of wealth management research for Bernstein Global Wealth Management in Chicago. The bottom line: Too many foundations simply spend 5 percent of their previous year’s assets, subjecting grant-making to swings in the financial markets.

“The majority of private foundations are either spending 5 percent a year or being checkbook philanthropists,” he adds. “What that doesn’t do is provide the board with rules of the road in times of crisis.” One key finding from Bernstein’s research: To gain more control and achieve the greatest charitable impact, a foundation’s board should align its spending policy with its investment policy.

9. Smoothing

There is no one right answer but some foundations — no matter the size — have found that using a spending policy like a smoothing formula can allow them to maintain stronger spending levels during times of crisis without substantially impacting their ability to continue in perpetuity, according to Wodar. Bernstein research shows that smoothing formulas, when adjusted for the required 5 percent minimum distribution, can facilitate more investment in stocks than would otherwise be thought comfortable.

The result: creating a potential for greater philanthropic impact over the long term. How? While higher stock allocations will likely increase an investment portfolio’s volatility, smoothing — which determines annual giving as a percentage of the average of several years’ asset values rather than one year’s — reduces the volatility of the foundation’s distributions.

10. Charitable Lead Trusts

The use of charitable lead trusts as a testamentary vehicle has become very popular but Wodar says that with today’s low interest rate environment, there is opportunity to set them up inter vivos, or during the donor’s lifetime. “It’s been said that charitable lead trusts inter vivos are the unicorn of the estate planning business,” observes Wodar. “You hear people talk about them but you don’t see them.”

Charitable lead trusts, used by the very wealthy, are required to make a yearly distribution to charity. The distribution is lower when interest rates are lower and higher when interest rates are higher. “With rates low, as they are now, there is a better chance the trust will succeed in distributing everything it’s supposed-to to charity with something left over at the end of its term for children or grandchildren,” he said. Notably, once the trust is drafted and funded, the interest rate is permanent.