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The Biggest Bang for the Financial Buck

December 8, 2022

Bernie Kent



The Biggest Bang for the Charity Buck 

Deciding how to give away money is no longer a simple matter. But numerous vehicles exist to help a philanthropist achieve the most impact and the highest personal benefit.

Philanthropists obviously receive tax benefits from making their donations, but that is not the biggest consideration for many of them, according to Drew Rabe, managing director of Washington, D.C.-based Arabella Advisors, a firm that helps clients navigate the ins and outs of giving. “There are legal, financial and operational considerations that factor into decisions about how to give, but there is also a deeply personal side that revolves around what a client cares most about and the kind of change the donor wants to effect,” Rabe says. “Decisions about philanthropic vehicles often follow from those personal considerations.”

There are a number of things that determine how a person will give. It depends on how much control they want to have over their contributions, whether they want to give locally or globally, and whether they are looking for a long-term impact or to solve a more immediate problem.

The giving vehicles people choose are determined by how deeply the givers want to get involved with organizations or a cause, says Renee Karibi-Whyte, senior vice president at Rockefeller Philanthropy Advisors, a consulting and research organization based in New York City that manages philanthropic planning for both advisors and donors. These givers might want to pursue simple checkbook philanthropy, or perhaps set up trusts, donor-advised funds or private foundations—or get involved with some other type of collaboration.

Karibi-Whyte says the goals of philanthropists have changed in recent years and today they put more emphasis on social justice and equality. Such shifts also affect their giving vehicles, since the donors want to see the long-term effects.

She has also seen an increase in unrestricted giving—when donors give charities discretion over how to use the funds for their most pressing needs. Most of the information is anecdotal, but the Center for Effective Philanthropy recently estimated that about 20% of giving had no stipulations about how the money was to be used.

Charitable organizations have learned the value of transparency and they are paying more attention to communicating about what they are doing, Karibi-Whyte says. Rockefeller has developed a philanthropy road map showing people how to align their family goals and be more purposeful in their giving.

Some donors are even bringing an entrepreneurial outlook to their giving, says David Winslow, managing director of Choreo, a financial services firm based in Charlotte, N.C. “Venture philanthropy has taken hold today for donors who are trying to solve large and ingrained societal issues,” he says. “These donors have a business mindset targeted to solving a basic problem and having a bigger, longer-term impact.”

The Right Vehicle For The Right Give

There are a number of vehicles that philanthropists can use. The type that’s seen rock star growth is donor-advised funds. In these vehicles, donors receive an immediate tax benefit for setting aside money, which can then be invested and grow until needed. The money is then available for grants when the right opportunity to help presents itself.

According to National Philanthropic Trust’s “2021 Donor-Advised Fund Report,” charitable gifts to donor-advised funds increased 20.6% in fiscal 2020 over 2019, the two most recent years for which data are available. Total grants from these funds grew 27% in 2020 to a total of $34.67 billion, equivalent to 7.4% of total giving in that year. This increase is the most substantial year-over-year increase in grant-making from donor-advised funds. The report found that other metrics increased in fiscal 2020 from the previous year as well, including the total value of donor-advised fund assets, which increased by 9.9%, and the total number of the funds’ accounts, which increased by 16.3%. The number of individual donor-advised fund accounts passed one million in 2020.

Fidelity Charitable, which oversees donor-advised funds, has clients who also set up private foundations outside Fidelity. Colby Bircher, vice president and charitable planning consultant at Fidelity Charitable, says that among its clients, the use of donor-advised funds seems to be more popular than creating foundations. This could be because “foundations are powerful giving vehicles but can be costly and time consuming to maintain” when compared to donor-advised funds, according to the National Philanthropic Trust.

“The wealth level of the family absolutely makes a difference for the vehicle used,” Bircher says. She says that private foundations are more attractive to high-net-worth donors and those who want a long-term giving vehicle.

Besides donor-advised funds and private foundations, there are also a variety of trust arrangements donors can use, especially if they are melding their philanthropy with their estate planning. Take charitable remainder unitrusts, which are designed to defer recognition of capital gain income for tax purposes. A donor can make a donation to the nontaxable unitrust. He or she then receives a distribution of a fixed percentage of the trust’s value each year for a period of years or for life. The remainder of the assets are donated to charity when the donor dies.

“These trusts can create valuable opportunities for those who want to increase their cash flow from appreciated property without paying significant income tax on the sale,” says Bernie Kent, chairman and senior advisor at Schechter Investment Advisors in Birmingham, Mich. Most of his firm’s clients have between $3 million and $35 million in assets, so philanthropy is a major part of their financial planning, Kent says.

“Tax planning comes into play for many of our clients who have highly appreciated assets or who have a large amount of stock from one company,” he notes. “These types of assets are good ones to give to charity,” he adds, because by giving them the donor avoids paying capital gains taxes and that leaves more money to donate.

People will also pick charity vehicles according to how aggressive they are in their giving. Says Melanie Jones, senior vice president with Evoke Advisors in Los Angeles: “For instance, if a family wants to give away 50% of their wealth” it might require multiple vehicles.

The age of the stakeholders also plays into the decisions about how to give. “If the donor is more than 59 and a half, he can make withdrawals from an IRA without penalty, and if he is more than 72 years old, he is required to make withdrawals,” says Jones. Calculations of these amounts can be used in charitable planning.

Better Together

The nature of philanthropy has also required new ways of organizing it.

Consider the charitable startup called Daffy. The company, launched in 2021, has created an unusual program meant to bring families together in their giving goals. The firm (whose name stands for “Donor Advised Fund For You”) has recently launched a technology that draws a group of up to 24 people into the giving process. It’s called “Daffy for Families,” and it allows the donors in its donor-advised fund to include up to 24 of their family members, or close friends, to be notified of the donor’s fund activities, according to Adam Nash, the firm’s CEO and co-founder.

“The goal is to prompt conversations among family members about philanthropy and about the family’s legacy,” Nash says. Those invited to share in the group are advised when the fund makes a donation and are able to create their own sub-accounts with profiles and make donation suggestions to the organizers. Only the organizers, however, can actually make donations from the fund and receive the tax benefits.

“We are hoping Daffy for Families will create situations where family members will have more conversations about their philanthropic goals and the causes that are important to them,” Nash says. “It has been shown that people who set goals give more.”

Turmoil Or No

Fidelity Charitable says that 59% of its clients are considering giving more to charity this year, even though giving is often one of the first things cut from budgets during times of economic woe.

Jodi Rosen, the director of business and product development at Vanguard Charitable, a donor-advised fund, says that when it comes to things like estate planning, giving still plays a role no matter what the markets are doing. “This comes up even as donors are considering the volatile markets,” Rosen says. “They are still thinking about leaving a legacy.”

This article was written by Karen Demasters and originally published in Financial Advisor magazine.