Philanthropy has a significant role in the overall planning picture for many families and can have a number of benefits, such as tax benefits, life satisfaction and the opportunity to pass values to the next generation. These benefits are relevant regardless of philanthropic vehicle – including outright “checkbook” philanthropy and more structured vehicles, such as a donor-advised fund or private foundation.
Philanthropy can help reduce overall income and transfer tax exposure. Philanthropists may receive benefits in the form of income tax deductions for current gifts, and gifts to charity at death will be exempt from the federal estate tax. While many studies have anticipated declines in charitable giving as a result of recent tax legislation, taxes are not generally the primary driver of philanthropy.1 Further, high-income philanthropists and those with potential for estate tax exposure will continue to receive tax benefits.
Philanthropists – big and small – give because they want to give. They may want to leave a permanent legacy or address a specific issue in the community. Research shows that being engaged in philanthropy – both giving and volunteering – results in an overall increase in life satisfaction. Philanthropy may actually make you happier.2
Passing Values to the Next Generation
In addition to creating tax benefits and increasing happiness, philanthropy creates a platform for teaching the next generation about values that are important to the family.
Role in the Community
Many families feel connected to a specific geographic community. They have served on school boards, attended houses of worship and helped their less fortunate neighbors. Many have built their businesses and felt supported, encouraged and mentored by members of their community. These families may make charitable gifts in support of their specific geographic community because they feel a specific connection to that place.
On the other hand, a family may define its community without respect to geographic boundaries, but by some other purpose that brings its members together. Consider, for example, the Lost Boys of Sudan, who fled Sudan during its civil war. Approximately 3,600 youth were accepted into the United States. They began arriving in fall 2000 and settled in small groups from Seattle to Boston.3 Those who embraced the arrival of these boys may make charitable gifts in support of this community – one not defined by geographic boundaries, but through a connection to this specific experience or purpose.
While there are different ways to define community, one thing is certain: Subsequent generations of family members will define their own communities. With an ever-increasing mobile workforce, it is likely that future generations will move away and establish themselves in communities with different geographic boundaries. And those who define community with respect to specific experiences will have different experiences than their predecessors. As a result, the sense of community within a family will evolve over time. Still, no matter how family defines it, what is important is to begin to instill the importance and value of community early on.
Bill Gates, who is the founder of Microsoft and, along with his wife, Melinda, one of the country’s leading philanthropists, says his mother never stopped pressing him to do more for others. When she was very ill with cancer, she wrote a letter to Melinda, closing with, “From those to whom much is given, much is expected.”4 Many philanthropists share this view. They have volunteered, served on boards and provided financial support to organizations within their community because they feel a responsibility to do so. They may wish to instill in the next generation this same sense of responsibility within their community of choice.
Philanthropy can be used to further that goal. The next generation can use the example of their predecessors as a model regarding the role of the individual in a community. Each family member can be encouraged to find a meaningful connection to his or her own community and to nurture that connection through volunteer service and financial support.
Financial Literacy and Discipline
Many families use a structured vehicle for giving, such as a donor-advised fund or private foundation. As part of the process around selecting grant recipients, families often review programmatic and financial information from potential grantees. In terms of programs, families want to understand an organization’s mission and how the current programs address the issues. Regarding financial information, families may review budgets, tax returns and statements of financial position.
Reviewing financial information is helpful in understanding an organization. It also creates an opportunity for families to discuss myriad financial concepts with the next generation. For example, a nonprofit’s statement of financial position, which is similar to a for-profit balance sheet, will create opportunities to discuss the components of a financial statement and how these components can be used to evaluate an organization’s strength.
These conversations may illuminate for the next generation the manner in which a family’s values toward finances influence its evaluation of a charity. Consider, for example, a family that reviews a charity’s financial statements and discusses its perspective that the charity needs to build its unrestricted endowment. The next generation may conclude that the focus on the endowment is an indication that the family values financial stability, which can be extrapolated to personal financial matters.
Consider, also, an entrepreneurial family that reviews the financial information of a charity that relies heavily on funding from one source (for example, one grant or one private foundation). The family might discuss the risks of this concentrated revenue source and the implications if the funding were reduced or eliminated. These conversations may help the next generation understand the family’s views on risk and see the parallels in the family business.
As part of Brown Brothers Harriman’s (BBH) values-based planning work, we work with families to help them identify the values that motivate their decision-making process so that they may align their planning decisions with their values. Philanthropy can be used to communicate these values.
Example. Molly is an avid hiker who once took a semester away from college to hike the Appalachian Trail. Her husband, David, loves fly fishing. David and Molly create and fund a private foundation with a focus on environmental causes and ask their three children to serve on its board. David and Molly engage in a values-based planning exercise with their BBH wealth planner and identify two core values: sustainability and effectiveness. These values might inform their private foundation grantmaking strategy. Because sustainability is a core value, they could decide to focus on environmental organizations that are seeking sustainable solutions for preserving natural and recreational resources. And because effectiveness is a core value, they might decide to focus on organizations whose solutions are based in science and have had a demonstrated impact.
The foundation could evaluate grants through these lenses: whether the solution is sustainable and whether it has demonstrated effectiveness. Through these conversations, the kids would develop an understanding of their parents’ views on sustainability and effectiveness. What does a sustainable solution look like? What makes an organization sustainable? What are the threats to sustainability? How is effectiveness demonstrated? Can the demonstrated effectiveness be replicated?
As the kids become more involved, they may wish to pursue different grantmaking paths and ask to make grants to different organizations, to organizations in a different geographic region or even to organizations that are completely outside of the environmental sector. The family’s conversations relating to sustainability and effectiveness can be relevant in the evaluation of any grant. Molly and David have laid the groundwork for their core values and are optimistic that their values will be carried forward, even if the grantmaking strategy evolves over time.
Philanthropy has many benefits – both for donors and for the organizations that receive their support. In addition to reducing taxes and increasing happiness, philanthropy can be an effective tool for engaging the next generation around values that are important to the family.