By David P. Murphy
It hasn't been a good time for good deeds in recent years. In 2009, estimated charitable giving in the U.S. declined by 3.6%; giving to foundations dropped 8%; and foundation grant-making fell by 8.9%. It's clear that philanthropy has been impacted to a degree because of uncertainty in the economy, but many high net worth and ultra high net worth individuals remain passionately committed to helping other, and generosity levels are still impressive. In 2009, philanthropists gave $303.75 billion, which represents 2.1% of Gross Domestic Product, close to the historical high of 2.3%.
Clarifying a Philanthropic Vision
The wealthy are frequently approached by numerous nonprofits for donations, and they often respond by writing checks and attending benefits. The result? Donations are spread thinly across many groups for whose causes there may or may not be a true passion and commitment. If you're heavily involved in giving, good for you; but it's important to give in a way that's focused, intentional and intelligent. Do the organizations you support align with your core values and beliefs? Do you have a say in how funds are spent? How much of each charitable dollar goes to the programs the group supports, as opposed to administrative costs and overhead? Major philanthropy can involve complex financial decisions that have major ramifications for you, your family, and the organizations you support.
Managed Philanthropic Strategies: Donor Advised Funds
One popular strategy for integrating philanthropy into the rest of your financial life is via donor advised funds (DAFs). A DAF is an IRS-approved public charity that mainly solicits funds from the general public and performs services directly. Donors can give cash, appreciated securities and in some cases, restricted or closely held stock, real estate and a variety of other assets.
Essentially, DAFs combine investment management, philanthropic advisory services and administrative services under one roof. No need to write checks or gather contribution acknowledgements for tax purposes. Here's how it works: A donor recommends charities to which the fund issues grants, subject to the approval of its board of directors (although most public, tax-exempt charities will be acceptable). If necessary, a donor can receive professional guidance to help identify suitable candidates for grants, as well as to help determine how grant money is used by the nonprofit recipients.
Assets are invested professionally, and although the DAF has final say on all investment decisions, it will generally invest in accordance with a donor's objectives and personal preferences. Another beneficial feature of DAFs is that contributions are tax-deductible and invested assets grow tax-free.
Instead of a donor advised fund, many affluent families prefer an alternative philanthropic vehicle: a private foundation. Unlike public charities, private foundations have a principal fund (typically from a single private source, such as an individual, family or corporation) and perform services indirectly, mostly by making grants to other nonprofits. Foundations tend to be established by individuals and families who commit substantial sums to charitable causes, typically over $250,000 annually.
Foundations offer the ultimate in control over grant-making activities. Grants can be made to any organization that aligns with the foundation's mission and with stipulations on how they're actually used. They also provide an opportunity to instill philanthropic spirit in other family members. For many of those who opt for a foundation, the ability to ensure philanthropic involvement in subsequent generations is a major factor in choosing this approach. And finally, they offer individuals and families the opportunity to honor someone by naming the foundation after them.
Setting up and running a foundation can be expensive and time-consuming, however. In fact, it's much like setting up and running a corporation, with the additional burden of having to apply for tax-exempt status and meet numerous nonprofit reporting requirements. Some foundations hire professional staff at considerable cost to perform these functions; others outsource foundation functions.
So which is better: a donor advised fund or a private foundation? That depends completely on your individual family and financial circumstances, philanthropic vision and much more.
Major philanthropy can involve complex financial decisions that have significant ramifications. To help ensure that charitable aspirations aren't fulfilled at the expense of other important objectives and vice versa, it's vital to have a strategic approach that integrates charitable efforts effectively with an overall wealth management plan. It calls for in-depth conversations with your financial advisor and your tax and legal advisors.
David P. Murphy is senior vice president/investments, The Murphy Wealth Management Group, 1251 Avenue of the Americas, New York, NY 10020; 212-626-8895; email@example.com; www.ubs.com/fa/davidpmurphy.