retirement

The Path to Making a Charitable Impact

Giving back to the community or supporting important organizations is a noble cause. But you need to consider the options available to have the greatest impact.

You’ve achieved great professional success. You’ve been fortunate to ensure your family is taken care of financially. Now, you’re ready to give back to your community or support worthwhile organizations that further causes you believe in.

Perhaps you and your family sat down and developed a list of organizations you want to support. You may even have a number in mind to draw from when others approach you to make a financial difference. While this “checkbook philanthropy” approach can feel like you’re doing some immediate good, is giving back reactively really part of a strategic giving plan? Is it better to make ongoing donations of varying amounts to a handful of nonprofit organizations? Will going either of these routes accomplish your larger philanthropic mission?

You need to ensure your financial support makes the greatest impact and is the most logical charitable path for you. You’ve thought about “where” to direct your giving, but now you have to consider the “how.” Many new channels are emerging that are transforming the charitable giving process. Ultra-high-net-worth individuals and their families are exploring hybrid techniques, such as crowdsourcing, impact investing, green investing and social investing.

If you’re not prepared to explore these options, there are established avenues available that allow you to be disciplined and intentional about how you and your family manage your donations. These options can also provide a positive impact upon your family and be a part of your strategic giving plan, whether involving family with directing the charitable giving, creating mission statements or obtaining an overall education about and engagement with the charities.

Charitable Trusts: Flexibility with Dual Goals

Charitable trusts, such as a charitable lead trust, allow you to make gifts using trust arrangements that split the benefits of the gift between one or more non-charitable and charitable beneficiaries. As the trust is considered irrevocable, any assets placed in it are removed from your estate.

Transfers are gift-tax-free and can create a beneficial income-tax charitable deduction. This giving option provides flexibility in addition to tax benefits, with the trustee having the ability to allocate taxable income to various parties, including yourself, a beneficiary or a third party. For example, with a charitable lead trust, you could split the interest earned on the assets within the trust between a charitable organization and a beneficiary, with both realizing tax savings.

While trusts can be complicated to understand, they are often powerful charitable vehicles if you want to accomplish hybrid goals for both your family and your community.

Donor-Advised Funds: Low Cost with Tax Incentives

A donor-advised fund (DAF) allows a donor to make irrevocable contributions by opening an account and gifting cash, securities or other financial instruments. The donor surrenders ownership of these assets and has only advisory privileges over the distribution of the charitable grants to the money manager or donor adviser.

A donor-advised fund is easy to set up and maintain, generally has low administrative setup and registration costs, and creates a level of privacy for donors and recipients. Donors also receive tax deductions for contributions to a DAF and avoid capital gains tax if donating appreciated equities. The investments also grow free of estate and income taxes.

Private Family Foundation: Control with Legacy Building

A private family foundation (PFF) is a distinct, separate legal entity privately funded by a donor or donors created with the specific purpose of contributing to charitable causes. A PFF is an option for long-term charitable gifting goals and provides the ability to fund charities with larger gifts. In addition, a donor can maintain decision-making control over the underlying assets, investments and distributions. While more time-consuming, costly to maintain and complex to administer compared to other charitable giving techniques, a PFF can provide families with a lasting family legacy. Family foundations are commonly used to facilitate family governance, which educates future generations about family wealth, passes down family values and helps increase family bonds.

The path to charitable giving does not begin or end with the options briefly outlined here. Regardless of the vehicle you choose, you should start by knowing how much you can give to the community and follow a giving path that makes your desired impact.

SEI Private Wealth Management is an umbrella name for various wealth advisory services provided through SEI Investments Management Corporation (SIMC), a registered investment advisor. This information does not represent investment advice.

SIMC does not provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax adviser.

About the Author

Michael S. Farrell

Managing Director, SEI Private Wealth Management

Michael S. Farrell is Managing Director for SEI Private Wealth Management, a business unit of SEI that provides private wealth management solutions, serving high-net-worth individuals and families.

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