Putting the “Family” in Family Philanthropy

For many individuals, philanthropy is one of the more gratifying parts of estate planning. Adding in a multigenerational component can make it even more meaningful and compelling. Just as every family is unique, so is their philanthropic approach, and there is no single way to involve a family in philanthropy.

Like all planning, charitable planning involving multiple generations starts with the family’s needs, interests, assets, and goals. Charitable planning really is like investing: a family needs to think about its portfolio of assets, but also its portfolio of interests. Some assets are more tax-effective than others for funding charitable gifts, and different structures will be more effective for different assets and different philanthropic goals. A family with income needs and highly appreciated securities as its principal assets will approach things differently than a family that does not need additional income, but whose principal asset is a closely held business. And families that want to benefit a specific charity will be looking for a different solution than a family that wants to create a grantmaking entity for the long term. As a family develops its own philanthropic portfolio, it needs to consider what assets work best for family philanthropy, and which assets may be best for personal philanthropy or kept for family investment. But even as they think about the assets to give, families also need to think collectively about their philanthropic interests.

Nothing is sadder than watching a charitable gift unravel, bringing disappointment and loss to both charity and family. In addition to the technical aspects of deciding the right structure and the right assets for funding a multigenerational gift, there are enormous communication needs. More even than with other charitable gift planning, there needs to be communication within the family. A multigenerational gift entirely structured by the senior generation and force-fed to the next generation is likely to fail. Donors cannot assume that family members will share their passions or want to be involved in the family’s charitable endeavors. And surprising the family at death can be a big mistake that can lead to hurt feelings, confusion, family quarrels, and perhaps even litigation.

And as with every charitable gift, there is a need for clear communication with the charity. It is important to make sure that a charity is in a position to accept a gift and that it is not surprised by it. For example, a museum that you feel would be the perfect recipient of your prized Picasso may not even be able to accept the painting because it cannot afford to store and insure it. With advance communication, you could seek out a different charity or endow a fund to maintain the gift.

Successful multigenerational philanthropy is not giving by example, it’s giving by collective family decision making. Together, you need to first determine what level of philanthropy is right for your family now, and also how that might evolve as your family evolves.

For some families, simply writing a check to a charitable organization that supports causes the family believes in may be the right level of philanthropy. Attending charity-sponsored fundraising events may also be a good fit. Using a holiday when the family is gathered together, such as Thanksgiving, to hold an annual family philanthropic meeting can help facilitate discussion on what causes to support over the year. Engage your children in the process by encouraging them to use a portion of any financial gifts they receive for birthdays, holidays, Bar/Bat Mitzvahs, weddings, and other events to support a charity that they care about. The important part is to encourage children to think about their own causes, creating a culture of giving early on that can extend through multiple generations.

Volunteering time as a family and making a commitment to a charitable organization can be a great way to integrate philanthropy into a family. Seeing first-hand how contributions help those in need can have a powerful impact on children’s desires to give back to their community. Older family members may also want to volunteer to serve on a board or participate in the operations of a charitable organization.

Some families may wish to make a formal philanthropic effort in the form of planned gifts, such as establishing a scholarship fund at a school that has special meaning to their family. Or, you may want to consider vehicles such as private foundations, donor advised funds, and charitable lead trusts, which offer opportunities for long-term gifts that engage the family for generations and also provide potential tax-saving benefits.

•     Outright, unrestricted gifts

Not all multigenerational gifts need to be complex vehicles. A family can make an outright gift to charity as a multigenerational gift simply by having family members agree on a charity they care about and each making a separate contribution to it. Each contribution can reflect tax planning appropriate to that family member. For example, a parent might make a fairly large gift of  appreciated securities held for more than a year, mitigating capital gains tax on  future sale of the securities and potentially obtaining an income tax charitable  deduction for the full market value of the gift. On the other hand, a young adult  child might simply make a gift of cash, and most likely on the internet.     

•     Restricted gifts 

Often a family can carry out its values effectively by making a restricted gift to a charity. For example, a family might support a local community organization but limit its gift to specific programs for local conservation. In some cases a simple restriction can be accomplished just by a cover letter or even a notation on a check. However, sometimes a family may want a fund established at a charity to carry out a specific purpose permanently, for example a scholarship fund at the college or university attended by many family members. Many restricted gifts will require a gift agreement between the donor and the charity, clarifying not only the purpose of the gift, but what will happen in the event that the charity can no longer fulfill that purpose.

•     Private foundations 

Private family foundations are grantmaking entities that provide a way to foster a family’s values and provide a focus for charitable giving. They encourage intergenerational involvement by sharing values and decision making within the family while establishing a long-term legacy for the family. They can also create an endowment to fund future giving, while offering income, estate, and gift tax advantages. A private foundation can be created as a nonprofit corporation or a charitable trust, and it’s important to remember that it is a separate tax-exempt entity. Your family must be motivated enough to accept the complexity of the entity and the responsibility that comes with running it. It’s very easy to fall into the “documents are in the drawer” syndrome and simply write checks as the primary function of your private foundation. Family communication and involvement are key to creating a true endowment that reflects your family’s unique values and engages the family to carry out its philanthropic vision.

A private foundation can also provide a training ground for the next generation on corporate governance, investments, and philanthropy. A family can adopt a trustee or director structure, providing the next generation with the opportunity to serve on committees, such as an investment or grantmaking committee, before becoming a full board member with a full vote. A family can also create different tiers of board members, so that the senior generation has more voting rights than the younger, inexperienced family members.

Please see important disclosures at the end of the article.

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