Going Long: Building a Legacy of Family Philanthropy

Fam Phil Pic

by Ami Nahshon

Introduction

For a substantial number of wealthy Americans, establishing charitable foundations and family funds has become an attractive and tax-effective way of channeling philanthropy, and the proliferation of such vehicles has reached unprecedented levels.

In the US alone, roughly 100,000 private foundations and 250,000 donor-advised funds today hold some $1 trillion in assets. (For perspective, that’s more than $2,500 for every man, woman and child in America.)

The bulk of these assets are typically set aside in long-term portfolios whose income drives charitable grants in perpetuity. Let’s call this strategy going long. Increasingly though, spending down of charitable assets during one’s lifetime – going big – has become an attractive option for growing numbers of philanthropists.

“Like Bill and Melinda Gates, some believe they can make deep investments to address today’s biggest problems,” says Elliot Berger, managing director at Arabella Advisors in New York City, “and that other donors will emerge in the future to tackle the problems of tomorrow.” Or so the argument goes by the proponents of going big.

Hundreds of Google citations on the subject testify to the increasing frequency with which family and public foundations, large and small, are deciding to “go big” and spend down their charitable assets rather than entrust future generations with the keys to the philanthropic safe.

Going Long or Going Big?

As reported by the Bridgespan Group, only about 5% of the total assets of America’s largest foundations has been historically held by entities in the process of spending themselves out of existence. By 2010 though, that number had climbed to 24% and has presumably grown since.

What are the implications of this going big trend to spend-down charitable assets? What might it mean for the long-term well-being of our American society if some of the great philanthropic fortunes were to spend themselves out of existence? Is there evidence that accelerated current spending can solve social problems to a degree that will reduce future funding needs?

And what of the assumption that the next generation’s wealth will be shared as generously as the last’s to address the challenges of their day? What does the behavior of today’s privileged younger generation tell us about their likelihood of inheriting the charitable impulses of their parents – the grateful post-Depression, post-World War II generation? And what can be done today to prepare future generations to fulfill their collective responsibilities?

Obviously, these sorts of questions deserve a much deeper exploration than can be achieved in these brief paragraphs. But let me share a few observations that derive from my experience helping families structure their philanthropic giving, and from observing decades of both philanthropic success stories and family disasters.

It’s easy to understand the impulse to “go big” and spend down charitable assets rather than entrust the philanthropic wealth – and responsibility – to future generations. Because spend-downs typically disburse funds at a higher rate than foundations established in perpetuity, donors can be especially impactful if they concentrate their giving in a highly focused area of interest. They may believe that “going big” over a shorter period of time will give them greater influence, produce more dramatic results and, for some, offer greater personal satisfaction.

Strengthening the spend-down argument, I’ve encountered more than a few charitable donors who wonder about their children’s future interest in philanthropic giving, or about how their values, identities and priorities might diverge from those of their parents. These, in fact, are entirely reasonable concerns. It is surely legitimate for parents to worry about whether future generations will share their forebears’ commitment to social responsibility in general, and even more so to specific values, beliefs and causes.

But spending down is fraught with its own risks, based on a series of fairly speculative assumptions that raise important questions: Are today’s priority needs necessarily more pressing than tomorrow’s, since no current funder can know precisely what the future holds? Does sufficient knowledge exist to solve today’s problems once and for all, so we can stop funding such needs in the future?

Granted, the Gates Foundation may indeed extinguish malaria during our lifetimes and save countless future lives in the developing world. But what about hunger, poverty, climate change and the myriad of emerging threats to humanity that we may not fully recognize today?

As the title to this piece suggests, I come down strongly on the side of creating sustainable structures for multigenerational family philanthropy, wherever feasible. Wealth earned over multiple generations or through the extraordinary success of one generation should ideally be used to build social capital with lasting benefits, much as museums, universities and hospitals are built using present capital dollars with the intent of providing for the long-term good.

In my view, and executed correctly, the opportunity to create and sustain a shared space for collaborative, long-term family philanthropy outweighs the short-term benefits of spending down – both for the family and for society. And there is much that can be done to mitigate the risks of “going long”.

Raising the Next Generation of Givers

In my experience, accumulated over the course of a professional career working with and observing philanthropy and philanthropists, I believe there is a strong argument to be made for multigenerational philanthropy based on the notion that wealth accumulated over multiple generations or through the extraordinary success of one generation should ideally be used to build social capital with long-term, recurring benefits.

Paraphrasing Warren Buffett, a philanthropist-friend once told me that he intended to leave enough for his children and grandchildren so that they could do anything, but not so much that they could do nothing.

Creating a legacy of shared family giving is one of the best available ways of preparing future generations for leadership roles in their communities, based on an understanding that inherited wealth is not only a means for personal gratification, but carries with it a responsibility for advancing the public good.

There are of course legitimate first-generation concerns about whether children’s values and charitable priorities might well diverge from those of their parents. And the jury is certainly still out as to whether members of the “entitled generation” now coming into their own will share their post-war, baby boomer parents’ commitment to collective responsibility and sacrificial giving.

There is reassuring news, though, for those concerned about passing on charitable assets to their children’s stewardship. Not only is there much that can be done to train the next generation in the art of philanthropy and social responsibility, but the process can produce enormous psychic benefits for both generations and bring families together around a core of shared values while respecting diverse interests and priorities.

What then can parents (or grandparents, aunts or uncles) do to nurture a spirit of giving among the next generations and to instill the values and tools needed for responsible financial stewardship and effective philanthropy?

First and foremost, in teaching philanthropy as in most other important life lessons, adults need to authentically model the values and behaviors they hope to instill in their children, starting early on. The agenda is fairly straightforward. Social consciousness and engagement built on respect for others and concern about their well-being; a curiosity about the world around us and a commitment to continual learning; and a spirit of generosity, volunteerism and charitable giving would seem to be a good place to start.

Parents can engage their children, from a young age, in “family activism”: working together on a hands-on community project (preparing a meal or a bag of groceries for a food pantry, cleaning-up a neighborhood park, caring for an abandoned animal); writing a letter to the editor or a city council member on an issue of family concern, perhaps one identified by a younger family member; and setting aside some dollars for collaborative “mini-grantmaking”.

Encouraging children to set aside a portion of their allowance, gift money or chore income for charitable contributions is another excellent way to teach generosity and sharing. It is also not unheard of for children as young as elementary school age to participate from time to time in family discussions about charitable contributions, or even in age-appropriate family foundation convenings.

As children mature into their teen and young adult years, encourage them to participate in community-sponsored youth giving circles; mini-foundations convened and staffed by a growing number of community foundations to teach basic priority-setting, research and grantmaking skills. In many communities, sophisticated collaborative giving/grantmaking groups exist for young professionals and, if properly staffed and led, provide an excellent environment for developing sound, strategic philanthropy skills.

The payoff for the first generation is the enormous psychic satisfaction that can derive from seeing children follow in their parents’ footsteps: taking up community leadership roles, supporting important causes and adding another chapter to the family’s philanthropic legacy.

But the payoff for succeeding generations is no less compelling: the feeling of pride and satisfaction that comes from being entrusted with the responsibility of managing important philanthropic assets, and with the authority to participate in determining how those assets can be used in the most relevant and effective ways in an ever-changing world.

Philanthropy, generosity and collective responsibility are values that can be modeled, taught and passed from generation to generation. Done successfully, these lessons can prepare children and grandchildren to carry forward a family tradition of giving while laying the groundwork for good citizenship, civic participation and leadership.

Multigenerational Models that Work

This final, “how to” section will compare three alternative models for structuring family philanthropy, each of which – properly planned and managed – can produce meaningful and satisfying long-term results, and will conclude with a few practical tips for making multigenerational family philanthropy work. But before diving in, allow me to note the obvious:

The information provided here is general and educational in nature, and is not intended to be, nor should it be construed as, legal or tax advice, neither of which this author is qualified to provide. Readers are strongly encouraged to consult with their tax advisor or attorney before making significant charitable decisions or establishing a charitable giving program.

Now that we’ve gotten the disclaimer out of the way, let’s compare some of the key features and benefits of donor-advised charitable fundsprivate/family foundations, and supporting foundations; three popular structures for managing current giving and/or multigenerational family philanthropy.

Donor-Advised Charitable Funds

A donor-advised fund is a charitable savings account of sorts, established within and managed by either a traditional public charity or community foundation, and more recently, by a nonprofit subsidiary of a commercial financial institution (Vanguard and Fidelity being among the largest in this category).

Donors can brand their donor-advised fund and name successors or charitable beneficiaries, while contributions are placed into separate donor-advised fund accounts where they can be invested and grow tax free.

The donor-advised fund allows individuals to make charitable contributions, receive an immediate tax benefit and then recommend grants from the fund over time. (More on that later.) Contributions are irrevocable, and donors can contribute to the fund as frequently as they like and then initiate grants to their favorite charities when they are ready, with no minimum annual distribution requirements.

Donors receive an immediate tax deduction when they make a charitable contribution to a donor-advised fund. Liberal deduction rules allow up to 50% of adjusted gross income (AGI) for gifts of cash and up to 30% of AGI for gifts of appreciated securities, mutual funds, real estate and other assets, and there is a five-year carry-forward deduction on gifts that exceed AGI limits. By donating appreciated assets held for more than one year to a donor-advised fund, donors can generally avoid capital gains taxes.

Donor advised funds are not required to file separate tax returns or accountings. Operating expenses are generally limited to investment and transaction fees, and there are usually no other significant costs associated with donor-advised funds.

Prospective donors need to be aware though that the continuing relationship to the fund is advisory only, with grants being “recommended” by the donor to the nonprofit fund holder, who retains ultimate legal control and approval authority over all distributions.

Donor-advised funds can be a low-cost, easy-to-use vehicle for current or even multi-generation charitable giving, although the lack of independence and the limitations on grantmaking and governance authority make them generally less attractive to larger donors seeking to establish a long-term mechanism for family philanthropy.

Private/Family Foundations

If a donor-advised fund is the simplest but least autonomous vehicle for managing charitable family giving, the private foundation is the Rolls Royce of multigenerational family philanthropy structures.

Family foundations are one form of private foundation as defined in the tax code; IRS-approved independent nonprofit organizations established and funded primarily by private contributions for the purpose of supporting charitable activities through grantmaking to other nonprofit organizations and programs. One or more family members serve as officers or board members of the foundation, and they or their relatives and friends and, in many cases, second- and third-generation descendants, participate in governing and/or managing the foundation throughout its life.

Tax deductions for cash gifts to private foundations are generally capped at 30% of AGI per year, and 20% for property gifts. Assets transferred to a private charitable foundation, and appreciation of invested funds held within the foundation, are exempt from capital gains or estate taxes.

In contrast with donor-advised funds and supporting foundations, which are not subject to IRS minimum distribution requirements, private foundations are required to distribute 5% of their assets annually, calculated on the value of both financial holdings (stocks, bonds, cash) and non-cash assets (real estate, art collections and the like). Distributions in excess of 5% can be carried forward over a five-year adjustment period.

Beyond these minimum annual distribution requirements, which can be problematic for foundations holding substantial illiquid assets, private foundations must comply with all the regulations governing other nonprofit organizations: securing and maintaining tax exempt status, annual state and federal tax filings, accounting and audit regulations, banking, accounting and investment management, insurance coverages, staffing costs, start-up and periodic legal fees, and other operating expenses. In addition, private foundations are subject to an annual federal excise tax of 1-2% on net investment income. Clearly, a Rolls Royce is not for everyone.

On the other hand, private family foundations provide substantial benefits that make them an attractive option for certain high net worth families. Donors can make tax-deductible donations and still remain in control of the investment and management of the funds as trustees/board members. Trustees have wide-ranging autonomy, within the confines of IRS and state regulations, to establish grantmaking and investment policies; to specify bylaws and provisions for multigenerational governance; and to appoint professional staff, advisers and managers to lead the day-to-day activities of the foundation.

In short, private family foundations provide a fully independent – although costly and labor-intensive – framework and identity for community engagement, and can serve as an excellent platform for succeeding generations of philanthropists and community leaders. For good reasons, they are often the vehicle of choice for families of major wealth, but are generally less suitable – and less practical – for most others.

Supporting Foundations

In between the do-it-yourself, one-size-fits-all donor-advised charitable fund and the costly, complex but fully independent private family foundation lies a less-known and under-appreciated middle ground: the supporting organization as it’s known in the IRS lexicon, but to which we’ll refer here as the supporting foundation.

Full disclosure: I’m a big fan of supporting foundations – having helped create and serve on the board of several – which combine many of the most attractive benefits and features of the private foundation with the administrative and technical supports available to donor-advised funds.

A supporting foundation is a tax exempt charitable organization that is created under the auspices of another public charity such as a community foundation or a similar entity (known as the “supported organization”).

While the supporting foundation enjoys much of the independence of a private foundation – the freedom to appoint family directors or trustees, set its own investment and funding policies, and make independent grant decisions – it is one of the few organizations that receive the benefits of public charity status without having to satisfy the IRS public support test, or comply with minimum distributions and pay the federal excise taxes required of private foundations.

The IRS logic holds that the scrutiny provided by the overseeing public charity justifies exemption from some of the special rules and regulations to which private foundations are subject. This opens up many benefits to certain donors, including those who might want to gift closely held stock or other assets that cannot be held by private foundations.

In exchange for these relaxed IRS rules, the supported organization must hold a simple majority of seats on the supporting foundation’s board in order to satisfy the technical control requirements of the IRS, and its grantmaking must support activities aligned with the purposes of the supported organization.

In most cases, where for example the supporting foundation is affiliated with a community foundation-type entity, the mission and purposes of the supported organization are usually sufficiently broad as to allow wide grantmaking leeway to the supporting foundation. As a practical matter, the donor family enjoys significant deference, as it is obviously in the supported organization’s self-interest to exercise its authority with a light hand, and in a way that respects the goals and needs of the family.

Perhaps the greatest benefit of a supporting foundation is precisely its affiliation with an experienced and well-staffed host foundation or charity. The availability of expert staff resources – in management, grantmaking, investment and financial oversight – is a huge asset to families, particularly to supporting foundations that intend to “go long”; that is, to involve future generations in overseeing the activities of the foundation.

Private foundations too often lose their way when the founding generation is no longer in the room to keep the ship on course. The stability provided by a host community foundation or charity and its professional staff can play a pivotal role in mediating differences among succeeding board members, and in helping the family balance the goals and priorities of the founders with those of the next generations and with changing needs and times.

Tips for Making Multigenerational Family Philanthropy Work

Tip #1: Creating a multigenerational family legacy of philanthropy and social responsibility is a lifelong enterprise that starts on day one of a family’s life. It can’t – or shouldn’t – begin with a discussion between aging parents and their adult children about creating a charitable fund.

Rather, as I argued earlier, in teaching philanthropy as in most other important life lessons, adults need to authentically model the values and behaviors they hope to instill in their children, beginning in early childhood. A curiosity about the world around us, a social conscience built on respect for others and a concern for their well-being, and a spirit of generosity, volunteerism and giving are building blocks of such a family legacy.

These are not genetic traits passed down in our DNA. They are muscles that need to be exercised and developed.

Tip #2: Parents and other relatives hoping to engage their next generation(s) in family philanthropy need to create space – from early on – for divergent social and political views and, later, for divergent charitable interests and priorities.

I have been privileged to serve as an outside director of a supporting foundation created and led by fairly conservative parents who have respected the remarkably diverse choices and interests of their adult children. Their family foundation table serves less as a place where everyone reaches consensus and more as a place where respect is demonstrated through the diversity of grantmaking across a wide range of interests and priorities.

Tip #3: Don’t assume that succeeding generations will understand your values, motivations or charitable intent. Create a charitable legacy document – or an ethical will – to commit these ideas to writing. Whether a few paragraphs or book-length, your children and grandchildren will treasure it forever.

Each succeeding generation will add its own unique chapter to the family’s philanthropic legacy. Issues that were once the focus of the founder’s giving will have evolved or perhaps even resolved, and new challenges/opportunities will have emerged. But family philanthropy works best – and will be most gratifying to family members – when new priorities and decisions are informed by the vision of those who came before.

Tip #4: Work in the present but plan for the future. Intra-family relations invariably change and evolve, sometimes for the worse in the absence of parental mediation and leadership. Successful and sustainable structures and policies anticipate those changes and take them into account.

Second- and third-generation family foundations often succeed or fail based on the mechanisms that have been put in place for facilitating intra-family collaboration and managing conflict. The importance of building a team of investment, legal and charitable advisers (in the case of private foundations) or drawing on the vast array of community philanthropic resources for learning, guidance and leadership (as is one of the many benefits of supporting foundations) cannot be overstated.

Concluding Thoughts

Successful multigenerational family philanthropy doesn’t magically materialize. It happens when the various components discussed here are carefully planned and cobbled together. If I were to reduce the formula for success to a simplistic equation, it might look something like this:

Social consciousness + family activism + a sound family philanthropy structure + reliable partners/advisers + a culture of respect for difference/diversity = successful multigenerational family philanthropy

The largest wealth transfer in American history is now underway, with more than $50 trillion expected to change hands over the next generation or two. At the end of the day (figuratively and literally), each of us has the right to plan for the transfer of our share of those assets – however small or large – beyond our lifetime in the way we see fit.

My view though is heavily biased by a fundamental belief that inherited wealth is not only a means for next-generation personal gratification, but carries with it a serious responsibility for contributing to the public good. And creating a legacy of shared family giving is one of the best available ways of preparing future generations for exercising that responsibility.

(On a parenthetical note, protecting policy incentives that encourage significant inter-generational transfer of philanthropic assets is one of the major arguments in favor of maintaining the estate tax; a position, not surprisingly, that I fully support. Legislative proposals to severely limit or abolish the estate tax will remove a significant philanthropic incentive, and would almost certainly result in a major diminution of charitable giving.)

There are, of course, legitimate arguments in favor of giving now (going big) rather than committing substantial assets to long-term family philanthropy (going long). And there are certainly risks and unknowns associated with entrusting future generations with the philanthropic checkbook.

But it is my considered opinion that the risks and opportunity costs of spending-down often outweigh the benefits, however attractive those benefits may seem in the moment. And the readily available philanthropic supports that I’ve outlined – especially those associated with supporting foundations – can and do substantially mitigate many of those risks.

As Robert F. Kennedy once said, “Let no one be discouraged by the belief that there is nothing one person can do against the enormous array of the world’s ills, misery, ignorance, and violence. Few will have the greatness to bend history, but each of us can work to change a small portion of events. And in the total of all those acts will be written the history of a generation.”

All the more so when families commit to changing that portion of events across the generations, to paraphrase RFK, for in the total of all those acts will be written the history of humanity.

© 2015 Ami Nahshon

Ami Nahshon is principal consultant at Ami Nahshon Strategic Consulting, offering consulting and coaching services to help nonprofits, foundations and their leaders optimize organizational mission, strategy and performance.

This article was originally published as a three-part series by the PND/Philanthropy News Digest,  a service of the Foundation Center

Sources consulted for this article: The National Philanthropic Trust (nptrust.org), the Council on Foundations (cof.org) and the Planned Giving Design Center (pgdc.com)

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About Ami Nahshon

Ami serves as principal consultant and managing director of Ami Nahshon Strategic Consulting, working with nonprofits, foundations, social businesses and their leaders to optimize organizational strategy and performance.
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