As a personal wealth manager, I work with many families who come to me with questions about how best to prepare future generations for wealth transfer while ensuring that family values of stewardship and generosity are passed on along the way. While some families have created family foundations, others can opt for a much simpler process using a donor-advised fund (DAF).
Similar to a family foundation, but without many of the governmental regulations and paperwork, a DAF can be used by the family to create generational engagement and carry out the family legacy. By empowering each family member with a sense of ownership and inclusion toward giving, a DAF can present an opportunity for a family to create a strategic giving plan that fulfills the mission statement and legacy goals of the family.
Creating a Plan
A DAF can be created simply by opening an account and funding it with the initial minimum amount, which is typically $5,000. From there, the funds can stay in the account until the donor is ready to give a grant to a qualified 503(c) charity. Liquid or illiquid assets can be contributed to the DAF. For cash, donors receive a deduction of up to 60% of their adjusted gross income (AGI); and for gifts with long-term capital gains such as stocks, real estate or business interests, the donor will receive a deduction of up to 30% of their AGI.
To ensure best practices for family giving, families should meet regularly to discuss the charitable intent of the family. During this meeting, the family discusses their overall giving strategy and creates a giving policy that outlines the family’s giving budget. Often, families will give each child a set amount to be given to charity, thus creating further engagement. Choices of where to give the money can be governed by an overall philanthropic giving policy, or the children can be given free rein to pick a charity that suits them. For further family engagement, visits to the charity with the entire family can create additional engagement and enthusiasm for giving back.
Benefits of Engaged Giving
Establishing a practice around family giving can result in benefits beyond the actual charitable gift. Regular family meetings where participation is encouraged and familial financial affairs are discussed, better prepare future generations for inheritance that they will inevitably be receiving. All too often, the details of the family’s finances are not discussed, leaving future generations unprepared to manage what is given to them. In that same vein, engaging in open discussions around wealth and family values provides an opportunity to discuss the family’s principles around fiscal responsibility. Starting these discussions early and having them often teaches financial acumen and empowers future generations to make sound financial decisions in the future.
While engaging the family on a regular basis can create more work at the outset, those who prepare early, enjoy the benefits of a more engaged and prepared family to better preserve the family legacy.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.