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How to Help Philanthropically Minded Clients Develop a Charitable Giving Road Map

The sheer number of nonprofits shouldn’t force clients into a self-imposed game of 'eeny, meeny, miny, moe.'

The charitable giving universe can be overwhelming and confusing to navigate as clients embark on a journey with impact as their end goal. Many of us frequently receive donation requests in the mail—or maybe even phone calls—from various charitable organizations.

For the charitably inclined individual or family who wants to give back to their community or endorse specific social causes they care about, selecting and prioritizing which charities to devote their time and financial support to can be daunting. For context, the National Center for Charitable Statistics reports that there are over 1.5 million nonprofits in the United States!

However, the sheer number of nonprofits shouldn’t force clients into a self-imposed game of “eeny, meeny, miny, moe.” Financial advisors can—and should—play a meaningful role in helping clients craft a charitable giving road map that guides them over the long term while also aligning their philanthropic goals with their holistic financial plan.

Below are some best practices and tips for advisors to draw on when working with clients to develop charitable giving road maps:

Start with a mission statement: Clients are often on the receiving end of donation requests from many nonprofits, but no one can give to every deserving organization. There is a broad spectrum of philanthropic causes, from education to animal rights as well as many specific philanthropic focuses ranging from scholarships to combating animal cruelty (to name just a few examples).

At the beginning of a new client relationship, advisors should ask what philanthropic causes and focuses the client is passionate about or which organizations they have donated to in the past, discussing which are most important to them or have made them feel the happiest to support.

An advisor can then help draft a mission statement that narrows philanthropic giving to a maximum of two or three causes, explaining why they are important to the client and how they intend to remedy the identified issue. Geographic scope, which can be local, national or international, should also be defined. (Nonprofits with programs benefiting people and communities in other countries frequently have U.S. affiliates—often with “American friends” in their names—enabling American donors to direct tax-deductible gifts overseas.) An example of an effective mission statement is as follows:

“We will give to local after-school programs that promote college readiness in lower-income school districts. Our charitable giving will seek to bridge the gap in education funding which disadvantages these children in order to increase lower-income college attendance.”

Defining these parameters of “who, what, where, why and how” for charitable giving makes it much easier for clients to methodically evaluate individual donation requests. Ultimately, a client’s mission statement should guide their personalized charitable giving strategy, helping them effectively filter out donation requests by plucking up the confidence to say “no thank you” when a charity doesn’t align with their philanthropic vision.

Conduct thorough due diligence on charities: Clients often have at least one favorite charity in mind when building out their charitable giving road map. However, depending upon a client’s desired impact and the charity’s financial profile, the 501(c)3 organization that they have frequently donated to in the past may not be the best one to give to going forward.

Advisors can research nonprofits to help clients understand if their gifts are making a meaningful impact. Charity Navigator and GuideStar offer reliable data on nonprofit organizations based on 990 tax forms and other materials educating donors on how charities spend their money. Important questions to answer are: What portion of a charity’s budget actually goes toward its programs and services versus how much goes toward administrative costs and fundraising? Are there any financial red flags (e.g., extensive liabilities)? Obviously, a charity that consistently directs the bulk of its budget to programs and services over the years is an ideal candidate for a client’s donations.

Advisors can also reach out to individual charities to ask for more information about their specific initiatives and inquire if there are any funding gaps that could maximize the impact of their client’s donation. Most nonprofits employ donor relations personnel who can answer questions about their current budget, how long they would be able to operate if they didn’t receive another cent from donors and how much in additional fundraising they would need to be able to achieve their stated goals. Donor relations professionals are often eager to engage with donors and their financial advisors to discuss projects where donations would accomplish the most good.

It might also be worthwhile for an advisor to work with a client to create a concise “grant application” that lays out all relevant questions they want the charity to answer. This will allow the advisor and client to better compare individual charities side by side and also serves as a handy due diligence record for future reference.

Utilize investment vehicles and options that can maximize impact: From a very early age—when we were old enough to drop coins into donation cans—many of us think of cash as the default method for donating to charity. But when we are old enough to invest (and file our own tax returns), writing a check isn’t always the most efficient way to make a donation.

Today, investors can open up what is called a donor-advised fund (DAF)—akin to a charitable investment account that can be funded with irrevocable contributions of cash, stock, crypto, etc.—at many of the large brokerage firms or at community foundations. One powerful technique is for clients to donate highly appreciated stock to their DAF, thereby avoiding capital gains taxes when the shares are sold and increasing the size of the client’s gift compared with liquidating the stock in their taxable account and donating the post-tax proceeds. Simultaneously, the donor receives a tax deduction (if they itemize) while allowing them to diversify away from a concentrated stock position. Furthermore, investments in a DAF grow tax-free for future giving. Advisors can sometimes even manage a DAF account’s investment allocation. When the client is ready to donate to a specific 501(c)3 nonprofit, they can then make grant recommendations from their account.

Additionally, advisors can help amplify the positive change of their clients’ donations via socially responsible investment strategies in DAFs. Environmental, social and governance (ESG) criteria, such as negative screens, can reduce or eliminate investments in companies whose practices or policies are at odds with the client’s personal values. For example, some ESG strategies can screen out fossil fuels, tobacco and weapons. Advisors can also work with high-net-worth clients to customize the socially responsible investment approach of their DAFs to better align with their values (for example, promoting LGBTQ+ rights or divesting from animal testing).

Revisit the mission statement on an annual basis: A lot can change in a year, and this includes clients’ charitable giving priorities. This is why advisors should check in with clients to review the mission statements driving their charitable giving every year.

Maybe a client would like to incorporate an additional cause into their giving plan. Or maybe they have focused on impact in their local community and would now like to broaden their scope by supporting national programs.

Charitable giving mission statements are designed to provide guidance and guardrails but should also be flexible enough to accommodate clients’ ever evolving philanthropic interests and goals.

Revisiting mission statements also provides the opportunity to critically assess the tangible impact of a client’s donations over time. Together, advisors and clients can review each nonprofit’s annual report and discuss the numbers behind their work in order to determine whether the client’s mission statement justifies continued support of certain charities.

Well-off clients often want to give back and make a positive difference in the world with their wealth. Advisors are well positioned to help these clients understand how to do the most good with their money.

Ryan Klippel is a Financial Planner at Optas Capital.

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