Whether you love them or hate them, Jeff Bezos, Warren Buffett and Elon Musk give billions of dollars to philanthropic causes. The don’t always name their recipients publicly. The money’s not always put to work right away. And, yes, some of their companies leave a carbon footprint on the planet–how else can you launch rockets? But I get annoyed when I see pundits claiming these high-profile billionaires “Have it all wrong.”
A recent Forbes column opined: “It’s time for billionaires like Warren Buffett, Jeff Bezos, and Elon Musk to bring their philosophies on corporate purpose and impact into the 21st century,” the piece argued. “Today’s customers, employees, and partners are asking more of companies and the wealthy men that control them.”
Social advocates want the uber-wealthy to make their many companies as socially responsible as the causes they support. This argument has been waging since the time of the Vanderbilts and Carnegies—overt capitalists who still gave away vast portions of their wealth to educational and philanthropic causes. The universities and charities who benefitted from their largesse, didn’t seem to mind, did they?
Family Legacy Conversations
I bring this up because now’s the time of year when multiple generations of families are gathering for vacations at their lake, beach or mountain retreats. That’s often when difficult legacy and estate planning discussions take place.
Chances are you may be getting requests from clients and prospects (especially younger ones) to help them give in a socially conscious way. Naturally, you want to say “Yes” to additional services you can provide to the ultra-wealthy. You need to have the right knowledge, information and tools. You’ve all seen surveys that say wealthy clients want their advisors to talk to them about philanthropy. If you dig into the data, you’ll find they want more than just advisors who talk to them about philanthropy; they want advisors who have the right skills set and experience. They want advisors who can do more than just help them give highly appreciated stock or form a charitable remainder trust. They want more creativity about how to give and where to give. But most advisors are totally unequipped for that.
There’s societal pressure on advisors to get more involved in helping clients give to the right places, not just helping them throw money at causes. That’s a huge hurdle because it takes incredible training and skill to do research on charities. And it’s almost impossible for any advisor to be unbiased with this advice.
If you want to get into philanthropic planning for clients, it can be very rewarding both financially and psychologically. But before you do, you better do research, understand the options, find some tools and find a way to communicate with your clients. Otherwise, use consultants who are equipped to handle philanthropic planning.
Danger of Increasing the Private Foundation Payout
Last month, the Institute for Policy Studies (IPS) released the report “Gilded Giving 2022: How Wealth Inequality Distorts Philanthropy and Imperils Democracy.” IPS recommended increasing the annual foundation (PF) payout requirement to 10% of assets, arguing that such changes would “realign our charitable system to service the public interest.” But raising the payout could harm private philanthropy and undermine the missions of PFs working to help those in need.
Here's why. If PFs are forced to pay out 10% every year, they’ll soon run out of money. That’s because a 10% required minimum payout will force them to earn more than 10% a year on their investment returns. Historically, it’s been very hard to do this, especially in years like 2022 when we’re having a significant bear market in both stocks AND bonds. You’re essentially creating a drawdown.
This isn’t the first time such suggestions have made during difficult economic times. The Patriotic Millionaires pushed Congress to double the minimum share of assets PFs must distribute for each of the next three years to 10% from 5%.
By the way, just because a family PF is required to distribute only 5% of its assets every year doesn’t mean it can’t distribute more. Many do. But that’s not popular rhetoric for taking the wealthy to task. The same type of pressure is being put on donor-advised funds (DAFs), which many families use very much like PFs. Yet according to National Philanthropic Trust’s annual report, the total payout from DAFs at community foundations was an estimated 19.8% in 2020, up from 17.1% percent in 2019. The payout rate of 19.8% was the highest since 2017, matched only by 2011. The lowest payout rate over the past decade was 14.9%, the report concluded.
Meanwhile, a new report from Rockefeller Philanthropy Advisors claims a growing number of PFs are rejecting the perpetuity model in favor of a time-limited model, especially more recently established PFs. Again, if you’re going to advise charitably inclined clients, you need to understand the pros and cons of giving money to organizations that may not be around for more than one generation at best. That can substantially alter their legacy planning and estate planning.
Many family PFs are designed to teach the kids how to handle and distribute wealth responsibly. If new legislation runs them out of money before the kids get the chance to have an impact with that money, you’re defeating the family’s purpose.
Make sure your charitably inclined clients realize this if they decide not to support organizations just because they receive help from billionaires and other uber-wealthy.
As I discussed earlier this year, Musk donated $5.7 billion worth of Tesla shares to charity. It’s believed to be the second largest charitable gift in history and will do a tremendous amount of good for the recipient(s). What rubbed many the wrong way was that he donated the shares to a DAF. He was accused of parking the money in a DAF to avoid paying taxes on his scheduled recognition event of Tesla stock. Further, the benefactor(s) haven’t been publicly announced yet, and much of the money hasn’t been deployed. That irked many people, too.
Musk did nothing illegal, and the money has been earmarked for charity. It can’t go back to Musk. He just hasn’t decided where it should all go. His gifting strategy also protects the charity(s) receiving his enormous gift. It will be a huge challenge for charities to manage and distribute a gift of that size, and they probably don’t have the infrastructure to receive it.
As with any segment of your professional practice, philanthropic planning has many elements and a great deal of complexity. If you want to help clients with gifting, they’ll certainly welcome it. But doing so requires commitment and diligence. You can choose to be technically adept in the “tools and techniques,” or you can be an expert at matching client desires to proper philanthropic resources. There’s no right or wrong path when it comes to how you choose to practice. Philanthropy is a largely untapped practice area for advisors and will reward those well who choose to pursue it.
Educate Clients About Smart Philanthropy
Maybe you don’t work with billionaire clients (yet). But as an advisor, you can make a tremendous difference in clients’ lives by educating them about the tax and estate planning advantages of smart philanthropy and by preparing the next generation(s) of their family to be responsible stewards of the family’s wealth and legacy. It’s up to you.
Randy A. Fox, CFP, AEP is the founder of Two Hawks Consulting LLC. He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker.