So let’s say your client wins the big jackpot. One billion dollars. Maybe he keeps enough to pay off the house and buy a new car, but for our case study, he decides everything else goes to charity. Whatever the reason, he decides he can teach his children more by how he gives money away, than by how he holds on to it. This thought experiment highlights some important ideas around using charitable giving as a tool for sharing values from generation to generation. This is the Rockefeller, Gates and Buffet approach. Maximizing the positive social impact of wealth, both for the recipient and the giver, requires a bit of planning, a bit of thought and a lot of hard work.
This exercise can be helpful even if your client didn’t win the lottery. These same ideas are frequently discussed when a closely-held business is sold, an inheritance transitions generations or simply when an individual has the good fortune to have a far greater income than they choose to spend. Whenever wealth moves from generation to generation there is an opportunity to use charitable giving as a way of transferring values between generations. A thoughtful approach to this process can yield far more meaningful benefit to the next generation than simply the number on a bank statement.
To set up our case study: Your client wins the jackpot with an immediate $1 billion cash payout. Instead of the payout, assume he takes it spread out over 30 years, known as the “annuitized” payment, which will yield about $1.5 billion in total. Each annual amount will be placed into a newly created charitable trust. On winning, he immediately receives $33,333,333 and places it into the trust. By year’s end, the trust must distribute just over $1.5 million, since charitable trusts are required to give away at least 5 percent of their value each year to maintain tax-free status. Giving away at least 5 percent each year is a significant amount, but the thoughtful consideration to how the money is distributed is the start of the generational transmission of values.
Step One: Understand Why
Any announcement of a wealth event, whether it is a lottery win, business sale or family inheritance, will lead to seemingly exponential requests for money. The key is to establish what John Stanley calls a “Generosity Gameplan.” [i]. Stanley, an advisor to major donors, encourages donors to develop a personalized strategy that is intentional, personal and meaningful. This is an exploration of why you want to be generous, and Stanley suggests telling our personal story to someone we trust is a powerful way to tap into these ideas. When we tell our personal story to our children or grandchildren, as it relates to the ideas of generosity, we teach them to uncover similar values in their own lives.
The power of sharing your own personal experiences and how it shaped your approach to a generous life can be more impactful than explaining why you advocate for a cause. This is an important distinction. Sharing the why with the next generation is not about politics or culture, nor is it about fear or hope for the future; rather it’s about who you are as a person and the experiences that formed who you are. Sharing the stories behind our core memories shows the next generation where our values come from and encourages them to explore the same process in their own lives. Exploring our values with the next generation is not dependent on the amount of the gift, but on the motivation for the gift.
Step Two: Understand How
On establishing the generous motives, we can determine how we want to be generous. This step engages the next generations in conversations around stewardship. These conversations are actually two related issues—how we manage our wealth and how we give it away.
In many ways, the amount is less important than the discussions of investment ideas and portfolio construction. Investment ideas may include public equity markets, bond markets, private equity, real estate, and a host of other investment approaches. You, or a trusted advisor, can teach the next generation about the historic returns, risks, volatility and liquidity. Portfolio construction is another area to learn about how various investments have historically interacted and the impact of the global economic market. By presenting these ideas from the framework of the charitable trust, these ideas become less intimidating, less emotional, and can still be applied to one’s personal finances.
In addition, charitable trusts are an opportunity to teach critical financial lessons by involving family members in vetting and selecting charitable causes. As each charity presents detailed information around how they finance operations and the percentage of dollars directly reaching the intended audience, family members learn critical skills for assessing financial efficiency. As the discussion turns to impact on the community, they learn about effective outcome measurement. Finally, in assessing organizations, the family considers leadership traits and strengths of management teams. Between the skills learned in the asset management discussion and the selection process of the charities, family members learn what the client values as he evaluate the relative merits of these opportunities. And, though they may not always agree with his values, they will come to understand them, and in the process learn to clearly define their own values.
Step Three: Define What
After selecting charities, family members can get involved in the ongoing actions of the organizations. This process comes down to defining what we hope to impact through our generosity. The key is to develop an ongoing relationship with the organizations your client supports. The power of connection, according to Stanley, is one of the central motivating factors for all people. One way of developing a connection may involve family members participating in the reporting process. If clear objectives are established at the time of the charitable gift, then clear checkpoints can be defined to determine progress. Having family members involved in following up with an organization and reporting back to the family on a regularly scheduled basis teaches accountability and relationship management. In our jackpot scenario, the gifts are large enough to request a seat on the board of most organizations and many are open to involvement by donors at a much smaller amount. Regular interaction with the board can be a wonderful source of experience and education. Reflecting those experiences back to the family allows for another forum to discuss values, ideas and ideals.
Moving from Means to Meaning
Though we have entertained an outlandish example of winning the lottery jackpot, these lessons apply to anyone considering the issues of passing wealth from one generation to another. One question I often pose to a prospective clients attempts to get to the core of the issue: “What do you want your wealth to mean—for you, your children andyour children’s children?” One way of approaching that question comes from the work of Paul Ylvisaker[ii]:
The returns on a family investment in philanthropy are—or can be—extremely high, both internally and externally. When such an investment is well executed, a family can achieve a cohesion that comes with a sense of higher purpose and cooperative effort.
This approach can be part of a larger strategy for unifying the family, which is built on sharing values from one generation to the next. Sharing wealth with future generations without sharing values may lead to the lottery winners-gone-bust stories that circulate each time the lottery grabs the national headlines. But with a bit of planning and a bit of thought, we can address the hard work that goes into making the world a little bit better, no matter how much we have to give away.
[i] Stanley, John L., Connected for Good: A Gameplan for a Generous Life, Beacon Publishing, 2013, First Edition
[ii] Ylvisaker, P. N. (1990), Family Foundations: High Risk, High Reward. Family Business Review, 3: 331–335. doi: 10.1111/j.1741-6248.1990.00331.x
Robert J. Holton is Vice President, Private Client Group at Cleary Gull