Many families and family offices — perhaps even yours — define success by how much they give back to their communities. The most successful people (and often the most admired among us) are frequently involved in large philanthropic efforts that not only make an impact, but also leave a legacy.
If you’ve been thinking about how generations of one family can make a difference, it’s important to understand the strategy that goes into making these types of decisions. While it’s relatively easy to give to this charity or that nonprofit, it’s more difficult to make a lasting impact that aligns with your and your family’s values and mission statement.
To support you and your family office, Arootah COO Steve Wilner shares five factors to consider when devising a charitable giving strategy, based on his 30-plus years in investment management and family offices.
1. What’s the Mission of the Family Office?
Most philanthropic families have their own near-and-dear causes. One family might have had a beloved relative who was impacted by a particular ailment, so they put a special focus on fundraising related to that. Another family may choose to support a social cause that addresses a particular issue, problem, or social injustice that has special meaning for them.
What is your family’s philanthropic focus? Once you’ve identified where they would most likely want to build a legacy, begin investigating nonprofits related to those identified causes or issues. Look not only at a possible philanthropic recipient’s area of expertise but also the recipient’s impact and even whether they offer volunteer and involvement opportunities.
“Find a charity whose mission you believe in,” says Wilner. “If it’s a local nonprofit or a national organization with programs in your community, you can volunteer your time or go in person to see some of the programming in action. Check out the company’s website as well as independent reviews and evaluations.”
As you get a sense of the on-the-ground impact the nonprofit is making in your community, consider how you can give your time, not just your money, to help them. Use your involvement in volunteer work as a family bonding opportunity.
2. Do Your Due Diligence
After you’ve identified a cause and the active charities and nonprofits that align with that cause, it’s time to do your due diligence. Wilner explains, “Much like you would consider an investment, careful due diligence and analysis on where you are going to allocate your capital is important. What are the administrative costs of the charity? How much actually gets donated? What is the money being used for?”
One simple place to start is by making sure that the organization in question is a legitimate, reputable charity. Verify the charity is a tax-exempt organization registered with the Internal Revenue Service (IRS) by visiting the IRS Select Check website. Here you can see the IRS Form 990 tax return for most nonprofits, as well as any revocations or suspensions of the status of a tax-exempt organization.
3. How Is the Money Being Used?
After you confirm the legitimacy of the organization in question, look at how it uses its donations. Determine how much of the funds raised go to charity rather than administrative costs (for example, at the Red Cross, an average of 0.90 of every $1 goes to charitable programming).
GuideStar, CharityNavigator, Better Business Bureau Wise Giving Alliance, and CharityWatch are just a few websites you can visit to develop an overview of an organization’s financial health and budget breakdown.
According to CharityNavigator, the typical charity spends 75% of its budget on programming, so look for nonprofits that hit or come close to that benchmark; the rest of the budget should go to administrative costs (approximately 15%) and fundraising (approximately 10%).
CharityWatch also delves a bit deeper into an organization’s fundraising and other accounting practices, including how much an organization spends to raise each $100 of funds they collect.
Similarly, GiveWell does in-depth research on programs they determine have had the greatest impact on people’s lives, then suggests a handful of charities it deems best at delivering these programs. The website also offers recommended questions you should ask a charity to evaluate whether the organization is actually “doing good” and having a measurable impact on the community.
4. Share Your Findings with the Next Generation
Part of building a philanthropic legacy is sharing the importance of giving and social responsibility with the next generation. You can make this part of the process easier by involving them in the decision-making and strategizing. Do they care about the issues of importance you’ve identified? How do they feel about the potential charities you’re considering?
“Educate the next generation to build a legacy,” says Wilner. “Succession planning and legacy building are among the main responsibilities of family offices. Philanthropy provides a good opportunity to engage and educate the next generation of the family and prepare them for the responsibility of wealth.”
5. Take Advantage of the Tax Benefits
Lastly, as you form your charitable giving strategy, don’t forget to take advantage of the tax breaks associated with philanthropy.
As Wilner notes, “Philanthropic giving often carries tax preferences that can be advantageous in financial management. There are tax benefits to consider, whether it be a monetary donation or appreciated non-cash assets that allow you to keep more wealth, which can eventually be donated.”
The Bottom Line
There isn’t a standard model for family offices when it comes to charitable giving. Each family is unique. However, as you plan your charitable strategy, taking the factors above into consideration can result in your charitable donations having a larger, more meaningful impact.
Put simply, as you begin planning your charitable strategies and allocating where you’d like your philanthropic efforts to be focused, consider…
- Does this organization relate to your family’s values? Is its cause meaningful to them on a personal level?
- Will they be willing to give this organization not just money, but also their time?
- Will the next generation of the family share these feelings?
- Is this charity legitimate and sound?
If you can say “yes” to all the above, you’re on the right track.
Need more assistance? Arootah Family Office Advisory offers expert guidance on important family office services, such as charitable giving, insurance, and legacy planning.