Introduction: Welcome to the Bryn Mawr Trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome your host, Jennifer Fox, president of BMT wealth management.
Jennifer Fox: Hello everyone. We’re here today with Elizabeth Wagner, who is the director of institutional wealth management at Bryn Mawr Trust. We’re here today to talk about philanthropic giving and utilizing vehicles like private foundations and donor advised funds. The two most commonly used charitable vehicles. So Elizabeth, I’m going to just turn it over to you right away to hear about the philanthropic giving trends and the vehicles that we’ve seen. And if you could give a little background on why this is so important.
Elizabeth W.: So for a very long time, we all knew about the Rockefeller Foundation and the Carnegie Foundation and the Pew Trust and all the good that they did in our world. And then in about the last decade, the news started to explode around donor advised funds. And they’re relatively similar vehicles. They really are ways for individuals or families to work together and to accomplish whatever their social goals are, their giving goals are, and to have some flexibility in terms of how they structure the goals they’re giving goals, what assets they use to achieve those giving goals and how they structure some governance around achieving those goals.
Elizabeth W.: And so one of the things that I think is really interesting is the trend in the last decade toward donor advised funds, there just has been such an uptick in assets that have gone into donor advised funds and frankly and assets that have gone out of donor advised funds into new kinds of charities. I also think it’s really interesting to note that we’re seeing other very new kinds of philanthropic giving organizations like the Chan Zuckerberg Initiative, which is an LLC model. We’re seeing people very creatively apply existing models to their giving goals. And so today I think we’ll talk a little bit about how do our giving goals, whoever we are and whatever those goals are, match up with some of the common vehicles that are available to us now. And the big ones. I think for most people are that private foundation and the donor advised fund.
Jennifer Fox: We have a lot of clients and colleagues and friends who are very philanthropic, lead minded and who are very interested in giving back why actually have a vehicle at all. If it’s really about getting money to the charity and writing the check, why would you want to have any of these vehicles and why not just write the check?
Elizabeth W.: I talked to a client once who had just absolutely enormous wealth and we were talking about his giving and he did a lot of giving, very thoughtful giving. In fact, it was most of what he spent his time on day to day and I said, you know, we should set something up for you to make this easier. And he said, but I love it because when I write the checks, I think about the organizations that, I think that’s the key way for most people, no matter how you structure it, the the to think about problems that you want to solve, the idea that you can spend time with people who are really good at solving those problems and you can learn about solving those problems and that eventually you can apply your wealth to things that matter to you.
Elizabeth W.: All of the joy. And in fact, the National Institutes of health did a, did a study, the health benefits that come with giving all of those wonderful things that flow out of giving have to be at the forefront. And so the big question for most people is when do I organize my giving? What’s the stage at which my giving becomes a project or a burden or it needs an organizing vehicle. And I would say for most people, if you’re writing a whole bunch of checks a year, if you’re giving $10,000 a year or more, those are the times when you want some kind of vehicle. And here’s why. Number one. We know that over the last really 15 years generous people have been audited by the IRS much more often than less generous people. And that’s because there are models out there for how generous people are likely to be at different income levels.
Elizabeth W.: And if you happen to look quite generous, the IRS wants to make sure that you really are that generous because you’re unusual and special. And so having one vehicle that all of your charitable gifts flow into and then through is really, really convenient for that purpose. Frankly, a lot of clients that I’ve worked with have said they really enjoy having a vehicle because that means they have one receipt at the end of the year to take to their accountant. They don’t have to take a shoe box of charitable receipts for every hundred dollars they ever gave to anyone anywhere, all year. So I think though, just the aggregating of charitable receipts benefit is a big one. And then I think frankly, the nice thing about having an organized giving vehicle is that it gives you the opportunity to think more deeply. If you’re always just trying to replicate the list of checks you wrote last year, you don’t get a chance to think about what’s my total giving budget? What am I trying to accomplish? How do I want to involve my friends, family, colleagues in whatever it is I’m trying to do in the world, especially in a private foundation or a donor advise fund. It’s very easy to draw and family members, siblings, children, grandchildren, great grandchildren, and really talk about what giving means to you. Pass on the legacies that you have learned in your own life. And a lot of times that’s not wealth. That’s knowledge. That’s hard earned knowledge. Using a giving vehicle is a much easier way to pass on some of those family legacies. And so those are some of the reasons that I think people gravitate towards using a giving vehicle. Both, you know, the the organization piece and frankly that passing on a legacy, feeling like they have it, something that’s, that is designed to carry on their legacy and empower future generations to have a charitable legacy.
Jennifer Fox: So in speaking of those charitable legacies, because you’ve mentioned you know, Rockefeller, Carnegie and Pew among a few and historically those private foundations have done tremendous amount of good. So as you think of clients and folks who are really starting do that, organizing around their charitable giving, why might they use a private foundation even if they’re not going to approximate the levels of a Carnegie or Rockefeller?
Elizabeth W.: Often when I sit down with a client, they talk about the private foundation as the way they know they’ve been successful. It’s so interesting. I think a lot of us dream about the day when we can do the things that we’ve always wanted to do and we’ve worked for a long time to achieve success and we finally feel like we can give back on a big level. And so for many people, the best thing about the private foundation is the fact that they’ve arrived there and they can do it and it’s something they know and we all feel really good about the work that we can do to improve the world. And I think for many people, the private foundation is the way we say to the world, I, I have arrived and now I’m going to do what really matters to me. So I think the first thing is, is just incredible emotional benefit to the private foundation. There are a couple of other things that I think are huge benefits in the private foundation. One of them is that the donor can retain a tremendous amount of investment control, which is not possible in any other charitable vehicle. The donor can make choices about staffing, which are really interesting. In most other charitable vehicles, it’s difficult or impossible to hire a staff and you really can’t hire people who are related to you. But in the private foundation space you can, if you intend to hire family, it’s important to do some compensation studies and be really thoughtful about how you are going to discharge the fiduciary aspect that you bring to the table. But there are models out there and you have a board to help you. One of the really nice benefits of private foundations is that they allow you to build name recognition and so if you’re doing something that’s important to you or you have a family legacy that you really want to impact, that name recognition I think can be so powerful. We see this a lot with business owners who have their family name on the business and who were thinking about transition. Maybe thinking that this might be the generation when the business sells and setting up a separate private foundation with the same name that allows them to carry forward some of the legacy of the business and all of the legacy of the family can be a really powerful draw. So for a lot of people that name recognition and legacy piece is a really important reason that they choose a private foundation as well.
Jennifer Fox: Can you talk a little bit about how you can utilize a private foundation to really transfer the, the family values from one generation to the next? Because I know that that’s in that legacy component, that transference of values is a conversation that I often get from clients. How do I instill this value for giving back and philanthropy and helping others, you know, and my children or grandchildren.
Elizabeth W.: This is my favorite topic because it’s a part of my work and all of our work that is so incredibly rewarding. One thing we often find in families that have achieved tremendous success is that the younger family members in here, I’m, I’m you children, grandchildren, great grandchildren, nieces, nephews, the kids who grew up with your kids, who watched your, your kids come into more wealth. All of these are people in life who you want to influence and whose values are determined in part by the things that they’re taught. And I work often with parents or grandparents who say, I have shown my children what it means to achieve success, but I need to show them. I have a deep, important need to show them other kinds of success that are not financial. And so often we sit down with a family and we start with the wealth creator and we say, we see that you have built all of this wealth, but what is behind it? What are the secrets to your success? What did you learn from the people who came before you, maybe grandparents or parents that helped you build your wealth and how do you want to pass that down to the people who are likely to inherit your wealth as well as your charitable legacy. And we have really important conversations with families about there’s so much value beyond just the money and being able to help families tap into what are our values? What is it about us that has made us successful is so key to transferring family values to the next generation. And most people who have created a lot of wealth are very cognizant of the fact that in in almost every language in the world, there is a parable about shirtsleeves to shirtsleeves in three generations. And the goal is to help families figure out what are the assets we have that are non-financial and how do we transfer those assets to future generations so there’ll be successful in whatever it is they go on to do. So often we sit down with a family, started to identify those assets, help family members reinforce what they see in each other, right? A lot of times there’s one wealth creator, everybody else feels a little standoffish about the wealth. That’s not my wealth. I didn’t make it. So we make some rules about how we’re going to treat the charitable wealth and that might be a little different than the way we talk about the family’s wealth at the dinner table.
Elizabeth W.: And it might allow us to bring in new generations of leaders. And one of the things we see on the charitable side is that helps the charitable work, helps families raise up leaders who might not have become leaders if the whole family’s conversation was around the wealth or the family business. So I find, I often say to people that the, the charitable planning is a great way for families to begin to confront some of the issues that become sort of third rail issues and estate planning conversations. It’s a great way to start to talk about who are we as a family, what are our goals? What’s the wealth supposed to do for us? What are we supposed to do for us? You can accomplish all of that in family conversations around a family foundation or frankly a donor advise fund.
Jennifer Fox: Right. Well, I think the part that’s absolutely fascinating when you bring in children and grandchildren is that I’ve seen children as young as four and five years old, really have a passion for giving. I don’t know if it’s from my perspective it’s the sensitive heart of a four year old, but they’re willing to be active participants and really enjoy having people listen to their point of view and take them seriously. So I fully agree with you that bringing in children and grandchildren across multiple generations and ages is a way to really cement that family conversation where they don’t to understand quite yet what a P&L is or what a balance sheet is or what forecasting for a business means. But it’s a way to connect with their their parents and grandparents in a way they may not otherwise be able to. So we’ve spent a lot of time talking about all these fantastic benefits of a private foundation, but with all good things, there comes some sort of trade off. So what are some of the trade offs of having a private foundation?
Elizabeth W.: The private foundations are not, as you might expect from the name private. And that’s usually the first big tradeoff that a family has to confront. A private foundation files a tax return every year that tax return is public. Anyone can look it up and frequently charities do look them up and they’re very specific about who gave how much of what asset every year. And so in addition to all the information they publish about the charitable contributions that the private foundation might make itself, there also was a lot of information about gifting in a worked with a family once that had tremendous sensitivity around their family name in their community. And the year that mom died, which was after the year the dad died, the whole really her whole estate terminated into the foundation and all of a sudden people in the community started to figure out exactly what assets the family had and what they were worth.
Elizabeth W.: And it was a very stressful situation for the adult children. And so one of the challenges with private foundations is that although they are called private foundations, they are really very public in terms of the, the family information that shared the other challenges they think are an annual 5% payout is required. And although that can include some expenses, sometimes people find it’s difficult to give away 5% every year. Sometimes the things they care about are, are hard to match up with the dollars that they have in any one year. So having to achieve that year after year as opposed to being able to save some years and spend big and others is a challenge. In private foundations, there are more costs. With a private foundation, you have to retain an attorney to set up the private foundation. You have to keep an accountant around every year to file that Pesky public and nonprofit tax return that you have to just submit there.
Elizabeth W.: They’re also a little less deductible. So if you give to a public charity, your gift of cash is deductible at up to 60% of your adjusted gross income and your gift of stock or other property is usually deductible at about 30% up to 30% of your AGI. If you have a private foundation, you’re gifting into the private foundation of the deductability is about in half. So if you give cash, it’s deductible up to 30% of your AGI and if you give stock or other property up to 20% of your AGI. So those are some differences. And the reason the deductibility is different is that our tax structure perceives that you are retaining more control inside the private foundation. And so because you have more control, you get less tax deduction, there’s less public benefit. So I think that deductability is a trade off. Sometimes for people that really matters.
Jennifer Fox: So as folks are evaluating the different vehicles, that may make sense. Let’s spend some time on the donor advised fund. And how is that different from a private foundation and what situations would you use a donor advised fund as opposed to a private foundation?
Elizabeth W.: Donor advised funds are similar to private foundations in that they’re independent funds set up for a person or a family or a group that can only do charitable things. However, donor advised funds set up a little faster. Most organizations that sponsor donor advised fund can set them up in a day. They all live within a public charity structure. So they’re all 501(c)3 but they’re not private foundations. And so that means that they do have that enhanced deductability. Couple of Nice things about donor advised funds that often appeal to people include the anonymity benefits. So if you have a donor advised fund, because usually the reporting about your donor advised fund is aggregated with a whole bunch of other donor advise funds. It is completely anonymous. There’s no tax return someone can go to to see how much of what as I did you give to your donor advice fund this year and where did your grants out of the donor advice fund go. So you really get a lot more privacy and for some people and families that is just critically important there. Couple of other nice benefits, there’s no required annual payout rate for donor advised funds. So people who are sort of saving up their charitable dollars toward a big goal are able to have years in which they only put money in the donor advised fund or they let it sit, but they don’t spend money down. Although in general, from a donor advised fund industry as a whole, we know that most donor advised funds spend down about 15 to 20% a year. So it’s interesting. Even though there is no payout requirement, we see a lot of money flowing out every year.
Jennifer Fox: Right. And at a higher level than what’s required by the private foundation.
Elizabeth W.: Which makes a lot of sense when you think about the fact that donor advised funds live in a public charity structure and they’re a little bit more deductible. We do see more activity flowing out of them and going into other charities. One other nice thing about donor advise funds is that they are not subject to some of the same tax structures that private foundations have. To think about excise tax. You have to think about their net investment income every year and whether they’re going to pay a little bit of tax. Donor advised funds don’t have that. Donor advised funds are interesting in that often they live within a public charity structure that allows you to take advantage of some existing staff. So although when a donor advise when you can’t hire your own staff, sometimes the donor advised fund comes with a benefit where you can tap some people who are really expert at giving and you can ask them questions or have them look up organizations for you and give you information.
Elizabeth W.: The other nice thing about donor advised funds, and this is true also for private foundations, but I see it done a lot more in donor advised funds, is that you could put almost any asset in them. And so you can put a partnership interest in a donor advised fund. You can put held stock or IPO stock or real estate or personal property like art, antiques, jewelry, any of those things can fund a donor advised fund. And most of the donor advised fund providers are really very, very good at transacting more complex assets. And so that’s a nice benefit because the best asset to give for most people often is not cash. Frequently it’s appreciated securities or other appreciated property in a donor advised fund or really makes that transaction seamless and easy.
Jennifer Fox: So where do you see other opportunities? I mean as you’re sharing the story about key things like privacy and the ability to give a lot of gifts, I think there’s also some family dynamic components. Um one of the stories that we were sharing earlier was the fact that I had a client who was very, very successful young family with very young children and very philanthropic, really minded. And so what they looked at their donor advised fund as a way to maintain the privacy for their very young children in the sense that they didn’t because they were fairly well known in their community. They’re fairly well known publicly. They wanted to protect some of the anonymity of their children until they were old enough to be able to understand that responsibility. But I know there’s other dynamics, for example, family dynamics and choosing charitable organizations that I’d love for you to touch out, Elizabeth.
Elizabeth W.: So one of the things that I love about private foundations and donor advised funds is they can work together. And I worked for years with a family that had a very large, still has a very large private foundation. And when it transitioned to being led by the current generation, it’s it’s a brother and a sister. He’s very conservative and, and she’s very liberal and they try really hard not to talk politics at Thanksgiving, but their givings really different. And so their solution, because they have a 5% payout every year and they don’t employee staff and their expenses are really very minimal, is they carve it up. They each take about two and a half percent of the total. He makes his gifts right out of the private foundation and they’re listed on the nine 90 and it’s all very public. She puts her entire half in her donor advised fund. And to this day, her brother has no idea what she has been giving to all this time. And it’s a nice solution that preserves a little bit of family harmony, allows them to have happy thanksgivings together and encourages both of them to use the vehicle that their parents set up, which was the private foundation in a very modern way together to achieve the charitable goals that their family has always had.
Elizabeth W.: But also taking into consideration the fact that as time changes, people change. And these families goals have changed and one branch of the family wants to do things a little differently and that’s why they’ve paired it with that donor advised fund.
Jennifer Fox: So a really effective way among many but an effective way to preserve that dinner harmony. It’s one that I know in wealth management and family dynamic conversations it, it’s almost a running joke of how do you manage that Thanksgiving conversation. But it’s one that’s so important because that’s the one time of the year that many families can come together and have really robust discussions. And I think that applying this from a philanthropic giving perspective can mitigate some of those tougher conversations that families have.
Elizabeth W.: And you know, I want to add to that Thanksgiving theme. A lot of the families I’ve worked with use Thanksgiving as the time, not only to get together as a family, but to have those big conversations that you were alluding to about who are we, what do we want to give to? And one of the challenges, especially when there’s a private foundation, is that often Thanksgiving always happens at the end of November and often that 5% payout must be completed by the end of December and there’s not a lot of time in between those two. And so sometimes when the family gets together Thanksgiving and they have the big giving conversation and everyone who’s supposed to put a word in gets to put their word in, it’s hard to make a final decision by December 31st and that’s where that pairing of donor advised fund and private foundation is so powerful and so practical for private foundations that need to make a 5% payout but could use a little more time to work on that inter-family harmony staff could use a couple more months making the payout into a donor advised fund, which is a public charity by December 31st meets their 5% payout obligation and it buys them a couple of extra months to figure out a either how to get along or where to place the money with charities that they all can agree on.
Jennifer Fox: So Elizabeth as his families are starting to think of, as we said at the beginning, kind of organizing their philanthropic intent. What’s the best way to get started and some tips for families.
Elizabeth W.: So the first thing I think is to decide that giving and going out in the world and doing something new and interesting is really important to you. The next one is to sit down as a family or if it’s just you doing this, sit down with yourself in a piece of paper and think about what really matters to me in the world. And this might be where you came from or who you came from. It might be what has been important to you or your family as you were growing up or raising children. It might be a particular theme that has run through your life, but so figure out what really matters to you.
Elizabeth W.: And that doesn’t have to be a long involved exercise. You could use a cocktail napkin and 20 minutes and probably get to the heart of it if there aren’t too many people who are participating. If there are a lot of people participating. A tool that I really like and use frequently with families is the great 2164 tool called picture your legacy, which is available in the app store for free. It’s just a series of images that let you flip through, figure out which images speak most clearly to your values and share those with family and friends. And that’s something that’s very easy for us to do here as wealth advisors with family groups. If you need a little help with the exercise. And in my experience, most family groups need a little help with the exercise. It’s nice to have someone on the outside who helps you think through how do we do this and how do we make sure everyone’s voice is heard.
Elizabeth W.: And so once you kind of figured out what you care about, then you start to think about what assets am I going to use to fund this and what kind of vehicle is it going to live in? And that’s where it really makes sense to go back to your wealth advisor and say, I want to do something charitable. And we have a direction we want to go in, but we’re not sure how best to fund it. We’re not really sure what level we’re going to fund it at and we’re not really sure what vehicle is right for us. And sit down with your wealth advisor and think through those issues and come to something that feels good. And then I would say, remember it’s a journey. Most people were pretty serious. Philanthropists spend 10 years between when they get started and when they feel like they really know what they’re doing. And this is a learning exercise just like anything else.
Jennifer Fox: Well, and I would also say too, one of the benefits for our clients at Bryn Mawr Trust is the access to you and as a resource for these conversations to be able to facilitate philanthropic planning for families. And so we’re very happy to have you here and very happy to have had this conversation on really establishing that philanthropic journey. So thank you Elizabeth.
Introduction: Thank you.
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