The Role of Intentional Philanthropy in the New Era of Wealth Management for Business Exit Planning
Wealth management is fast shifting from financial and tax planning to a more holistic approach that is informed by human, intellectual, and social capital—far beyond the more traditional, narrow focus on financial capital.
Very high- and ultra-high-net-worth individuals and families and their advisors are quickly understanding the important role philanthropy plays in this evolving model. In previous years, wealth management concerned only the investment portfolio. Today, it’s about comprehensive asset, wealth, estate, and succession planning. This includes risk-managed capital preservation and purposeful capital contribution towards causes that are important to the family.
Along with this evolution, we’re seeing a major shift in giving, from an “accidental” approach to a more strategic, intentional one.
Moving from Accidental Philanthropy to Intentional Giving
An increasing trend we see is the shift behind the intentions of giving. Very high- and ultra-high-net-worth individuals and families want to integrate wealth management, business transition, wealth transfer, legacy, and succession strategies.
In years past, a significant charitable donation was often an afterthought resulting from tax planning around the time of a major liquidity or business transition event, such as the sale of the business or a large asset. These events trigger tax, so donations could be used as a way to reduce the amount of tax paid. In other words, charitable giving was more reactive based on annual taxes owing.
Today, we are consistently seeing philanthropy not as an afterthought or an accident, but as an intentional strategy that has deep meaning to the family. Intentional philanthropy is a wonderful opportunity to provide meaningful support to the community and causes of a family’s choice. Looking at it with a long-term lens, this type of giving can bring together family members across generations, engaging and aligning them to create a truly united and more meaningful family legacy.
A family may choose to rethink their approach to giving after experiencing a significant health event. This can prompt the family to come together and reassess their philanthropy strategy and goals, and support related causes. A giving strategy with a personal or familial connection can create a deep bond between the family and the cause (or causes) they choose to support.
Exploring Philanthropic Options for Business Exit Planning
For very high- and ultra-high-net-worth individuals and families that are going through a business transition and are looking to shift their approach from accidental philanthropy to an intentional one, there are three main options.
Create a private foundation
A private foundation is a tax-exempt organization that a family office can create and manage, which is funded by the family’s assets. Family members can serve on the board of the private foundation, deciding which charitable causes to direct the funds. One consideration to keep in mind is that the private foundation is somewhat of a misnomer—nothing within the foundation is actually private. The funds, including when and where they are directed, are all public information. Another consideration for families is that private foundations come with annual administrative and compliance costs, making them an option for only those with significant time and resources.
Set up a donor advised fund
A popular alternative to the private foundation is the donor advised fund (DAF), which also creates a structured organization for giving. Unlike the private foundation, however, donor advised funds have lower administrative and compliance costs. They also do not require any public reporting. Similar to a private foundation, families can give from the donor advised fund in their family name, fund it with their assets, and direct where the funds should go. The DAF is an efficient, flexible, and engaging solution. With assistance from legal and tax professionals, families can transition their private foundations to donor advised funds.
Give directly to a specific existing charity or cause
Private foundations and donor advised funds have often been used for tax purposes, but with the movement to more intentional giving, families are now using them with a strategic approach. Giving directly to a specific charity has always been part of a more intentional giving strategy, typically by families who are more focused in their view of philanthropy. In some cases, this approach can provide a greater personal connection to a cause and allow for more direct involvement with the impact they wish to make. It can also offer tax benefits after a major liquidity event.
A Client’s Recent Philanthropic Journey
Recently, a client of ours, who is a successful business owner, experienced a liquidity event resulting in him having more liquid wealth than he ever anticipated. Following his exit from the business, he had to explore new concepts; namely managing wealth outside of his business rather than accumulating wealth inside the business. These conversations and considerations were completely new to him. He and his wife struggled with how to best to deploy this wealth.
We asked him: “What are the values you and your wife hope to instil in your two children?” This question led to a discussion about concerns that his daughters would inherit far more than they would ever need. It was important that they understand how fortunate they are and that many others do not share in such fortunate circumstances. While our client gives annual charitable gifts, he and his family had not yet considered more detailed, planned gifting that could incorporate philanthropy. And importantly, values to pass down to his children and grandchildren. This became integral to a meaningful and highly tax-efficient estate plan.
This family is deeply private and believes in giving anonymously. We therefore recommended the use of a DAF rather than a private foundation. The plan was to establish a DAF and fund that DAF this year to help mitigate the taxes on the liquidity event. Our client would then sit down with his family each year to discuss how best to distribute the appreciated portfolio within the DAF. Together, he and his family discuss what charities are meaningful to them and why. Moreover, he acquired a permanent life insurance policy and named the DAF as the beneficiary. This part of the plan was to ensure that the DAF would be well-funded, not only for his children, but for future generations as well.
This strategy will help our clients and his family achieve many goals: 1) allocate a portion of his sale proceeds to philanthropy; 2) help teach his children the importance of gratitude, community and of giving back; 3) create a lasting legacy for his family; and 4) create a tax-efficient vehicle for his philanthropy.
Every client, every family, and every business is different. The discussion will never be quite the same. We do know that asking the right questions is fundamental to creating a meaningful wealth plan, including tax, estate, impactful legacy planning, income planning, and philanthropy.
About the Author
Jeff is a senior consultant in the BDO wealth advisory and tax services practice. With more than 25 years of family facilitation and financial experience, Jeff helps family enterprises, private companies, and not-for-profits effectively deal with the transition from one stage of their lifecycle to the next. In 2003, he earned the certified management consultant designation, globally recognized as the highest standard of consulting and adherence to a code of professional conduct. More recently, Jeff earned the designation of family enterprise advisor representing the pinnacle of professional expertise in the field of family enterprise advising.