All in the Family: How to Instill Giving in The Next Generation

See Important Disclosures Below

Baby Boomers are set to pass an unprecedented amount of wealth to the next generation in the form of businesses and personal assets. Yet, most family wealth is earned—and then lost—over the course of three generations. Planning for this wealth transfer is crucial to preserving financial wellbeing.

INSTILLING PHILANTHROPY IN THE NEXT GENERATION

Many families focus on succession planning as a way to ensure the health and legacy of their family business. However, incorporating philanthropy into the discussion can provide valuable lessons about a family's values and the way they manage wealth. How? Because philanthropy has been found to make people more thoughtful about money, and it’s been shown to make heirs more financially confident in other areas of their life.

Fortunately, younger generations are familiar with charitable giving. In 2014, 84% of Millennials made a charitable donation, and 70% spent time volunteering. The key to integrating that interest with your legacy is including them in your family's philanthropic pursuits as early as possible and establishing a plan that encourages giving over the long term.

UPCOMING GENERATIONS WIRED DIFFERENTLY FOR GIVING

Millennials, born roughly between 1980 and 1996, do take a different approach to charitable giving than older generations. Baby Boomers tend to spread the money they give among four or five charities each year — causes such as social services, religious organizations, veterans' services and colleges.

Younger Americans, though, are interested in purpose-driven giving: They want to feel inspired by the organization and see the impact of their donation. Millennials prefer charities that work in education, health care and on environmental causes.

Members of Generation Z, born in the mid-90s to early '00s, will no doubt give even differently as they’re the first to grow up entirely with the Internet. They will likely harness online platforms, such as crowd funding, to make a difference.

5 STEPS FOR ENGAGING THE NEXT GENERATION

So how can you get children more involved in charitable giving? Here are five ways to start the conversation.

1. Document your family's philanthropic history
Make sure children understand your family's legacy of giving and how and why you donate to charity. This is particularly important for those with a family foundation where the younger generation never knew the founding generation.

2. Create a mission and values statement
Work together to define your family's values, and the principles and behaviors that guide your philanthropy. Make the statements direct and personal so that they can be clearly understood and are meaningful to the family.

3. Include heirs in the philanthropic work
If you have a family foundation with a formal board, consider having family members join the board when they reach college age or become young professionals. Pair new board members with more experienced members who can teach about the foundation and its work.

4. Set aside assets that younger generations can direct to charities
Challenge your children to decide what causes they’d like to support and encourage them to research different charities to find out how each organization uses the donations it receives.

5. Meet regularly to discuss giving
Have regular philanthropy-related discussions and include Millennial and Generation Z family members in those talks. Be open to the differing goals younger generations may bring to the table.

TWO WAYS FOR FAMILY TO GIVE

When it comes to actually engaging in philanthropy, there are several ways to give that can include future generations. Here are a two of the more popular options.

Gifting via family foundations

Family foundations allow for targeted giving in line with your family’s philanthropic mission statement.

Gifts to the foundations from family members and others are tax-deductible, and there are tax benefits when donating appreciated securities as well. The income sheltered within the foundation is tax exempt, and it is not subject to estate taxes, which is why many families consider foundations during their estate planning process.

There are a few drawbacks, however. First, foundations can be time consuming and costly to set up, so you’ll likely want to start with a considerable sum—as much as $3 million. Record keeping requirements can also be time consuming.

And while the foundations don’t have to pay income taxes, they are subject to an excise tax of 1% to 2% on net investment income depending on the foundation’s level of grant making. Tax deductions are also lower than if you were to make a gift to a public charity.

Donor-advised funds offer an alternative

Donor-advised funds (DAFs) are a simpler, more convenient option for gifting. With a donor-advised fund, you make a contribution to the fund and get an immediate tax deduction, then you make recommendations about where you would like the fund to grant the money. DAFs are managed by a sponsoring organization, which takes investment decisions and regulatory responsibilities out of the hands of donors.

The popularity of DAFs has grown in recent years: Contributions to these funds increased 11.9% in 2015 over the prior year. The number of DAFs also grew by 11.1% from 2014 to 2015, compared to 2.6% growth in private foundations over the same period.6 Millennials appear to be driving the growth.

However, even as donations to DAFs have grown, some charitable organizations have seen the number of direct donations lag. That's because the money is not necessarily distributed to charity in a timely fashion, and instead sits in the funds awaiting donor recommendations. The onus is on the donor to remember to make distributions, otherwise the money may just languish in your family's DAF, instead of being put to use in the way your family intended.

Another important point: Though donors may make recommendations about grants, some sponsoring organization may have a strong say about which grants are made. For example, some DAFs may not be able to donate money to causes overseas. Before choosing a DAF, understand what you can and cannot do with your donations.

Talking about money with family members often feels like a taboo subject, yet working together on charitable giving can instill family values in the next generation and start a greater conversation about family wealth. A financial adviser can help you and your family understand the best way to carry out your philanthropic goals.

This article was helpful.