Charitable Giving Strategies for High-Net-Worth Investors
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Table of Contents
Charitable Giving vs. Impact Investing
How Much to Allocate to Charitable Giving
Charitable Giving Strategies
Incorporating Charitable Giving Strategies into a Financial Plan
For high-net-worth individuals, creating thoughtful and intentional charitable giving strategies not only benefits the causes they care about but also aligns with broader financial goals, fostering a sense of purpose and responsibility. Whether motivated by a desire to make a meaningful impact, reduce tax liabilities, or leave a lasting legacy, high-net-worth philanthropy is an important aspect to consider when managing wealth.
However, with many options available, it can be challenging to determine the right philanthropic approach. Should charitable giving be a percentage of net worth or income? How can one ensure that donations are distributed effectively across causes and organizations? And what kind of charitable giving account is best? By understanding the methods available, individuals can develop a giving plan that is both meaningful and tax-efficient.
Charitable Giving vs. Impact Investing
Like philanthropy, impact investing considers the moral and social impacts of investments, with the goal of making a positive difference through monetary contributions. For many high-net-worth individuals, impact investing has emerged as a complementary approach to traditional giving, allowing them to support social causes while achieving potential financial returns. This balance creates a diversified “impact portfolio” that aligns with both philanthropic and financial goals.
However, impact investing is more strategic; the goal is to not only support important causes but also to reap positive financial returns. In comparison, those engaging in charitable giving may be less motivated by financial returns and may be more focused on giving back to the community or supporting causes close to their heart even if doing so will not benefit them financially.
That being said, there are certainly benefits of charitable giving even if financial returns are not realized. Beyond the positive feelings associated with making a difference, making philanthropic donations can also provide tax benefits, teach children the importance of standing up for their values, build a trustworthy reputation, and create a lasting legacy of giving.
How Much to Allocate to Charitable Giving
Many individuals struggle with determining what level of giving feels meaningful, often questioning if their contributions are “enough.” This subjective assessment can vary widely depending on personal values and financial goals.
In a discussion among Long Angle peers, 72% of high-net-worth individuals revealed they follow an ad hoc approach to giving, while 20% dedicate a fixed percentage of income or net worth annually. A smaller segment—just 3%—opt for a percentage increase based on the previous year. This range of approaches highlights how personal values and financial goals can shape a highly individualized philanthropic strategy.
As financial situations and personal priorities change, philanthropic strategies may also evolve. Individuals often increase their giving as they reach financial milestones or upon reaching a certain age. Some may choose to ramp up giving in later years, with a long-term view of reducing donor-advised funds (DAFs) to zero by the end of their lives.
Philanthropists who have achieved financial independence early in life may take a more aggressive approach, dedicating a larger portion of their wealth to charitable causes at younger ages. This can provide a more immediate impact, which is particularly appealing to those passionate about specific causes, such as environmental preservation or educational equity.
Here are some common frameworks and considerations that can guide high-net-worth individuals in setting a charitable giving budget:
Percentage-Based Giving
Some philanthropists establish a target percentage of their after-tax income or net worth as an annual donation amount, with 10% often cited as a good benchmark. Such consistency can make annual giving more predictable and sustainable, supporting both personal goals and the recipient organizations.
Structured Approaches
A structured approach allows donors to align their contributions with specific impact areas, such as education, healthcare, or environmental causes. Many high-net-worth individuals select a few organizations to focus on. In parallel, smaller donations may go toward a broad group of causes, spreading impact across various areas of interest. High-net-worth philanthropists may also review their donations annually, assessing whether they are meeting the set financial targets and potentially adjusting to surpass the previous year’s contributions.
Long-Term Planning and Donor-Advised Funds (DAFs)
Donor-Advised Funds (DAFs) are a popular tool for those who wish to manage their philanthropy tax-efficiently. A DAF enables donors to contribute to a managed fund, receive an immediate tax deduction, and then allocate grants over time. Many high-net-worth individuals find that DAFs simplify record-keeping and allow for effective altruism with a lighter administrative burden. DAFs also offer flexibility; charitable giving funds can be donated in substantial amounts during high-income years to optimize tax benefits, then gradually distributed over time.
As DAFs grow in popularity, modern digital platforms have made managing these funds easier, offering donors flexibility and greater control. Many high-net-worth individuals now consider DAFs a core part of their giving plan, helping maximize tax benefits by donating appreciated assets during high-income years.
By treating the DAF like an endowment, philanthropists can make donations that represent a certain percentage (often around 5%) of the DAF’s value each year. Some philanthropists take it a step further by using a DAF to structure giving plans that increase or vary in percentage over time, as their assets grow or other financial needs are met. For those who have recently experienced a liquidity event, such as an IPO, a substantial DAF contribution can serve as a tax-efficient way to commit to philanthropy without affecting day-to-day cash flow.
Estate Planning and Charitable Trusts
For those considering legacy giving, charitable trusts—such as Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs)—offer structured options that integrate philanthropic goals with estate planning. These trusts provide tax advantages by enabling assets to appreciate within the trust, which benefits both the donor and charitable recipients. CRTs allow the donor or other beneficiaries to receive income for a specified term, with remaining assets transferred to a chosen charity. CLTs can also donate income to a charity for a set period, after which the remainder goes to heirs or returns to the donor.
In addition to trusts, some philanthropists set “wealth caps” on family inheritance, committing any wealth above a set level to charitable causes. This strategy ensures that accumulated assets contribute to societal impact while streamlining estate planning.
Cap-Based Inheritance
When setting inheritance limits, some donors establish a cap on family inheritance, directing any amount exceeding the cap toward charitable causes. By placing a fixed ceiling on family inheritance, donors ensure a large portion of wealth flows back into society, aligning personal values with social impact. This strategy can streamline estate planning, especially since families may view charitable donations as an alternative to tax payments.
Adaptive Giving
As interests and priorities evolve, high-net-worth individuals may adjust their philanthropy to reflect emerging needs and personal experiences. Some prefer to rotate charitable recipients annually, adapting based on exposure to new causes or changing social issues. In this way, giving remains responsive, aligning with the donor’s current values and fostering a lasting commitment to positive impact.
Recent economic fluctuations have encouraged a more strategic approach to giving. Many high-net-worth donors are now focusing on consistent support for key causes while considering long-term sustainability and impact. This shift is also prompting a growing interest in impact measurement, enabling philanthropists to make data-informed adjustments to their charitable giving.
Charitable Giving Strategies
The first step when incorporating charitable giving is determining how much to allocate based on disposable income and which of the allocation strategies, outlined above, fits best. From there, there are a few other charitable giving strategies that high-net-worth individuals can use to maximize the effects of their contributions.
Aligning Purpose with Philanthropic Goals
Philanthropy is often deeply personal, shaped by beliefs, experiences, and the desire for a positive legacy. However, objectivity can be challenging when balancing personal and philanthropic goals. High-net-worth philanthropists may wish to pursue causes that resonate personally but also seek to make a measurable impact. In some cases, wealth managers can assist in evaluating the potential impact and feasibility of different giving strategies, bringing a more objective perspective to emotional and value-driven goals.
For instance, establishing a family foundation may appeal to those who wish to involve future generations in their philanthropic mission. Financial advisors can help by recommending best practices for structuring such initiatives, including methods to evaluate and communicate impact.
Selecting a Non-Profit
Choosing the right donation recipient can be challenging. How can one determine if an organization’s values are truly in the right place and whether monetary contributions will be used for the right purpose?
Red flags to look out for when choosing a recipient include organizations that:
Spend a large percentage of their budget on fundraising.
Pay their senior executives excessively large salaries.
Do not clearly communicate how donations will be used.
Have high employee turnover or employees who seem dissatisfied with their treatment.
Have a poor financial history and are unable or unwilling to provide financial reports.
It is wise to do thorough research before choosing an organization to contribute to. Consider not only their stated mission but also their reputation, their financial state, and their level of transparency. Discussing options with other high-net-worth individuals can be an effective way to get advice and recommendations for non-profits in need of philanthropic support.
Giving Beyond Financial Contributions
For many philanthropists, giving is not limited to financial donations. Contributing time and expertise can add a significant dimension to philanthropic efforts. High-net-worth individuals often have valuable skills and networks that can benefit nonprofit organizations and social causes directly. Providing mentorship, serving on boards, and offering pro bono professional services are some of the ways individuals can amplify their impact beyond financial support.
This kind of engagement can deepen a philanthropist's connection to their chosen causes, combining financial resources with personal involvement. It offers an opportunity for the individual to see firsthand the impact of their contributions. This can be a particularly fulfilling strategy for those who retire early, giving a meaningful way to spend free time.
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Incorporating Charitable Giving Strategies into a Financial Plan
High-net-worth individuals have a wide range of strategies available for structuring their charitable giving, from percentage-based allocations to more intricate estate planning tools like Donor-Advised Funds and charitable trusts. By carefully considering personal values, financial goals, and the societal impact they wish to create, philanthropists can craft a giving strategy that aligns with their values while also creating a legacy that reflects a commitment to social good.
Long Angle’s high-net-worth community often discusses topics such as philanthropy, impact investing, and more. In addition to our online community where members openly share insights and advice, members can also participate in social and educational events, peer groups, and alternative investment opportunities. Join Long Angle to get started.
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