Philanthropic Giving: How Much Control and Complexity Do You Need?
John F. Thompson, CPWA®, CIMA®
As a Private Wealth Advisor, I help highly successful Business Owners, Professionals and their Families work towards making "work" optional so they can focus on their life of meaning
Key Takeaways:
Well-planned philanthropic giving is easy, but it’s not always simple.
That is, it’s easy to want to give generously enough that a planned gift structure makes sense. But even after you have decided to make a planned gift, implementing it can be complicated because of the many structural details that must be gotten just right.
In addition, you have to decide to what extent you want to be in charge when you make a planned gift and how much of the work you want to delegate to an advisor (or even to the nonprofit itself).
The upshot: You need to think through how complex a gift you would be comfortable with and how much control you want to maintain. Gaining clarity in those two areas can be instrumental in deciding which planned giving options are right for you.
Two case studies
To better understand what’s at stake here, start by looking at a case study involving planned giving complexity.
Rick is meeting with his lawyer regarding a planned gift to a children’s hospital. When his lawyer starts to go into deep technical detail on some of the ways to structure the gift, Rick interrupts. “Slow down,” he says. “I want to make this tax-efficient, but I also want to keep it simple. I really don’t want any ongoing responsibility or involvement. I just want to make it happen.”
Clearly, Rick has a need for low complexity in making this particular gift. He wants to know it’s going to get done but also wants to be spared the details. He’s busy with other pressures and doesn’t want ongoing involvement with, or responsibility for, the gift.
Next, an example involving the issue of control in planned giving.
Maggie and Steve share a tradition of giving to nonprofits. For many years, they’ve been active donors to the art museums and art schools in their city. They prefer to fund individual programs (such as specific exhibitions) rather than contribute to operating expenses or make unrestricted gifts. Now they’re discussing a major planned gift they want to make.
“I understand we’re setting the money aside,” says Maggie, “but we’d still like to be able to pick and choose what we support. Is that possible?”
Maggie and Steve have a strong preference for control over the beneficiaries of their generosity. For them, the pleasure and gratification of giving generously comes partly from being able to control the ways in which the organizations that Maggie and Steve support spend that money. They like being able to pick the program of one museum or another based on their values and beliefs, and they would feel frustrated if a planned gift made them cede control over the way their money was used.
As evidenced above, different people have different preferences for complexity and control. While Rick clearly has a low tolerance for complexity, others might insist on being part of the intricate planning and implementation process. And while Maggie and Steve want to maintain significant control, others are content to make a planned gift to a specific worthy charity and leave it at that.
Think about your own giving preferences. Do you want ongoing control even after you’ve made your planned gift? Do you need the structure of the gift and its implementation to be simple, or do you want to dive into the details?
Important: There is no one right answer. Planned gifts differ in terms of their control and complexity characteristics, and you need to decide which one is right for you in order to get the most out of your charitable experience.
Control issues
When you approach planned giving, think through where you are on the control continuum. For example, some approaches to planned gifts—including private foundations and donor-advised funds—give donors near-total control. Generally, both of those options allow donors to stay extensively involved and have control over which charities will benefit from their giving. You can, for example, give to the same charities year after year—or you can choose to change charities when you wish.
On the other hand, charitable gift annuities and pooled income funds are planned gifts that require you to relinquish most of your control. People who use these types of planned giving solutions have carefully selected the charity and are extremely comfortable with it. They’re not interested in staying actively involved after they make the gift.
Complexity sensitivity
Donors who want a low level of complexity will likely look for planned gift options with minimal startup costs, streamlined financial planning and legal requirements, and simple ongoing administration. In contrast, those who prefer a high degree of complexity in their financial and charitable arrangements can expect comparatively higher startup costs, more involved financial planning and legal requirements, and extensive ongoing administration. Often, there are greater tax benefits offered that help make such complexity more palatable.
As with control, there is a complexity continuum. The degree of complexity can be illustrated by the same two planned gift options cited in the case of control—private foundations and donor-advised funds—which, as it happens, are at opposite ends of the complexity continuum (see Exhibit 1).
The Complexity Continuum
Private foundations are high in complexity. When a private foundation is established, it becomes a legal entity that must adhere to many administrative rules and regulations. Donor-advised funds, on the other hand, are quite simple to set up, and they require limited ongoing oversight. In addition, the list governing rules and regulations to consider is short.
Assessing your control and complexity preferences
So where do you fall on these continuums? Rating the following list of statements about you and your giving can help you get a much better idea of your control and complexity preferences.
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Pick a number from 1 to 10 to show how important each of the following considerations is to you:
Now, add up your score for statements 1 through 5.
Identifying solutions that may work for you
Based on your preferences for control and your willingness to deal with a complex process, there are certain types of planned gifts that will likely be more or less appealing to you. In Exhibit 2, we have placed different types of planned gifts in one of four quadrants. (Keep in mind, there may be situations that don’t match up perfectly with this matrix.)
As you can see:
Donors who want a lot of control but are not very interested in complicated planning or implementation generally favor will bequests, charitable gifts of life insurance, and donor-advised funds.
Donors who want a lot of control and don’t mind complicated planning and implementation should seriously consider charitable remainder trusts and private foundations.
Donors who do not need a great deal of control and who are okay with complexity should think about charitable lead trusts.
Finally, donors who have little interest in control and have a low tolerance for complexity will be attracted to pooled income finds, charitable gift annuities and supporting organizations.
Ultimately, donors with a significant need for control tend to prefer planned gifts that let them change investments or make an anonymous donation. Donors with a high tolerance for complexity are significantly more likely to look for a break on current income taxes, expect estate tax benefits and want to generate a personal income stream as a result of the gift.
Getting advice
In our experience, many financial advisors are not knowledgeable, not experienced or both when it comes to planned giving (see Exhibit 3).
Therefore, one of the smartest moves you can make is to get a second opinion—either about your current approach to charitable giving and how it is being managed, or about a particular planned giving strategy or product that you are now considering.
Getting a second opinion is also a wise move if you have taken action already but are a little unsure and anxious about the path you’re on. This gives you the opportunity to correct mistakes or use solutions and products that can do a lot more to help you accomplish your charitable goals—and have a major impact on a cause you care about.
Action step: Contact your financial or legal professional to assess whether you’re on track to achieve your charitable goals and to determine any gaps that could be addressed to help you get there. This can also be a good time to discuss any other financial concerns you may have.
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