A new year often sparks a desire to give back to others in a big way. I love this time of year because, as a wealth manager at Aspiriant, helping clients set up a charitable program is one my favorite things to do.
It’s exciting to sit down with families and discuss what’s truly important to them. Many families are strongly motivated to share their success to help make the world a better place, and they approach the mission with a serious sense of responsibility.
For example, one of the families I work with gathers every year to explore ways to give back. Both the older and younger adults go around the table talking about what charitable causes are really important to them and why. From that conversation, they list their philanthropic goals and plan for the coming year.
If establishing a giving plan is one of your New Year’s resolutions, start by focusing on five questions:
1. How do you want to help?
The first thing you need to do is decide the manner in which you want to give. It doesn’t have to be simply money. While you may have ambitious goals and desires, the key is to be true to yourself and realistic about what you can and cannot reasonably do. For example, a C-suite executive may not have much time to devote, but she may have a chunk of stock she could donate, which would help to diversify her portfolio, potentially reduce her tax liabilities, and provide long-term income to the charity.
2. Who do you want to participate?
Once you’ve decided the primary manner in which you want to give, look around to see if there is anybody you’d like to support your endeavor and select specific causes. Do you have a spouse who would like to help out or maybe even take a leadership role? What about children? Would you like to involve your broader family, like parents, grandparents, siblings, nieces and nephews? If so, how much time or money do they have available to give?
3. What specific causes do you want to support?
Now that you know how large of a network you have, it’s time to start working on a mission statement. A mission statement helps to hone in on the causes and communities that are most important to you, it also creates a road map to help you be more effective and empowered in giving.
Start by focusing on your family values and the impact you would like to have. Give thought to where you want to dedicate your efforts — locally, nationally, internationally or a combination of all three.
Involving your family in this step can be really rewarding. I find that kids and young adults have very particular ideas of which causes matter most to them. And it’s important to respect their wishes if you want their involvement and to instill long-lasting values of philanthropy.
4. Which charities best serve your mission?
Once you’ve developed a mission statement and figured out how to get involved, you can select the specific charities. This can be the most overwhelming part of the process because there are so many worthwhile organizations out there, and unfortunately, some that are ineffective or worse.
I often advise clients who are just getting started to go local. Find organizations within your community that you are already familiar with. Consider looking at charities affiliated with your church, university, work or some other group you trust. Starting small and building from there is the best way to go about it.
It’s also a good idea to refer to your local community foundation or a research organization such as Charity Navigator to learn more about how the charities spend donations.
5. What type of giving entity should you establish?
Finally, it’s time to set up the proper vehicle that will not only help you reach your philanthropic goals but also benefits your broader financial situation. It’s at this point where level of control, taxes and paperwork fit into the equation.
The three primary ways of giving are direct gifts to charity, establishing a donor advised fund (DAF) or a private foundation.
Direct giving is the easiest thing to do, but you give up the ability to potentially implement better tax planning. For example, gifting securities may be more tax-efficient, but not all charities are set up to receive stock.
With a DAF or foundation, you may contribute marketable securities. You can also control the timing of your gift and the year you claim a deduction. For example, you can fund a DAF in one year, then decide later where the money will go.
Foundations offer the opportunity to leave a legacy and provide a great platform for you and family members to develop a robust mission and giving program. But foundations also require more administration, separate tax filings, and compliance with an array of rules.
DAFs tend to be the most flexible. As a general rule, I believe that unless you have at least $5 million to give, it’s better to use a DAF than a private foundation.
The gift of giving
This is a great time of year to start thinking about establishing a charitable plan that will benefit the causes you believe in for a long time. A financial advisor experienced in philanthropy can make it easier by guiding you through these questions, then helping you set up and maintain your giving plan according to your wishes.
(Nikki Michelini is a Director of Wealth Management and Principal working in the Los Angeles office of Aspiriant, a leading wealth management firm serving affluent clients nationwide. Her area of specialty is Family Office Services. Nikki is a member of the American Institute of Certified Public Accountants.)
Originally published at medium.com