If You Knew You Could Make Philanthropy a Bigger Part of Your Financial Planning, Would You?

Whether we want to or not, we all end up giving money in the name of philanthropy each year. Some of us do this intentionally by contributing to a favorite charity. Others have our hands forced into helping others without even completely realizing it. In the financial world, we call this voluntary versus involuntary philanthropy.

• Voluntary philanthropy is giving money freely because you want to help people and/or it makes good financial sense.
• Involuntary philanthropy is paying taxes. Because, let’s face it, this is social capital and a form of philanthropy too.

You may not think of paying taxes as philanthropy, but it is. A good chunk of our tax dollars are put into programs that support people in some way. It’s involuntary because you didn’t really choose to send it there, nor do you have any real say over how it’s allocated, you only made the “gift” because it’s the law.

Charitable Giving Isn’t Just for Billionaires

Most people, if they had a choice, would prefer to decide how their money is used to help people. That’s where voluntary philanthropy enters into the financial planning conversation. Voluntary philanthropy is about redirecting wealth that would otherwise be taken as income or estate taxes to more worthwhile causes or organizations.

For over 100 years, as a country we’ve had a charitable deduction rooted in a public policy that promotes charitable giving to private institutions and organizations doing great work within the community. On average, these organizations can do what the government can for a quarter of the cost. They are more efficient and impactful.

Many of us think that charitable giving as part of the financial planning process is only for the mega-rich. We assume this kind of planning is just for the Bill and Melinda Gates’ of the world. It’s not. It’s for average-affluent, middle-class millionaires. Rethinking how you give to charities each year can help you do more that matters in your community and more effectively manage your money.

Financial Freedom Is Key to Building a Philanthropic Legacy

Before you can approach this idea of doing more voluntary philanthropy, most individuals and families need to believe confidently, through quality and comprehensive financial planning, that they are legitimately free financially. How does that happen? Generally, the priority list looks like this:

 
The majority of people we’ve worked with want to accomplish steps one and two before they tackle step three. That usually involves investing, creating income, protecting assets, and doing risk management in a way that helps them to feel very confident of success with a high level of statistical certainty. At that point, they can more seriously enter into a conversation about family legacy and what they want that to look like.

Once those first two steps are accomplished, we can then move to more serious thought around philanthropy. It gets easier when we’re talking about tax money because that’s money that you’re not taking away from yourself or your family. When you make it to that third level, you can take back control of your own money for the things you care about more personally and the causes and organizations that are more likely to make an impact in your community.

Examples of Ways You Can Use Philanthropy in Your Financial Planning

When we talk about making the move from involuntary to voluntary philanthropy through strategic financial planning, people always want to hear some examples. What are some things that can potentially work for you? Well, some of the more interesting strategies right now are charitable remainder trusts, donor advised funds, and using life insurance as a source of financial leverage.

Here are a couple examples of how people are putting these strategies to work:

Example 1: Donor Advised Fund + Strategic Use of Life Insurance

We currently have a gentleman who’s putting $200K a year into his donor advised fund. That donor advised fund could be given out annually to nonprofits to the tune of $200K plus earnings each year. But, right now, this individual doesn’t really feel clear or comfortable with what sort of organizations he would give that much money to and feel good about it.

His idea is I can give away $100K a year and feel good about that, but that other $100K I want to leave in my donor advised fund for now. So we said to him, what if you took that other $100k and put it in a life insurance policy inside the donor advised fund? You still get the deduction (because the deduction is triggered when you give it to the donor advised fund), but now for $100k a year he’s creating within his own donor advised fund what he’s able to view as an endowment component.

That $100k a year is going to result in a $5.7 million benefit upon his death that will pay into that donor advised fund and sustain an enduring legacy after he’s gone. Even if he pays that premium for 20 years, he’ll have put in $2.7 million and gets out $5.7 million guaranteed. That’s a pretty nice return. This is an example of leveraging life insurance to make one plus one equal three.

Example #2: Charitable Remainder Trust + Strategic Use of Life Insurance

Another client of ours has a condominium that she owns outright, worth about $300K, that she uses as a rental property. She recently placed this condo into a charitable remainder trust. Upon her death, the condo—or if she’s sold it by then, whatever she’s reinvested the proceeds into—will pass to her main charitable beneficiaries.

This is a woman whose total net worth is about $2.5 million. She’s average-affluent in the grand scheme of wealth holders. But she’s very motivated to help her church and some other organizations, and wanted to do something charitable. Even if she holds onto the condo and real estate grows at an average of 3% per year, because she’s still relatively young she’s looking at leaving somewhere in the ballpark of half-a-million dollars to charity at the end of her lifetime.

Also, because it’s an income property, she can easily satisfy the other aspect of a charitable remainder trust—which is paying out income annually to the donor. The end value (the remainder interest) goes to the charitable beneficiaries, but the lifetime value (the income interest) goes back to her. So her income just keeps flowing to her like it does now, except it’s coming through a trust. The beauty of this is that she gets a partial income-tax deduction for putting that condo into a charitable remainder trust—even though it’s not really going to an end-user charity until 20 or 30 years from now.

The last component was adding a term life insurance policy. We did $400K for 20 years. If something happens in the first 20 years and that condo goes to that charity instead of her family, she can still make her kids whole. After 20 years, she will have made up the money and the kids get plenty. This is another strategic use of life insurance—but in this instance it’s being used to make one minus one still equal one if that policy were to kick in.

Using Financial Planning to Do More That Matters with Your Wealth

Many individuals and families have a desire to do more to help the people, causes and organizations they care about the most. Unfortunately, there’s a lot of data showing that the majority of us will go to our graves not having done even close to what was possible because we didn’t understand what we actually had the financial potential to accomplish.

Most people never take the time to sit down, look at the numbers, and see the big picture. They never create a plan for establishing financial independence, building a family legacy, and making a major philanthropic impact. That’s a shame because the people that do are often blown away when they find out how much they have the ability to achieve and what a significant contribution they can make to the things that matter most to them.

Strategies like the ones in the examples above—and others such as charitable deduction bunching with new tax law—can enable you to both serve the greater good and maximize your finances in really smart ways. But you never know just how much of a difference you can make until you take that first step.

At Wealth Impact Partners, we encourage you to pursue a greater level of understanding through a comprehensive approach to financial planning. Chat with us today to schedule an assessment or have us take a second look at your existing plan. We would love to help you do more that matters with your money!

The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be complete analysis of the material discussed, nor does it constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned.

Disclosures:

The material contained herein is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation or needs of individual investors. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as insurance professionals and investment advisors.

Neither Wealth Impact Partners, Valmark Securities nor its affiliates and/or its employees/agents/registered representatives offer legal or tax advice. Please seek independent advice, specific to your situation, from a qualified legal/tax professional.

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