The events of September 11 have affected all of us, and one of the effects has been to cause people to rethink their priorities and their goals in life. Perhaps now more than ever, many high-net-worth individuals (HNWs) are seeking ways to enhance the quality of their wealth experience. In addition to focusing on the traditional concerns of risk and return, they are looking for better solutions to the "soft" issues, such as how their resources are put to use in society.
Most HNWs, by definition, have more money than they will ever need. This means that they will ultimately either give it to charity, their heirs, or the government (through taxes). Traditionally, fee-based advisors have addressed these concerns in a context of estate planning. But in addition to being technically complex, estate planning is a topic that very few clients are enthusiastic about. Nobody really wants to think about dying.
But there is another way to address these issues–a way that is satisfying to the client, beneficial to charity, and profitable to the fee-based advisor. The solution? Think philanthropy.
Delving into a client's philanthropic goals is a perfect opportunity to learn more about a client's deeply held beliefs. Discussions about philanthropy lead naturally into more profound discussions about social problems the client would like to help solve and about the role of the wealthy in society. These are conversations that most advisors and clients would never get into in any other context, and they can deepen and strengthen the personal bond between advisor and client.
From a financial standpoint, advising a client on philanthropic matters is an excellent opportunity to develop a relationship with client's kids and grandkids– locking in the family as a client forever.
What's more, a client who becomes involved with philanthropy will be a more profitable client. When properly used, a private foundation, because of its many tax advantages, will greatly increase the total assets available for the client's philanthropic activity and for his family as well. This increase in assets translates into increased fees for the fee-based advisor.
Why do HNWs give to charity? There are probably as many reasons as there are donors, but a small number of reasons recur regularly. For the advisor, understanding these common reasons provides a context for raising the issue with clients who might be interested. (Because we believe private foundations offer an attractive combination of control and flexibility, this discussion assumes that a private foundation will be the vehicle proposed.)
#1: To Make the World Better
The desire to make the world a better place, in a big way or a small way, is an essential component of virtually every private philanthropist's desire. This desire may be highly specific, as for example, the HNW individual who knows he wants to help advance research in the field of gerontology. Or the desire may be generalized and, as yet, unformed.
This latter situation is much more common than you might think. In fact, a large number, perhaps the majority of private foundations, are formed and receive initial funding before the founder has specifically identified what he wants to accomplish. Rather, the founders are committed in a general way to improving the world and expect to grow into the role.
#2: To Minimize Taxes
Few people set up private foundations or make other gifts to charity just for income tax breaks. After all, if someone really places no value on money given to charity or set aside for future charitable use, the 50 cents of taxes they save is less than the dollar it cost. But many HNW people have an unformed feeling that they want to devote part of their wealth to philanthropy. For these people, tax benefits can be the key motivation to get them to act. Once they have acted, and formed a foundation, they then proceed to grow and develop as a philanthropist.
There are three basic tax incentives for HNW people to create their own private foundation. First are the immediate income tax savings. A client can cut his income taxes by up to 30%, every year, simply by funding his private foundation.
