The Foundations of Philanthropic Financial Planning
If you’ve been thinking about donating to causes that are important to you but have not yet pulled the trigger, or your giving plan simply consists of giving to places like your child’s school or your church or community group when they ask, you may be missing out on the potential benefits of making philanthropy a well-considered part of your overall financial plan.
Why Philanthropic Planning Matters
There are two main reasons for taking the time and effort to make a philanthropic plan. When you have the resources to make an impact, this type of planning helps you pinpoint what you want to accomplish for your family, community, and society. Plus, putting charitable giving in the context of other wealth planning strategies like estate and tax planning can help increase the effectiveness of your philanthropy and overall financial plan.
Steps to Setting Up a Philanthropy Fund
Taking the proper steps in the beginning can give your charitable giving plan a solid foundation.
- Establish a budget and schedule for giving. How much are you comfortable giving? Do you want to donate once, annually, during your lifetime, or through your estate?
- Create goals for your philanthropy. What kind of efforts do you want to support in what fields? Once you pick the recipients of your philanthropy, what do you want to help them accomplish?
- Determine what kind of assets you want to donate. While cash is the simplest, you can also donate non-cash assets such as stocks, real estate, or private business interests.
- Figure out a structure for your charitable giving. Of course, you can simply make one-time or annual donations, but you can also set up a donor-advised fund, charitable trust, or family foundation.
Identifying and Managing Financial Risks in Philanthropy
There is one other step that’s equally important. As with any other part of your financial plan, philanthropy can involve some risks. A recent survey of donors and nonprofits found that one in five projects are negatively affected by risk.[1] So, it’s essential to integrate strong risk management practices into your philanthropic activities.
Key Financial Risks to Watch For
Four kinds of risk can affect philanthropic outcomes:
- Financial risk. This refers to the potential for your fund or foundation to lose financial value, due to poor investment decisions, insufficient tax planning, etc. Losing value means you may be unable to donate at the desired level to meet your goals. Financial risk also covers failures by your chosen organizations to meet their own goals because of financial difficulties related to underfunding or over-spending.
- Reputational risk. Reputational risk refers to events that could cause a foundation or donor to lose face. This could come from making a grant or pursuing policies that bring negative attention to the nonprofit organization and/or its donors.
- Governance risk. Governance risk events include conflicts of interest, poorly designed or inappropriate organizational structures, and inexperienced boards. Some of these risks can be revealed by due diligence, while others may be less predictable, such as a board member’s death or a law change.
- Execution risk. There are also risks that can negatively affect the intended impact of a charitable project. If you are planning to support a specific project, it’s important to look into how well it’s organized and implemented. A poor plan on the part of a nonprofit can derail your charitable goals.
Creating a Financial Risk Management Plan for Philanthropy
Any risk management plan should include risk assessment (identifying and prioritizing potential risks), mitigation (taking steps to manage risk), contingency planning (alternative plans to address unexpected events), and monitoring (keeping an eye open for developing and new risks).
Planning for risk involves due diligence in researching the companies you’re considering supporting, care in structuring your philanthropic activities, and transparent and effective communication among donors, professional advisors, and grantees.
The Role of Nonprofit Compliance in Risk Management
It’s important to know how the companies you’re supporting manage their own risks, and compliance with all relevant laws and regulations plays a large part in this. Nonprofits must avoid risks like losing tax-exempt status, reputational damage, and financial insecurity to operate and fulfill their mission.
For most nonprofits, the biggest concern is adhering to IRS regulations to maintain their tax-exempt status. But there are also laws at the state and local levels that they must follow to avoid penalties and fines. These regulations may cover fundraising, reporting, or governance. You want to be sure your selected organizations have clear policies and procedures to ensure compliance with all the applicable regulations. They should also have internal controls to monitor and improve their own compliance and compliance training for board members and staff.
Nonprofit compliance safeguards your investment, the organization’s financial stability, and the reputation of the organization and you as a donor.
Balancing Impact and Financial Security
As you probably know from your investment activities, results are sometimes proportional to the risks you’re willing to take. In other words, taking certain types of risk can be positive. For example, it may be riskier to support a start-up nonprofit than an established organization. Still, if the new nonprofit has an innovative approach that gets results, you might achieve more impact by donating to them.
Like portfolio management, there is a spectrum of risk appetite, and you need to consider where you are comfortable. As part of your philanthropic planning, you should define your preferred level of risk and determine the kinds of risk you might be willing to take for what level of impact.
Leveraging Professional Guidance
Developing a philanthropic plan with achievable goals, an appropriate charitable giving structure, and an effective risk management strategy may sound complex. Honestly, it can be. That’s why it’s important to leverage the knowledge and experience of professional advisors. Your financial advisor can help you understand and take advantage of various tax incentives for philanthropy that may reduce your income tax, capital gains tax, and estate taxes.
Your advisor can also guide you in determining the level and kind of resources you want to dedicate to your philanthropic program and in evaluating the charitable vehicles you wish to use, such as donor-advised funds, foundations, and trusts. An advisor can also help you think through how much direct non-monetary involvement you want with your charities and whether you want your charitable structure to also provide income for you or your family. It is essential to understand all these factors before you finalize your giving plan.
To be custom matched with a fiduciary you can trust to support your goals with customized planning and put your interests above theirs, take advantage of our advisor matching program today.
[1] http://seachangecap.org/wp-content/uploads/2017/02/Open_Road_Risk_Toolkit.pdf
The information in this article is provided by CWM, LLC. The opinions are those of the writer, and not the recommendations or responsibility of Cetera Advisor Networks LLC or its representatives.
