Legacy Planning

The second stage of Tactical Philanthropy looks at how you want to distribute your personal and social capital upon your death. Subject to the rules of the estate tax, you can distribute the capital you accumulated during life to the government (as social capital), to nonprofits (as social capital) and to your heirs (as either personal or social capital).

There are numerous competent estate planners and bequests are the number one form of planned gift. Therefore, I think that the distribution of personal capital to your heirs and social capital to the government and nonprofits is pretty well understood by individuals and their advisors. But, don’t overlook the distribution of social capital to your heirs.

Here is a simple example:


Susan is an 86-year-old widow with an adult daughter named Jill, who is financially secure. Susan’s assets are large enough that she expects the bulk of her estate to be subject to the estate tax. She plans to leave Jill her entire estate. While talking to her estate planner Susan learns that $1,000,000 of her estate is held in an IRA. If she leaves this account to Jill, both income tax and the estate tax will be levied on the assets and almost 75% of the account will be due in taxes. While Susan has never given very much to nonprofits, she knows that philanthropy is very important to Jill. Susan wants to make sure that Jill has the money she needs, but both of them would like to see the money used for social good if possible.

Tactical Solution:

Jill will inherit about $250,000 from the $1 million IRA after the estate pays taxes. Since Jill is financially secure, she may not “need” the $250,000 and might rather be named as an advisor to a donor advised fund with $1 million in assets. Susan can accomplish this by naming Jill as the heir to the IRA and a donor advised fund as a contingent beneficiary. In this way, Jill can decide which option is better at the time the inheritance takes place. If she wishes to take the $250,000, she can do so. If she would rather be named as advisor to a donor advised fund, she can disclaim – or refuse to inherit – the IRA assets. The $1 million would then flow into the donor advised fund and no income or estate tax would be due. She will have created this meaningful account for a cost to her of one fourth of the account value. Jill would then be able to use the donor advised fund assets either to increase the amount of her giving or to offset the cost of her personal giving, thereby increasing her personal capital.

Looking only at the IRA, we can see that Susan can either leave $750,000 as social capital to the government and $250,000 as personal capital to Jill, or the full $1,000,000 as social capital for Jill to distribute to nonprofits. Another important point is the fungiblity of personal and social capital. Since Jill already engages in charitable giving, she can use the donor advised fund assets to replace her own giving or to enhance her giving. By replacing her giving she frees up personal capital, by enhancing her giving she distributes more social capital.