Tactical Analysis

The first three steps in the process of Tactical Philanthropy are Goal Establishment, Legacy Planning and Asset Analysis. Today we move on to Tactical Analysis.

Once we know what a donor’s short and long-term goals are and what assets they have at their disposal, we can begin restructuring their assets to more explicitly reflect their desired allocation of personal and social capital. Most people make charitable gifts in a reactive fashion, giving each year to the nonprofits that catch their attention and not giving much thought to the character of the social vision they are trying to achieve. But, once you have taken the steps to examine your goals and analyze your resources for achieving those goals, a world of new tactics becomes available to you.

The purpose of these tactics is to increase the amount of social capital you have at your disposal, reduce your cost of giving, and provide a platform for the donor to realize the many non-financial benefits of tactical philanthropy. Remember that the initial steps of creating your philanthropic vision and strategy (the creation of your worldview and which organizations you believe are best positioned to further your goals) must already be in place for tactics to have their desired impact. Otherwise, the leverage inherent in tactical giving will be used to enhance missions and values that may not be important to you.

Tactical Analysis is a dynamic process. The end result is a package of philanthropic tactics that interact to achieve the multiple goals of the donor in question. There are often synergies between the various tactics. For instance, setting up a private foundation by itself may not be a good tactic for a particular donor. However, that same donor may benefit from setting up both a private foundation and a charitable remainder trust. I think the best way to describe the process of Tactical Analysis is to delve into a case study that highlights the use of a set of tactics in combination and then to describe each available tactic as a stand alone entity (this second part I will cover in future posts).

So let’s begin with the case study…

Joe and Wendy are very financially successful young parents. They have a 5-year-old son named Andrew and a 3-year-old daughter named Claire. Recently they have been talking to their friends about the challenges of raising their children in an environment of so much affluence. They want to give their children the benefits of having wealth while at the same time teaching them financial discipline and not to take their money for granted.

Joe and Wendy make significant annual gifts to a number of charities. Currently they write checks for most of their gifts and from time to time, they transfer stock. Recently, they have been reading about more effective ways to give and they are eager to put a plan into action.

Joe and Wendy should consider setting up a charitable lead trust (CLT) and naming a donor advised fund (DAF) as the recipient of the lead interest. They will then have an opportunity to make a large, gift-tax free transfer to their children while utilizing philanthropy as a platform for teaching their children financial and family values.

By funding a CLT with $2,000,000 and committing to make annual payments of $164,000 from the trust into a DAF, Joe and Wendy can gift the principal of the trust to their children in 20 years. Assuming an 8.2% rate of return on the investments in the trust, the children will each receive $1,000,000 in 20 years. A higher or lower rate of return could increase or decrease the amount they receive, but regardless of the value, the gift will be completely free of gift-tax. In addition, the trust will receive an income tax deduction for the annual payments of $164,000, these gifts will be excluded from Joe and Wendy’s personal giving and will not face any annual percentage limitations.

Joe and Wendy can involve Andrew and Claire in the operation of the DAF to a greater and greater degree as they get older and use the process as an opportunity to talk to their kids about financial management, investments, taxes and giving back to their community.

In this way, Joe & Wendy set up a structure that will:

  • Provide them with a tax efficient way to engage in giving.
  • Allow them to think only about the philanthropic motivations of their giving, since the tax ramifications will be taken care of up front and put on autopilot.
  • Give them a framework to use their giving as a platform to discuss their most deeply held values and beliefs with their children, learn about their children’s interests and values, and give them a context to teach their children about financial issues.
  • Transfer approximately $1 million to each child at ages 25 and 23 respectively, but only after the children have spent 20 years discussing and witnessing the value of money and being educated in how to handle it.

You can see from this example how Joe and Wendy have increased their ability to give (by lowering their after-tax cost of giving), increased their family’s personal capital (by transferring assets on a tax-free basis to their children), and incorporated giving into the very fabric of how they raise their children.

This is just one small example of how a family can engage in tactical philanthropy. Going through the process in practice would involve a much more thorough analysis with many more issues being addressed. There are actually multiple solutions that could fit Joe and Wendy’s needs; the CLT/DAF combination is just one possible outcome. At my firm, when we produce a Philanthropic Optimization Process® report for a client, we present a series of options for consideration. Given the trade-offs between various tactics and the way that a particular solution can change family dynamics, there is no “right answer” when it comes to devising a Tactical Philanthropy plan.