The Altruistic vs. Financially Pragmatic Donor

In December, Bank of America and The Center on Philanthropy at Indiana University published The Bank of America Study of High Net-Worth Philanthropy. In the report is a section which contrasts the giving behavior of Altruistic Donors and Financially Pragmatic Donors. My question, which is an overarching theme of how I work with donors at my firm Ensemble Capital Management, is why must there be a choice between the two approaches? Why shouldn’t highly altruistic donors also be financially pragmatic?

Think of an altruistic donor who decides to give $10,000 to a charity. They are full of passion and write a check to the nonprofit. After taking into account the tax deduction, this gift will cost the donor about $6,000. But what if the donor was more financially pragmatic? What if instead of writing a check, they called their investment advisor and asked for $10,000 worth stock they had bought years ago for $2,000 to be transfered to the charity. The charity would receive the same amount of money, but the gift would only cost the donor about $4,400 because of enhanced tax deductions. If the donor transfered $14,000 worth of the stock, the after tax cost would be about $6,000.

Now if you assume that the altruistic donor was truly moved by the cause in question, then you can also assume that the $10,000 gift was the most they could afford. But it is the $6,000 after tax cost of the gift that is the relevant number when thinking about how much the donor can afford. So simply by transferring $14,000 worth of stock, the altruistic donor would be able to give 40% more support to the nonprofit without the gift costing them any more. The additional $4,000 is paid for in lower taxes.

Imagine your workplace has a corporate matching gift program where they will give $40 for every $100 you give to a nonprofit. I would hope that altruistic donors who cared deeply about a nonprofit would take the time to apply for those matching funds. Being tax smart about your giving is the same concept. But not taking full advantage of the tax incentives available to philanthropists, donors are effectively withholding government funding from the nonprofits they care about.

Being altruistic and financially pragmatic are not mutually exclusive. Being financial savvy does reduce the emotional passion behind a gift. Being smart about your giving only enhances the degree to which you can act on your passion.

If you are a fundraiser reading this, I have a suggestion for you. Next time a donor presents you with a large check, refuse to accept it. Tell the donor that in good conscious, you cannot let them overpay their taxes. Run the calculations and show them how much money they will save by transferring appreciated assets to you instead. The donor will either thank you profusely or better yet, may very well opt to give you a larger gift based on the fact the stock transfer will cost less than they expected. I wrote about this concept a couple years ago in an article titled Turning Major Donors into Philanthropists.

Disclaimer: The calculations in this post are intentionally just estimates. Depending on which state the donor lives in, the actual numbers could be higher or lower.

One Comment

  1. Pete Manzo says:

    Sean,

    Good points. I’ve always remembered hearing Jack Shakely, the former president of California Community Foundation, observe that most donors he worked with didn’t give for tax reasons, and that implying donors are giving for tax reasons was the quickest way to offend them. As you point out here, and as many commenters on your earlier post about Why People Give noted, tax incentives usually won’t factor into WHY donors give, but smart donors should take them into account when deciding HOW they give. I imagine it takes a good deal of tact, though, to find the right time and way to discuss that with them.

    Thanks,

    Pete