What Type of Philanthropist Are You?

Whether we like it or not, we are all philanthropists in some form or fashion. An important distinction is whether our largesse is voluntary or involuntary.

Voluntary philanthropy is done with deliberate intent to promote the welfare of others. While there is no shortage of worthy causes, we make a conscious choice to donate our limited resources in a way that reflects our values. In contrast, involuntary philanthropy refers to how our tax dollars are allocated by various government entities in support of what economists call “public goods”. Public goods may include roads, bridges or other infrastructure that we find worthwhile, but may also include spending that we find unnecessary, or even odious. While taxes are necessary to promote our collective welfare, this type of involuntary philanthropy is probably not how we would otherwise allocate our funds, given the choice. 

Think about it, taxes really are a form of involuntary philanthropy. We don’t get to choose how our tax dollars are spent by the government. We have no say in the matter. In fact, much of the government’s spending is classified as mandatory, and includes spending that the government must fund by statute, as well as interest on our nation’s debt that must be paid. So, in fact, the government too has limited control over how our tax dollars are spent. When we get to choose where our money is spent, and how it is spent, then and only then do we become a voluntary philanthropist and, in the context of taxes, few would argue that it's completely our choice.

Again, do you ever wonder where on earth your tax-related involuntary philanthropy actually goes? The answer may surprise you, and it can be found in the instructions used to complete your income tax return (Form 1040).

As the chart indicates, most of our money goes towards Social Security, social programs, national defense and foreign affairs, followed by the growing interest on the national debt. You have no say in where it goes or in what percentage, and you probably would not allocate your own charitable bequests in this manner.

If, however, you are a voluntary philanthropist you get to choose where your money goes and how it will be spent. This control can be exercised directly, or may be a function of selecting organizations and causes that reflect your values, and ensuring that they are transparent and effective in how funds are used.

Would you prefer that your philanthropy be directed to cultural arts programs, educational institutions, scientific research, religious institutions, organizations that promote public health, or any number of worthy causes that reflect your values, rather than to fund the spending objectives outlined in the chart above?

The Internal Revenue Code (our tax system) provides significant incentives for your voluntary philanthropy. If you are willing to plan a gift the government is willing to forgive a tax, and this is true of both income tax and estate tax. You may ask why would the government provide any incentive for your personal philanthropic pursuits? Simple, the more money you give, the less money the government has to give to fund various programs.

On December 20, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which increases the benefit that individual taxpayers will reap for their voluntary philanthropy. Philanthropic planning is not merely for the ultra wealthy, the tax codes makes generous allowances for gifts to qualifying charities. When charitable planning is combined with income tax and estate tax planning, retirement planning, investment management, and other forms of financial planning, a ripple effect is created. In other words, your voluntary philanthropy is similar in some respects to tossing a pebble in a lake or skipping a stone in a pond. You’ll see and hear the splash, but the impact of the exercise is in some ways unknowable at times. So too is the end result of your philanthropy. The lives it can touch and the changes it may effect can be truly profound. When charitable or voluntary philanthropic planning is entered into, it results in income or estate tax savings, increased cash flow, or any number of other positive financial outcomes, so it’s possible to reap the benefits and satisfaction of doing good while improving your own lot. Further, it provides positive incentives to expand your voluntary philanthropy in ways that you may have never imagined. And all on your terms.

Here are just a few examples of common scenarios and events that may help spur your own voluntary philanthropy:

• You have a highly appreciated asset(s) that have not been taxed, or a tax liability that you’d prefer to avoid. Examples may include:
• A planned sale of a business
• Having a significant capital gains tax exposure resulting from real estate or other investments that have increased substantially in value
• A concentrated equity position with significant built in capital gain
• You hold large retirement plan balances in IRA’s 401k or 403b plans, pensions, or other types of retirement plans with required minimum distributions
• You are already retired and have sufficient assets, but would like to generate more income
• You have a large estate that may incur a federal and/or state estate tax liability

Or perhaps you just want to leave your mark on the world. Famous people such as Warren Buffet, George Soros, Carlos Slim, Bill and Melinda Gates, along with some less-known folks like Robert Morin, Raymond Suckling, and Dorothy Webb have been advised on how to leverage voluntary philanthropic planning to benefit themselves and others. All changed the world in their own way.

Philanthropy creates opportunities and pathways for change, and by using the tax code to leverage voluntary philanthropy new paths may be created. Now may be the time to open your wallet and choose to become a voluntary philanthropist.

For more information please reach out to me.

A special thanks to John Male CFP for his contributions to this blog

Jonathan Gassman | 9 East 40th Street, Suite 500 | NY NY 10016 | Telephone: 212-221-7067

DISCLAIMER: Any accounting, business, financial or tax advice contained in this communication, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. The opinions and analyses are subject to change at any time. If desired, The Gassman Financial Group including Gassman & Gassman CPA PC and G&G Planning Concepts Inc., would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired services. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument

#taxes #chartiableplanning # retirementplanning #estateplanning #financialplanning #plannedgiving #capitalgains #CRT #CLT #Foundations #DAF #CGA