“Planning for charitable giving is one way families help their younger members prepare to manage money they may receive through an inheritance,” said Kevin Wick, a senior wealth planning strategist with Vanguard Advice Services. “It gives you an opportunity to observe how your children—and grandchildren—make financial decisions,” said Wick.
Prudent investing principles apply to any kind of long-term investing, whether it’s for charitable giving, retirement, or education goals. (Vanguard Charitable’s Invest in philanthropy report highlights the similarities.)
To make the experience even more effective, apply these key principles.
Knowing your financial goal is the first principle of successful investing, as well as charitable giving. “We’re big advocates of family meetings,” said Dennis Duffy, who leads Vanguard Flagship Select Services™.
Set clear goals
“No matter how a family comes together, whether it’s a family dinner or a family vacation, they should talk through what’s important to all of them, what they value, and what they want to stand for as a group, including charitable goals,” Duffy said.
“We’ve seen families make those goals more concrete in a variety of ways. Many let children pick a charity that benefits a hobby or interest they have. Others give children a sum to invest, along with guidance from an investment-savvy family member, with the goal of generating returns they can donate to charity. And some even explore causes their children’s favorite celebrities support as a way to help develop good decision-making skills,” said Duffy.
As with investing, it makes sense to be tax-smart when choosing charities to support. Consider selecting one the IRS classifies as tax-exempt. Using a donor-advised fund or even forming your own family foundation could also help you manage and disburse your charitable gifts, especially if you collectively have $25,000 or more to fund your donations.
Once you set your goals, you can define charitable savings and spending targets, just as you would in your investment plan.
If you have a family charitable investment portfolio, you can help engage novice investors in your family in the process of determining the appropriate mix of stock and bond investments (the asset allocation).
“The concept of diversification—having a mix of stock and bond investments in percentages that are appropriate for the time you have until you need to start spending and your risk comfort level—is a good one to discuss with family members. Loved ones who are less familiar with investing can learn good practices for constructing their own portfolios during the conversations,”
Some family members may be very comfortable taking on risk, while others may be quite conservative. Some may have outsized expectations for investment returns, while others may have no expectations at all.
Regardless of why you’re investing, costs matter. “The less spent on fees, the more is available for growth, which leads to creating a greater charitable impact,” said Ann Gill, chief philanthropic officer with Vanguard Charitable.
Keep costs low
One way to stay connected to the causes you support as a family is to keep the conversation going. Make it a practice to review your investment strategy as a family to confirm it’s still appropriate. Then comes the fun part—reviewing the charitable contributions you agree to give collectively.
Maintain perspective and long-term discipline
“It’s a good practice to speak regularly with those you love about your charitable goals, especially when they’re shared goals. These discussions are also excellent segues to more difficult topics, such as financial readiness for retirement, preparations for medical issues, and even plans for dividing your estate once you pass away,” said Wick.
Investing for a cause you love, with those you love, can be one of the most rewarding experiences you have. Giving as a family is a great way to learn together and can bring you closer as you share a common goal and the satisfaction of working together to achieve it.
Enjoy the process
All investing is subject to risk, including the possible loss of the money you invest.
The information provided here is for educational purposes only and isn’t intended to be construed as legal or tax advice. We recommend that you consult a tax or financial advisor about your individual situation.