All about Charitable Giving Strategies

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In serving high net worth clients, financial advisors and financial planners need to assess their attitudes towards charitable giving. For clients with an interest in philanthropy, helping them to systematize their approach to giving, as well as to increase the impact of what they give, can be a vital service that increases their satisfaction and thus cements their relationship with you.

Wealth and Charitable Giving: According to a 2009 report by the Center on Philanthropy, the vast majority (98.2%) of Americans whose net worth exceeds $1 million engage in charitable giving. The same study, meanwhile, indicates that these donors often are reactive rather than proactive in their giving, responding haphazardly to direct appeals for funds rather than setting out a strategic plan for giving, in which they identify and prioritize the causes and organizations that interest them the most. In many cases, these wealthy donors are simply uncomfortable with saying no to a direct solicitation, and thus wind up saying yes either too often or to the wrong charities.

On the other hand, in an intriguing test of financial psychology, researchers at the University of California, Berkeley conducted a series of experiments designed to test people’s attitudes about charitable giving that cast doubt upon the charitable impulses of the rich. (See “The rich are different from you and me” in The Economist, July 31, 2010.) The best predictors of these attitudes were the subjects’ self-perceptions about socio-economic status, out of all the demographic characteristics tested. Contrary to the implications of the Center for Philanthropy report, participants in the Berkeley test were less charitably inclined as their self-identified status grew.

That is, people who placed themselves low on the status scale believed that people should donate a larger percentage of income to charity than those who viewed themselves are of high status. Moreover, the lower they were on the scale, the more likely they were to assist a specific poor individual.

One possible interpretation is that selfish people are more apt to become wealthy. On the other hand, the researchers found that whether high status was inherited or earned was immaterial. Self-made persons were not more selfish than those who were born into high status. Another possibility is that the poor tend to share and cooperate out of necessity, to survive. Note, however, that a key weakness in the study was that no money actually changed hands, and thus professed attitudes may not be consistent with actual behavior in the real world.

Setting Charitable Giving Strategies: In order to take a holistic approach to their clients’ philanthropic attitudes, financial advisors and financial planners need to go beyond the consideration of purely monetary contributions. The client also should ponder which causes are also worthy of his or her time and effort, such as by serving on a charitable board, and how much time and effort they are willing to contribute.

The process of discernment can be time consuming, and may require a series of meetings between the financial advisor (or financial planner) and the client. An executive of a small wealth management firm suggests that these meetings should address:

  • What really matters to the client
  • What results do they seek
  • How much are they willing to commit in terms of time and money to each
  • What are their principal areas of interest and concern
  • What causes or organizations are they most interested in helping

Impact of Tax Benefits on Charitable Giving: Additionally, various experts find that the tax deductions associated with charitable giving, as they apply to both income taxes and estate taxes, tends to affect strategic givers in a different way than is normally supposed. That is, rather than being a primary motivation for charitable giving, these tax advantages instead are sought by givers as a means to increase their overall philanthropic spending. In other words, they tend to recycle their tax savings into yet more giving.

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