As U.S.-based f oundations and endowments consolidate amid shrinking donor participation, those nonprofits should be engaging their next generation of trustees and donors as soon as possible, investment and tax professionals shared, to make sure the institutions are well-positioned to attract new money amid the Great Wealth Transfer.
Through 2048, an estimated $124 trillion will be transferred from older generations to new beneficiaries, including spouses, children and charitable organizations, according to Cerulli Associates projections. Of that amount, $18 trillion is projected to flow to charities as these assets change hands—meaning endowments and foundations should be strengthening their relationships with likely inheritors now. In 2024, charitable giving in the U.S. totaled $593 billion, according to data from an Urban Institute annual analysis of IRS data. The same data show non-cash donations, largely donations of stock, represented 54.9% of all itemized charitable contributions in the U.S.
The Great Wealth Transfer will not only represent a shift in who stewards these trillions in assets, “it’s also a transfer of decisionmaking and values,” says Michael Gibbons, a partner in and the managing director of TwinFocus Capital Partners. “We work with our families in trying to integrate the children into the next generation of managing the families’ wealth. A first approach to that is often bringing them into the private foundation or donor-advised funds.”
TwinFocus is a Boston-based multifamily office and private investment firm serving ultra-high-net-worth individuals and families—some of which have their own foundations.
“Historically, when assets or bequests have been given to a charity at the death of an individual, in the past maybe they would give a big chunk of cash to a named charity. A lot of families today look to have more control over how those funds are directed,” Gibbons says, noting that donor-advised funds have allowed families to more easily direct money to multiple charities, as well as to control the pace of when donations are made.
Donor-Advised Funds Set to Grow
Donor-advised funds are charitable investment accounts that allow individuals to contribute cash, securities or other assets to charities while earning tax advantages.
“We have some clients that start family foundations, and they distribute money to charities as they choose to,” Gibbons says. “A donor-advised fund does a similar thing, but it’s a little less administrative burden on the family.”
Donor-advised funds are increasingly becoming a preferred vehicle for philanthropic giving among the high-net-worth crowd, particularly younger donors, new research by Bank of America Private Bank found. While 9% of wealthy individual respondents said they use DAFs, adoption was significantly higher among younger (Generation Z and Millennial) donors, with 20% of survey respondents in th e younger age range saying they use these investment accounts, the survey, released in September, revealed.
Bank of America Private Bank surveyed more than 1,400 respondents in the U.S. that had at least $3 million in investable assets and were age 21 or older. Survey respondents said they enjoyed various benefits of DAFs, such as tax-free asset growth, being able to maximize tax benefits and simplifying the process of their charitable giving.
“For younger donors especially, tools like DAFs offer a structured way to formalize the philanthropic values they are actively working to define,” the Bank of America report stated.
Next Gen’s Focus on Impact
In addition to engaging in authentic outreach to the next generation of donors and family trustees, Gibbons says nonprofits should also make sure their supporters are able to measure the impact of their giving. “On the asset allocation side, there’s ESG investing and socially responsible investing that is certainly important, but a side that’s often overlooked is that the next generation is also looking at the impact of their dollars and where they are being directed, ” Gibbons says. “Regardless of the investment return, how can you measure the impact of those dollars? Whether it’s a school or hospital, how can they measure the impact it’s having on the charities or cause they are there to benefit?”
Charley Meyer, director of institutional asset management at St. Louis-based Plancorp, works with endowment and foundation clients and notes that the organizations that are going to be “best positioned to receive significant charitable gifts are those that can demonstrate strong governance, financial stewardship and a long-term ability to keep that gift intact— so assurances that [a donor’s] gift is going to be managed prudently and in line with their objectives.”
“What I’ve seen is the successful nonprofits shifting from fundraising alone, to donor stewardship. It used to be in the past [ that donors would] just give the money to Harvard, for instance, ” Meyer continues. The thought was that the recipient institution would know how to invest it. “But this current generation wants to know how they are investing it.”
Transparency will resonate with younger donors, Meyer explains, especially those considering legacy gifts . That includes how the assets are invested, how donations will bring impact— and how much of a gift is going toward planning and investment management fees.
“We’re doing a lot of donor education,” Meyer says. “There is a false narrative out there that if someone has a lot of money, they understand everything. They may know how to make the money, but they may not understand the best way to give it away.”
Tax Benefits, Relationship Building
While donor-advised funds are a popular vehicle for giving, wealthy families have also become more interested in establishing charitable trusts and making appreciated stock donations, which also carry tax benefits, according to Joon Um, a tax advise r and certified financial planner at Secure Tax & Accounting. “We’re seeing wealthy families become more interested in charitable giving as part of their estate plans,” Um wrote in an email. “Donor-advised funds offer flexibility, charitable trusts help with estate planning, and donating appreciated stocks can offer tax savings. Foundations that understand these options are better positioned to attract future gifts.”
Matthew Chancey, a tax strategist and the founder of Tax Alpha Companies, said that if foundations and endowments are waiting for a bequest to take place before introducing their organizations to prospective donors, they are already “too late.” For nonprofits expecting to be the beneficiaries of transferred wealth, “very little of that will show up as a check,” Chancey wrote in an email.
“It shows up as a company, a building or a large position in one stock. And it shows up on a deadline,” he wrote. “That matters because the giving decision gets made in a short window. In the weeks before a sale closes, the owner is sitting with a CPA and an attorney, and everything is on the table.”
Chancey said institutions may make the mistake of assuming the decades-long relationships they have with donors will carry over to the children who inherit that donor’s fortune. But often, the new stewards of the wealth want to give to “what they’ve been a part of, not the name on their parents’ building.”
With this in mind, “the best-positioned institutions aren’t the ones with the biggest campaign,” but those that can accept non-cash gifts quickly—and know the CPAs and attorneys of prospective donors by name already.
Of the next generation, those set to inherit in the great wealth transfer, Chancey noted: “Most aren’t in that room, and usually it’s because nobody thought to invite them.”
Tags: Endowment Tax, Endowments, Foundations, fundraising, Impact Investing