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This article appeared in the January 4, 2017 edition of "The Chronicle of Philanthropy"

Wanted: Better Advice for Wealthy Donors

By Paul Connolly

With the 2016 election just weeks behind us, it is still uncertain what the Trump administration’s influence on philanthropy will be.

But the odds are good that the number of huge gifts to nonprofits in America will continue to climb. If Congress enacts legislation to decrease top income-tax rates and repeal the estate tax, affluent people will see their after-tax income rise, and wealth will be further concentrated in the uppermost stratum, creating fertile ground for more high-net-worth individuals to make even bigger donations. That trend is already taking hold, as The Chronicle’s list of the biggest gifts of 2016 shows: Twelve people made donations of $100 million or more last year, compared with just six in 2015.

Unfortunately, some of these multimillion-dollar gifts may not do nearly as much good as the donors hope. That’s because too few of them are getting the sound advice they need to move from good intentions to effective contributions and real positive impact.

I’ve had an unusual vantage point to see many sides of philanthropy, as a consultant who worked nationally with foundations and nonprofits and, now, as a philanthropic adviser at a multifamily office that advises individuals and families with substantial assets on their philanthropic strategy.

While funding from foundations — which some call "organized" philanthropy — made up only 16 percent of total U.S. charitable giving in 2015, it gets the lion’s share of attention. The 80 percent from individuals and bequests totaled almost $300 billion, a far more consequential portion, although it is indeed "less organized," mostly representing a multitude of smaller donations to hundreds of thousands of religious groups, schools, and other nonprofits across the country.

But the proportion of gifts from individuals of $1 million or more is escalating, with more than 1,000 donations of that size made annually. And megagifts are getting larger: About $3.3 billion of philanthropic giving in 2015 included donations that were $100 million or higher, creating a more concentrated revenue stream that is becoming more crucial to America‘s nonprofits.

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Alongside the growing population of the ultrawealthy, an industry — which is somewhat fragmented and opaque — has arisen to serve them, including wealth managers, private banks, trust companies, family offices, and trust and estate lawyers, along with a host of other financial, insurance, investment, legal, and philanthropic advisers.

Yet too often, I have seen the most generous donors getting inadequate advice about how they can truly make a difference for a cause they care about. And when the size of the donations get bigger, the stakes are ever higher. To be sure, it’s in the interest of a firm like the one I work for — one expressly designed to provide integrated tax and estate planning as well as trust and investment-management services — to hire philanthropy advisers like me; it allows us to offer a range of services to meet our clients’ complex needs.

But my case for better philanthropy counseling is not based on self-interest. After all, family offices and financial-services firms that cater to ultra-high-net-worth people will probably do pretty well whether or not all of their clients make charitable gifts that transform the world. But it’s society and worthy nonprofit organizations that lose, and it’s time to improve the way very wealthy donors get strategic and coordinated advice about how to direct and structure their large donations.

What we need is analogous to what already exists for foundation staff, from the lowest-level job to the CEO: a codified body of knowledge and clear instructions on how donors can make major gifts more wisely.

Lots of information exists, too, on big gifts made by living donors, but almost all of it is aimed at fundraisers learning how to request money from prospects, so it focuses on getting, not giving.

The perverse result of this imbalance is that a foundation can sometimes devote far more time and know-how to award a $10,000 grant to a nonprofit than an individual does when making a $10 million donation.

This void needs to be filled because those who are new to making immense donations usually discover that distributing money for charitable purposes is more difficult than it seems. As philanthropist Julius Rosenwald, a former chairman of Sears, Roebuck and Company, declared, "I can testify that it is nearly always easier to make $1 million honestly than to dispose of it wisely."

How and why could a major gift be disposed of unwisely? In a worst-case scenario, a confluence of adverse circumstances could result in a "perfect storm": the wrong size gift to the wrong nonprofit at the wrong time for the wrong purpose. Behind such donations might be an overly persistent fundraiser at a less-than-stellar institution, a well-meaning and suggestible deep-pocketed benefactor, and a trusted financial or legal adviser who lacks philanthropic expertise or adequate attentiveness.

This sort of squandered opportunity can be avoided with more foresight and knowledge. The most successful major gifts are ones for which the donor sets clear intentions, carefully chooses a nonprofit that can make the best use of the money, collaborates closely with the recipient to determine the best size and purpose of the gift, and creates a thoughtful agreement with the beneficiary that clearly delineates any expectations and restrictions.

The affluent usually make very large donations to support causes they care deeply about, whether it is education, medical research, the arts, or religious causes. Some may believe that there are few other possible beneficiaries than the "usual suspects" like universities, medical-research centers, and museums that can absorb such outsize contributions, because years ago that used to be the case. While many big donors may still choose to loyally support their alma mater, some advisers could do a better job informing them about other types of nonprofits that fit their interests and are capable of accepting large gifts but might not actively solicit them.

Lately, more philanthropists are supporting a wider array of nonprofits that have no problem taking in gigantic donations. Consider William Louis-Dreyfus’s $50 million gift to Harlem Children’s Zone, Julian Robertson’s $25 million to Success Academy Charter Schools, and Jeff and Tricia Raikes’s $3 million to the Nebraska Food for Health Center — all of which focus on social change and on helping the disadvantaged. Other deep-pocketed donors are making seven-, eight-, and even nine-figure contributions to the growing number of large national and international nonprofits in other fields, such as the Nature Conservancy, Feeding America, the World Wildlife Fund, Save the Children, and the Humane Society.

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Moreover, several collaborations have emerged to offer additional options for major donors who are interested in supporting well-vetted nonprofits that are not necessarily household names but provide high-impact services for low-income people.

About a year ago, for example, 10 founding donors launched Blue Meridian Partners, a pooled fund to help nonprofit youth-development organizations with proven models to expand, such as the Nurse-Family Partnership and Youth Villages. Blue Meridian has already attracted $750 million from a range of philanthropic investors.

Among the areas where I see a lack of astute guidance from advisers to wealthy donors:

Appropriately calibrating the size of the gift. Donors should right-size the amount with an organization’s capacity to employ it. While a wider range and greater number of nonprofits can now absorb huge gifts, a donation that is too enormous can end up undermining an organization. The drug-company heiress Ruth Lilly, for instance, donated $200 million to the tiny nonprofit Poetry Magazine, which had an annual operating budget of only $700,000. This gigantic gift was a mixed blessing. For years, the group struggled to develop a plan to expand and ramp up its programs and operations.

Knowing when to earmark money. A philanthropist may want to place restrictions on a nonprofit’s use of a major gift, such as having it be used for a particular program, facility, or endowment. However, if the constraints are too narrow or do not adequately fit with the organization’s mission or goals, the nonprofit may choose to decline the gift. Yale University once refused a $20 million donation because the prospective contributor wanted to vet faculty who would be hired through the use of the funds, a stipulation that the institution deemed too limiting.

Recognizing the value of unrestricted gifts. If a donor knows and trusts the nonprofit and the group has a solid track record and future plan, he or she should strongly consider providing flexible general operating support. This unrestricted funding can be used to cover the costs of any aspect of the nonprofit’s operations. These might include plumbing upgrades, liability insurance, computer purchases, staff training, or rent increases — unglamorous yet essential needs for which it might be otherwise difficult to raise money.

Being deliberate about the degree of acknowledgment desired. A donor needs to be intentional about how much credit he or she wants. Nonprofits often want to publicize significant donations to express gratitude, lend credibility, and inspire others to provide funding. While many philanthropists appreciate this, some want a lower level of recognition or none at all because of their personal beliefs about philanthropy, concerns about public scrutiny, a desire for privacy, or a wish to direct the focus on the cause rather than the source of the funding. In some cases, naming a building, room, or program after a donor can make it difficult for the nonprofit to raise additional funds. Future potential donors may assume that an organization’s expenses have already been met by the named donor. Philanthropists may want to consider intentionally declining a naming offer to preserve the opportunity for another donor, maximizing the revenue potential for the organization.

Understanding why well-crafted gift agreements matter. When a gift agreement does not clearly state the donor’s intentions, there is a risk that problems will arise at a later point. Intent can become obscured or interpreted differently by future parties. For example, several decades ago, A&P heirs Charles and Marie Robertson gave Princeton University a $35 million gift and directed the institution to use the funds to help prepare graduate students in the Woodrow Wilson School for careers in public service. In 2008, Robertson heirs sued Princeton, claiming it misdirected substantial funds to uses outside of the donors’ original intent. Princeton settled the suit for more than $110 million.

Good philanthropic advisers know about the issues I have outlined, and much more. Yet the need for excellent integrated philanthropic advisory services is outpacing the supply. Many major donors still rely primarily on fundraisers for direction on why, how, and when to make a substantial gift. Those donors could gain from additional, impartial advice.

The burgeoning industry of professionals who serve the ultrawealthy need to step up their game and grow more active and knowledgeable in advising their clients who intend to make major gifts.

Recent research from Indiana University’s Lilly Family School of Philanthropy shows that 90 percent of high-net-worth clients expect their advisers to discuss their philanthropy within the first few meetings, yet few do so. Some may just think that it is not their role to raise the issue. Others might feel uncomfortable starting or engaging in deep conversations that may relate to intimate matters like personal values, family dynamics, or legacy wishes. Or, when they do address the matter, they focus too

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narrowly on the tax benefit and technical aspects, when most philanthropists actually have other, higher-priority motivations, such as a desire to give back, honor a faith, or build a family legacy.

Moreover, the set of professionals who advise wealthy individuals and families on their major gifts — typically including legal counsel, an accountant, a wealth manager, and perhaps even a philanthropic adviser — need to synchronize their services better. Often a client will not invite these various experts to the same table, fearing that he or she may get billed more or lose too much control. Likewise, advisers frequently avoid asking a client if they can reach out to other advisers to coordinate their work better. In fact, greater integration of the entire team’s services usually helps avoid landmines and leads to more creative major-gift solutions, which can actually lower overall costs and, more important, ultimately increase philanthropic impact.

Advisers can help their philanthropist clients connect with more seasoned donors and plug them into peer networks of like-minded donors. Groups like Bridgespan and Rockefeller Philanthropy Advisors have made notable progress in high-net-worth donor education. Bill and Melinda Gates and Jeff and Tricia Raikes are funding more of this sort of work.

Professional advisers who work with the wealthy need to do more to make sure we prepare the next generation of philanthropists to make high-impact gifts that advance the public good.

Paul Connolly is director of philanthropic advisory services at Bessemer Trust, a multifamily office that supervises more than $100 billion for 2,400 individual, family, and private-foundation clients, $4.7 billion of which is in assets for hundreds of philanthropic entities.