How to Teach Your Kids and Grandkids About Philanthropy and Giving Back Through Investing
The world’s problems seem to be growing and becoming increasingly complex – issues like war, poverty, climate change, sustainability, human rights, and health and education inequity — will likely continue to impact younger generations to come. It’s easy to feel overwhelmed and helpless about how you can help and how to effect positive change in the world.
Through philanthropy and giving back, you can make a difference by helping those who are in need, and by supporting meaningful causes to impart change in your community and the world. You wouldn’t be alone in giving back: in 2022, an estimated $499.33 billion was given to U.S. charities alone, $319.04 billion of which was given by individuals.
Philanthropy fosters a spirit of empathy, compassion, and social responsibility. Instilling these values in your kids and grandkids is essential, so the next generations can continue to be engaged in making a better world. Teaching your kids and grandkids about philanthropy by incorporating it into your family’s investment strategy is a powerful way to nurture their own sense of charitable giving, and encourage them to carry on a legacy of caring about the world.
Philanthropy Education: Teaching the Basics of Giving Back
Philanthropy is defined by the Oxford English Dictionary as “the desire to promote the welfare of others, expressed especially by the generous donation of money to good causes.” The word comes from the Greek word ‘Philanthrōpos,’ which means ‘man-loving’ – loving humanity.
Philanthropy encompasses more than donating money or volunteering your time at a local charity, although these actions are crucial to effective change; it’s also understanding your social responsibility to others and to the world, and working towards the common good.
Talk to your kids and grandkids about why philanthropy and giving back matter to you, and ask them to consider what issues matter most to them. Encourage, support, and involve them in volunteer activities and community projects so that they can experience philanthropy firsthand and understand the impact of their actions on the world. Inspire them through your own actions.
Explain The Role of Investing in Philanthropy
As a foundation of their philanthropy education, explain to your kids and grandkids the relationship between investing and philanthropy. Teach them that their money can be put to work for the common good: investing can be used to not only secure their financial future but also make a lasting, positive impact in the world. You can discuss with them how their investments can align with their values by teaching them about impact or socially responsible investing.
Impact investing is an investment strategy to generate specific social and environmental benefits in addition to financial gains. With impact investing, you purposefully invest in companies and projects with missions that align with your values and philanthropic goals. A recent study of the philanthropic efforts of affluent households found that 75% of those who practice impact investing said it was additive to their charitable giving.
Through your investments, you can promote and encourage corporate practices that are meaningful to you, like fair labor, diversity, or environmental stewardship. Impact investing enables you to use more of your assets, beyond charitable contributions, to support issues that matter most to you. You can also re-invest your returns from impact investing to further support your values and perpetuate the social impact of your investments.
Investing with purpose doesn’t automatically mean you’ll compromise on financial returns. A survey on impact investing found that the portfolio returns overwhelmingly met or exceeded investor expectations for not only social and environmental impact but financial performance as well.
Investments with Philanthropic Goals
While you’re teaching your kids and grandkids about impact investing, talk to them about the diverse investment opportunities they can pursue:
Environmental, Social, and Governance (ESG) Funds: ESG funds are mutual funds, index funds, or exchange-traded funds (ETFs) made up of investments that are graded using environmental, social, and governance (ESG) principles. The investments include companies that have strong ethical, social, and environmental practices, with the goal of a sustainable and beneficial impact on the world.
Social Impact Bonds (SIBs): Social impact bonds are not real bonds, but rather contracts between the public sector or governing authorities and investors for better social outcomes, like improving education or reducing homelessness. A bond-issuing organization raises funds from private investors, charities, or foundations, which are distributed to the public or government service providers to cover their operating costs.
If the measurable social outcomes agreed upon in the contract are achieved, the public sector or governing authority repays the investors. Investment returns are dependent on the achievement of these social outcomes; if the objectives aren’t achieved, investors receive neither a return nor repayment of the principal.
Alternative investments: Investments in alternative assets can include investing in non-traditional vehicles to support issues such as renewable energy, affordable housing, sustainable agriculture, or social enterprises that create a positive impact. Alternative investments can often require a longer-term commitment, which can align well with your philanthropic goals. Some examples of impact investing through alternative investments include:
Private Equity: Invest in private equity funds that focus on companies with strong environmental or social impact missions. These funds may focus on areas like clean technology, healthcare, or education.
Real Estate: Invest in environmentally-friendly or socially responsible real estate, such as sustainable housing developments, eco-friendly commercial spaces, or affordable housing.
Start-ups: Invest in early-stage, start-up companies that have a mission of developing clean technology solutions.
Venture Capital: Support start-ups and emerging businesses that prioritize social and environmental responsibility. These investments often align with the United Nations Sustainable Development Goals (SDGs).
Sustainable Infrastructure: Invest in sustainable infrastructure projects that promote resource efficiency and reduce environmental impact.
Sustainable Hedge Funds: Invest in hedge funds that employ sustainable investment strategies, such as ESG criteria, to select their investments.
Philanthropy through a Charitable Giving Account
Charitable giving accounts are one of the easiest ways to support your philanthropic efforts through investing. Eighty-five percent of affluent households made charitable contributions last year. Of those households, more than one in five households had a charitable giving account to simplify their family’s charitable giving.
A Donor-Advised Fund (DAF) is a charitable giving investment account that is used to specifically support your philanthropic goals. You can establish a DAF with a sponsoring organization, like a charitable foundation or financial institution. Your contributions – which can include cash, securities, or non-traditional assets like real estate, hedge fund or private equity investments – are irrevocable and tax deductible, even if they’re not immediately distributed to charities. The dedicated funds in the DAF can be invested, and any growth will be tax-free, with the potential to create even more capital you have available for charitable giving.
The donor is the advisor to the fund and is responsible for recommending grants to qualified non-profit organizations. You provide the name of the non-profit organization, the grant amount, and any other instructions, to your DAF sponsoring organization. The grants are reviewed to make sure they meet IRS regulations before they’re distributed to the nonprofit.
Using a DAF for charitable giving is a great way to teach your kids and grandkids about philanthropy. You and your family can recommend DAF grants together to support causes that align with your philanthropic goals. Involving the younger generations in making decisions about grants is an excellent way to engage them in giving back – encourage them to research and suggest charities, non-profit organizations, or projects that are meaningful to them. Charitable giving accounts like DAFs often have online platforms that make it easy for your family to collaborate on grant recommendations.
They can also have input on the investments you choose in the DAF, helping to ensure that your invested contributions continue to align with your family’s values and philanthropic goals.
DAFs are becoming an increasingly popular investment vehicle to carry out philanthropic efforts: as of 2021, there were more than 1.2 million DAF accounts in the U.S. An estimated $45.7 billion was given to qualified charities through DAF grants.
Building a Family Philanthropy Plan
Include your kids and grandkids when you create your family’s philanthropy plan – it can be a collaborative effort involving different generations. Your philanthropy plan acts as a roadmap for giving back and for investing with purpose: Define your family’s philanthropic goals, and what causes you and your family would like to support – whether it be education, healthcare, human rights, or the environment. Then create a strategy that outlines how investments can support these goals, either through impact investing or through a charitable giving account.
A charitable giving account like a DAF can be a key component of your family’s philanthropy plan, as you can use a DAF to specify your family’s charitable mission, goals, and grant guidelines. Through the DAF, you’ll reinforce the importance of giving back strategically, and how investments can align with your values. You can pass on the responsibility of managing the DAF to your kids and grandkids and leave a legacy of giving back to the next generation. By creating a legacy plan for your DAF, you can help ensure the continuation of your family’s philanthropic efforts.
The Challenges of Philanthropic Education
One of the biggest challenges in teaching your kids and grandkids about philanthropy and giving back is generational differences in values. Your kids and grandkids may have their own distinct priorities and concerns; you can encourage open discussion so your family can find common ground when it comes to charitable giving.
Create a Lasting Legacy
One of the most compelling aspects of teaching your kids and grandkids about philanthropy and giving back through investing is the potential to create a lasting legacy. You’re not only creating a foundation for financial success for them but also a foundation for your family’s values and charitable giving to continue on through the next generations. Philanthropy education will strengthen their sense of social responsibility, and carry forward your mission to leave a lasting impact on the world.
How Chicago Trust Administration Services Can Help
You understand the importance of giving back, and your knowledge and investment experience can guide your kids and grandkids in philanthropy and shape their own efforts now and in the future. Creating a philanthropic plan including purposeful, impactful investments can encourage a lifetime of charitable giving for generations to come.
At Chicago Trust Administration Services, we can help you leverage non-traditional opportunities in a self-directed plan to support what’s meaningful to you and your family. We can work together with you to build and create a lasting legacy, and we welcome involving your kids and grandkids in the process. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.