Philanthropy is large-scale charitable giving. It is based on an individual’s or organizational desire to improve society by donating financially to causes the donor believes will accomplish their goals. Wealthy individuals and organizations create philanthropic foundations to carry out this mission.
Philanthropy is a type of charitable giving that primarily wealthy people or organizations engage in to further their goals for improving education, arts, science or other aspects of human welfare. It typically involves large financial contributions that may also provide tax advantages for the donor.
What Is Philanthropy?
The word philanthropy has its roots in ancient Greek, meaning, “love for humanity.”
Philanthropy typically describes contributing substantial amounts of money to nonprofit organizations by individuals, foundations and corporations. But it may also include anyone who contributes their time, talent or money to causes that benefit the common good or improve the quality of life for society.
Charity vs. Philanthropy
Both charity and philanthropy involve giving money to individuals or organizations that also help people. Because of this, philanthropy and charity are sometimes used interchangeably — but there are differences between the two.
|Typically a one-off, immediate response||Multiple gifts over several years|
|Provides immediate relief to a short-term need||Addresses a long-term condition or need|
|Often made as an emotional response||Laid out with a long-term strategy|
A simple way of understanding the differences between the two is found in the old maxim, “If you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.”
Giving the person the “fish” is charity. Teaching that person to fish so they can feed themselves for a lifetime is philanthropy.
Tax Strategies Around Philanthropy
Charitable giving at all income levels can provide several tax advantages even though most Americans see modest tax advantages from their donations.
At the same time, philanthropy has become an integral part of wealth management among some of the most affluent Americans and has been used to significantly reduce their tax burdens.
There are several strategies and investment options you can use to improve your tax efficiency through philanthropy.
- Creating a family foundation as a 501(c)3 nonprofit organization can provide several tax benefits for philanthropists. You can make donations to your own foundation but maintain control over how they are invested and managed. Investment income in the foundation is tax exempt – except for a one to two percent excise tax. Assets transferred to the foundation are typically not subject to the estate tax. And family members can receive reasonable compensation for their services to the foundation.
- Donor advised funds
- These funds allow you to donate cash and other assets such as appreciated stocks or other securities while avoiding capital gains taxes and potential estate taxes. Donor advised funds grow tax-free and allow you to make distributions from the fund over time to the organizations you support.
- Qualified charitable deduction (QCD)
- This charitable rollover strategy can help cut your taxes if you are in a higher income bracket and must take a required minimum distribution (RDM) from an individual retirement account (IRA) once you turn 72. A QCD lets you roll over up to $100,000 of your RDM into a qualified charity each year. This reduces your taxable income by the amount you donated.
- Donating appreciated assets
- You can avoid some capital gains tax payments on highly appreciated assets – such as stocks and real estate – by donating some of them to a qualified charitable organization. This also gets you an income tax deduction for the actual fair market value of your donation.
- Charitable remainder trust
- This irrevocable trust allows you to convert your highly appreciated assets into income while avoiding capital gains taxes. Once you or your chosen heir dies, the remaining money in the trust goes to the charity you have chosen.
- Charitable lead trust
- An irrevocable trust that produces a steady stream of income for the charitable organization of your choice for a specified period of time. Once the time is up, the remaining money in the trust goes to your heirs. You get a tax deduction for the value of the income to the organization when you set it up. When it expires, your heirs are shielded from gift and estate taxes on the trust’s highly appreciated assets.
Tax advantages for charitable giving encourages philanthropy which, in turn, supports a diverse, independent nonprofit sector in the U.S.
But the super wealthy have drawn growing criticism of using charitable giving tax breaks to fund foundations that become extensions of their wealth while shielding themselves from large tax bills.
There have been no major changes to tax laws on charitable giving in about 50 years. But there are rising calls for reforms that could weaken the tax advantages of philanthropy.
Getting Started With Philanthropy
Getting started in philanthropy can be as simple as writing checks to organizations with causes you support. But you may achieve greater results if you create a strategic vision.
A typical plan will walk you step-by-step toward your strategic goal. It may require you to narrow your focus on the causes you contribute to. You’ll also need to ask yourself who – a particular demographic or other group of people – you want to help.
Many wealth management firms have departments or divisions devoted to structuring a philanthropy model for their clients. Financial professionals who specialize in charitable investing can help you lay out a long-term plan tailored to your beliefs and financial goals.
Professionals in this field can help you structure your goals and vision into the most effective and efficient use of your time and money.
What Are the Benefits of Philanthropy?
One of the chief benefits of philanthropy is to leave behind a legacy associated with a cause – or causes – you believe in. While most philanthropists choose to practice philanthropy through much of their lifetimes, it can also be a major part of estate planning and part of your overall personal finance strategies.
- Andrew Carnegie
- One of the richest Americans in history, Carnegie led the expansion of the American steel industry in the 19th century. He gave away $350 million to foundations and charities in the last years of his life. The Carnegie Foundation – created in 1905 – has funded advancements in medicine, engineering, teaching (famously funding more than 3,000 public libraries), dentistry and law.
- John D. Rockefeller
- The co-founder of Standard Oil and his son, John D. Rockefeller, Jr., co-founded this foundation in 1913. It has provided more than $17 billion toward diverse causes including aid to the American Red Cross, development of a yellow fever vaccine to initiatives that respond to the COVID-19 pandemic.
- Edsel Ford
- The son of Ford Motor Company founder, Henry Ford, created the Ford Foundation in 1936 with an initial gift of $25,000. Henry and Edsel Ford’s bequests upon their deaths turned the Ford Foundation into the largest philanthropy in the world in the 1940s. It currently reports a $16 billion endowment and makes $500 million in grants around the world every year. It supports diverse goals from addressing climate change to supporting creativity and free expression to gender, racial and ethnic justice.
- Bill and Melinda Gates
- The Bill and Melinda Gates Foundation was created by the Microsoft co-founder and his then wife in 2000. It has since spent $60 billion on goals including the reduction of poverty and improvements in global health. The Gates Foundation is reported to be the second-largest charitable foundation in the world, with an endowment of $49.9 billion.
Philanthropic foundations can have a significant impact on the causes they support. For instance, the Gates Foundation in 2020 was the second largest donor to the United Nations World Health Organization. The foundation contributes more than every country in the world, except the U.S.
Health Benefits of Philanthropy, Charitable Giving and Volunteering
Scientific studies have shown charitable giving can improve your mental and physical health. Several research projects have looked at the health benefits of volunteering for a cause or raising and contributing money for a specific nonprofit organization.
- Greater happiness and satisfaction
- Increased self-esteem
- Longer life expectancy
- Lower blood pressure
- Lower rates of depression
- Lower stress levels
One study found people 55 and older who volunteered at two or more causes were 44 percent less likely to die over a five-year period than those who didn’t, according to the Cleveland Clinic. Another study published in the Journal Psychological Science found that older people who helped others reduced their chances of dying by almost 60 percent.
12 Cited Research Articles
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