Key Takeaways
- Charity and philanthropy are both forms of charitable giving; however, philanthropy is usually conducted on a large-scale basis for an extended period.
- At a high level, there are three types of philanthropy – the gifting of money, the gifting of time and the gifting other valuable resources.
- Charitable giving and philanthropy are similar, but charitable giving is relatively limited in scope and duration. Philanthropy is conducted on a larger scale for an extended period.
- All types of philanthropy can have a positive impact on society and, depending on your situation, can result in significant tax and health benefits.
What Is Philanthropy?
The word philanthropy has its roots in ancient Greek, meaning, “love for humanity.” This connotation is still relevant because philanthropy is widely regarded as a deeply altruistic action.
Fundamentally, philanthropy is large-scale charitable giving aimed at improving our society or aspects of it, such as arts, education, environmental sustainability, healthcare and science. It is usually carried on by wealthy individuals and organizations through mission-driven philanthropic foundations, but people from all walks of life can be philanthropic.
While philanthropy typically involves making significant financial contributions, many philanthropists donate their time, talents and other valuable resources to benefit causes of interest. Oftentimes, philanthropic contributions can yield significant tax and health advantages – which can be valuable byproducts of making the world a better place.
- Giving Money
- Giving money entails making a cash donation to a charitable cause. In many ways, it is the easiest and most straightforward way to support a charitable organization.
- Giving Time
- Giving time involves engaging in some sort of volunteer activity aimed at helping others or addressing a societal problem. It could take the form of working at a homeless shelter, tutoring underprivileged students or helping clean up a community park.
- Giving Other Resources
- Giving other resources means donating valuable things other than your time and money. The possibilities here are endless, but many philanthropists leverage their experience, skills and talents to advance the causes they support.
Types of Philanthropy
Getting Started with Philanthropy
Getting started with philanthropy can be as simple as periodically giving money to organizations that champion causes you support. However, you can achieve greater results if you create a strategic vision.
Doing so usually requires narrowing your focus and identifying the causes you care about most deeply. As a good starting point, ask yourself who you want to help and what societal problems you want to address.
To optimize your vision, consider working with a wealth management firm. The best firms have divisions that focus on helping high-net-worth individuals build philanthropic models. These are designed to maximize the impact of their contributions and complement other aspects of their financial plans.
How To Get Started
- Identify the causes you care about.
- Set realistic goals.
- Conduct foundational research on charitable organizations of interest.
- Start slowly and gradually increase your contributions.
- Get involved in the causes you care about most deeply.
- Stay informed on the causes and organizations you support.
Benefits of Philanthropy
The greatest benefit of philanthropy is the ability to positively influence society. For some, the impact may be global. For others, the impact may extend through a particular region or local community. Regardless of the reach, making a difference can be incredibly rewarding, and it can yield reputational enhancement. Philanthropy also offers the potential to achieve secondary tax and health benefits.
Tax Benefits
The U.S. federal tax code incentivizes philanthropy in a variety of ways by providing donors with ordinary income tax deductions, the ability to avoid capital gains taxes on highly appreciated assets, as well as potential estate tax breaks. All philanthropists can capitalize on these incentives, but ultra-high-net-worth individuals usually stand to reap the greatest benefit – especially when philanthropy is conducted as part of a well-planned wealth management program.
Some of the most popular investment vehicles used to optimize philanthropic reach – while also maximizing tax advantages – are outlined below.
- 501(c)(3) Organizations
- Creating a family foundation as a 501(c)(3) nonprofit organization can provide several tax benefits for philanthropists. You can make donations to your foundation and maintain control over how the funds are invested and managed. Investment income generated by the foundation is tax exempt – except for a one to two percent excise tax. Typically, assets transferred to the foundation are not subject to estate tax, and family members can receive reasonable compensation for services provided to the foundation.
- Charitable Remainder Trusts (CRTs)
- A CRT is an irrevocable trust that allows you to earn income on your donations while living. Then, once you or your named heirs die, the income stream ends, and the assets in the CRT are transferred to a qualified charity (or charities) designated by you. Along the way, a CRT can provide several tax advantages, including deductions on asset transfers to the trust, avoidance of capital gains tax on highly appreciated assets and a potential break on future estate taxes.
- Charitable Lead Trusts (CLTs)
- A CLT is an alternative to a CRT. They are similar in terms of implementation complexity and tax advantages. However, a CLT works in an opposite fashion relative to a CRT. Once established, a CLT pays a guaranteed stream of income to a designated charity (or charities) for a specified period. Then, at the end of the period, the assets in the CLT are transferred to named heirs.
- Donor-Advised Funds
- A donor-advised fund is another type of irrevocable trust. It allows 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.
Types of Philanthropic Investment Vehicles
Philanthropic investment vehicles can be difficult to understand, largely due to the myriad of Internal Revenue Service (IRS) stipulations and limitations governing them. As a result, experts recommend you consult with a tax professional to gain a better understanding of things before moving ahead with any significant philanthropic pursuits.
In recent years, the super wealthy have been the target of mounting criticism relating to their use of philanthropic programs to shield their massive estates from large tax bills. Critics point to IRS loopholes that favor the rich and contribute to economic disparity.
While there are no imminent changes to the tax code, increasingly loud calls for reform could lead to changes that weaken the benefits available to philanthropists. The likelihood of this is uncertain, but given that there have been no major changes to tax laws on charitable giving in about 50 years suggests it may be plausible.
Health Benefits
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 nonprofit organization.
According to Cleveland Clinic, studies have discovered that those who volunteer are more likely to live longer lifespans compared to those who don’t.
At a high level, the following benefits are commonly associated with charitable giving:
- Greater happiness, satisfaction and self-esteem
- Heightened sense of connectedness with others
- Lower blood pressure
- Lower stress, anxiety and depression
- Longer life expectancy
Charity vs. Philanthropy
Charitable giving and philanthropy are similar, but there are differences between the two. Most notably, charitable giving is relatively limited in scope and duration, while philanthropy is conducted on a larger scale for an extended period.
The distinction can be clarified by using 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 man a fish is comparable to charitable giving. Teaching that man to fish so he can feed himself is likened to philanthropy.
Notable differences between charity and philanthropy are summarized below.
Differences Between Charity and Philanthropy
| Charity | Philanthropy |
| 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 |
Statistics on Giving
According to the most recent Annual Report of Philanthropy from Giving USA, U.S. individuals and organizations donated about $485 billion to national charities in 2021. A breakdown of the donations by source is as follows:
- Individuals donated approximately $327 billion
- Foundations and other organizations donated approximately $91 billion
- Approximately $46 billion was donated via bequests specified by trusts and wills
- Corporate donations exceeded $20 billion
From 2017 to 2021, total charitable donations were largely correlated with the performance of the S&P 500. This is logical, given that this index is viewed as a measure of economic health and upward trends usually correspond with higher levels of discretionary spending.
Incidentally, throughout that period, religious organizations, educational causes, human services causes, grantmaking foundations and public-society benefit organizations received the most money. The rest of the money was directed to healthcare initiatives, international affairs, arts, culture and humanity, and environmental organizations. A small portion was gifted to individuals.
Notable Philanthropists
One of the chief benefits of philanthropy is that it leaves behind a legacy associated with the cause – or causes – you champion. You do not have to be a billionaire to do this. The United States is filled with an array of philanthropists with varying degrees of wealth and societal influence. However, the ones you hear about most frequently are at the high end of the wealth spectrum.
- Bill Gates
- In 2000, Bill Gates and his former wife Melinda established the Bill and Melinda Gates Foundation. Since then, it has since spent over $70 billion on select causes, including reducing poverty and improving in global health. The Bill and Melinda Gates Foundation is reported to be the second-largest charitable foundation in the world.
- Warren Buffett
- The famed chairman and CEO of Berkshire Hathaway has pledged to give more than 99% of his wealth to philanthropy during his lifetime, or at death. Given he has an estimated net worth of around $113 billion, this commitment is massive
- George Soros
- The renowned investor conducts his philanthropic activities through the Open Society Foundations – a network of foundations, partners and projects based in over 120 countries. Collectively, they support individuals and organizations fighting for freedom of expression, government accountability and social justice and equality.
- MacKenzie Scott
- MacKenzie Scott, an American novelist and philanthropist, has given away over $14 billion and helped fund around 1,600 nonprofits. The former wife of Amazon founder Jeff Bezos, Scott’s philanthropic style is private and untraditional, largely due to the fact the recipients of her donations face minimal red tape and reporting requirements. Many people praise the elimination of costly bureaucracy, but others frown on the lack of transparency associated with Scott’s decisions.
Frequently Asked Questions About Philanthropy
Philanthropy is an altruistic action that means “love for humanity” in ancient Greek. Essentially, it is large-scale charitable giving aimed at broadly improving society or specific aspects of it.
Philanthropy can take on many different forms, but it is usually categorized by the types of donations made. In this respect, there are three types of philanthropy – the gifting of money, the gifting of time and the gifting of other valuable resources, including tangible and intangible assets.
There are many modern-day philanthropists, but a handful of extremely wealthy individuals are at the top of the list. These philanthropists include Warren Buffett, Bill Gates, MacKenzie Scott and George Soros.
Editor Malori Malone contributed to this article.
