The 3 benefits of charitable giving
Many of us give back to make the world a better place for the next generation. Some people volunteer time and talent. And some are fortunate enough to give through wealth.
Using wealth for good has become a core aspect of the U.S. value system. I’ve seen charitable giving grow steadily over the past several decades. Studies show that since the 1950s, even after adjusting for inflation, charitable giving has grown by 6.5 times.1
I believe when you combine your personal values with wealth management strategies, you create a greater sense of purpose and achieve benefits.
Why do we give?
Vanguard Charitable conducted a survey years ago on giving. Respondents overwhelmingly answered the question “Why do you give?” by saying, in essence, “I believe my giving makes a difference in the world.”2 One individual expanded on that answer by saying, “To give back to our communities with gifts and materials we’ve been lucky enough to have.”2
Additionally, in a study from Charities Aid Foundation, 42% of donors agreed that enjoyment was a key motivator to their giving.3 It’s the truest form of altruism—giving back and making a positive difference without personal recognition. However, there are many benefits to building a charitable giving strategy that complements the impact you want to make.
I’ll discuss these benefits in 3 broad categories: financial, emotional, and familial.
While the financial benefits of giving are obvious, some people forget they’re a valuable addition to any wealth management strategy. When you give, you:
Likely get an overall tax deduction. If you’re giving at levels above the standard deduction, you can receive a tax deduction for the fair market value of your gift. See the deduction limits against your Adjusted Gross Income (AGI).
Can minimize your capital gains. When you donate appreciated assets to a 501(c)(3) public charity, you don’t incur the capital gains tax. Just make sure you donate those assets in kind rather than selling them first. If your favorite charity can’t accept appreciated securities or mutual funds, consider using a donor-advised fund (DAF).
Reduce your tax exposure from a windfall. Financial windfalls are wonderful, but they can also open you up to additional tax exposure. Factor charitable donations in your strategy to help reduce your tax bill.
Can liquidate complex assets in a tax-efficient manner. Complex assets, like private equity, hedge funds, and insurance policies, are hard to sell. But you can still donate these assets in kind to a charity and have the charity liquidate them. Again, consider a DAF if your favorite charity can’t accept these assets.
DAFs—a type of charitable giving account—are the fastest growing charitable tool in the U.S.4 Because you can easily contribute appreciated securities and illiquid assets, which reduces the capital gains and estate taxes on those assets, DAFs are a tax-efficient option. Plus, the assets are invested tax free, maximizing dollars available for grants to your favorite charities to support both your short- and long-term giving goals.
Feelings may be subjective, but I find it interesting that researchers have found measurable psychological and physiological benefits to giving. Beyond the satisfaction donors feel, research has found there may be more subtle, yet still meaningful, benefits to the giver, such as:
Greater self-esteem and life satisfaction.
Better physical health.
A reduction in negative emotions.
Increased overall happiness.5
While it’s not clear how long these benefits last, it’s clear that giving back is good for you. Some research suggests making generosity a regular habit may influence long-term well-being and happiness.6
Giving can also foster important social connections.7 Volunteering can provide us with a direct physical connection to those we’re serving. There’s good evidence that people who are generous and who don’t think only of themselves lead significantly happier lives.8
Charitable giving also provides wonderful family benefits. Creating a giving plan with your whole family allows everyone to have a voice in the conversation and helps create deeper family connections.9 If you can, consider making this a multigenerational activity, which affords younger generations the opportunity to learn about the causes most important to your family.10
To help with this conversation, Vanguard Charitable has created 3 resources:
Additionally, I’ve heard from several high-net-worth clients that talking about charitable giving is a great way to begin discussing their wealth with their children. Discussing philanthropy vis-á-vis wealth education gives many parents and grandparents an opening to talk about wealth management. Plus, the discussion won’t focus on what the children will get, but rather what they can give.
A 2016 study by Indiana University helps to illustrate these points. The study found that:
Parents can play a major role in developing their children’s giving decisions.12
Charitably inclined parents are more likely to have children who are also charitably inclined.13
Children of parents who volunteer are more likely to give back in terms of volunteering their time with charitable organizations and make financial donations.14
In addition to the good we’re doing for others, charitable giving can benefit us emotionally, financially, and by creating closer family bonds.
1 The Almanac of American Philanthropy; 2015; www.philanthropyroundtable.org/almanac/statistics
2 VCEP-Analysis and Research of Donor Base; Vanguard Charitable in partnership with Vanguard Group, LLC; 2009.
3 Five Reasons to Give to Charity; Charities Aid Foundation; https://www.cafonline.org/my-personal-giving/long-term-giving/resource-centre/five-reasons-to-give-to-charity
4 The Almanac of American Philanthropy; 2015; www.philanthropyroundtable.org/almanac/statistics
5 The Health Benefits of Giving; Rush University Medical Center; https://www.rush.edu/health-wellness/discover-health/health-benefits-giving
6 A neural link between generosity and happiness; Nature Communications; Soyoung Q. Park, Thorsten Kahnt, Azade Dogan, Sabrina Strang, Ernst Fehr, and Philippe N. Tobler; 2017; https://www.nature.com/articles/ncomms15964.pdf
7 5 Ways Giving Is Good for You; Greater Good Magazine; University of California, Berkeley; Jason Marsh and Jill Suttie; 2010; https://greatergood.berkeley.edu/article/item/5_ways_giving_is_good_for_you
8 Study: People Happier When They Give; The NonProfit Times; 2017; https://www.thenonprofittimes.com/npt_articles/study-people-happier-give/
9 Being Generous Really Does Make You Happier; TIME; Amanda MacMillan; 2017; https://time.com/4857777/generosity-happiness-brain/
10 VCEP-Analysis and Research of Donor Base; Vanguard Charitable in partnership with Vanguard Group, LLC; 2009.
11 Focus on Giving Survey; Vanguard Charitable; 2010.
12 A tradition of giving: New research on giving and volunteering within families; Lilly Family School of Philanthropy; Indiana University; 2016; https://www.issuelab.org/resources/25294/25294.pdf
All investing is subject to risk, including the possible loss of the money you invest.
This information isn’t intended to be tax advice and can’t be used to avoid any tax penalties. We recommend that you consult a tax advisor.
Vanguard accepts no responsibility for content on third-party sites or for the services provided. Also, please be aware that when you use services provided by a third-party site, you’re subject to that site’s terms of service and privacy rules, which you should review carefully.