Can a 'charitable allowance' help with financial literacy, wealth transfer?

The intergenerational wealth transfer is about more than just money. Parents and grandparents want to leave a legacy to the next generation. That means teaching values and leaving gifts that sometimes extend beyond the confines of the family towards society as a whole and the causes they believe in. John Bromley believes that planned and strategic philanthropy can play a crucial role for advisors and their clients as they navigate this wealth transfer.

Bromley is the founder and CEO of Charitable Impact, a donor-advised fund operator facilitating strategic philanthropy. Among the programs his firm offers, he noted one program designed to help pass along values and financial literacy tools to the next generation. This program is called the charitable allowance and it allows parents and grandparents to give their children or grandchildren a set allowance that must be donated to a charity. Choices like who that money will be given to, when it will be given, and the follow-through involved are all left to the child. It’s a program that he believes can families and their advisors conduct the deeper work of the wealth transfer.

“Charitable giving is a super tax-efficient way to introduce this idea of values,” Bromley says. “When you use philanthropic planning and incorporate it into the generational wealth transfer, you get a more tax-efficient transfer while creating a context that almost imposes the charitable dollar asset on the family, which they have to grapple with giving away as best they can. They then start to develop their own strategic ideas of how to put that charitable money to use.”

Donor advised funds (DAFs), Bromley explains, allow an individual to generate the tax receipt for donations immediately while holding money there to be used once the donor is ready to deploy it. One product feature of Charitable Impact, Bromley explains, allows the holders of a DAF to transfer that money from one account to another, allowing another account to determine where the money is given. In the case of the charitable allowance program, children will be given an allowance out of their parents’ or grandparents’ DAF. Their decisions about who to donate to and when, Bromley says, can help instil philanthropic values and teach key financial lessons.

The core lessons that come with money management, he explains, are inherent in this system as well. What helps, in Bromley’s view, is that the money these kids get as a charitable allowance can only be used charitably. That’s because the parent or grandparent initiates the allowance by making their own charitable donation to their DAF at Charitable Impact Foundation, receiving a tax receipt in return. This locks the funds into the charitable world and therefore narrows how that money can be spent. It forces the kid receiving the charitable allowance to focus exclusively on choosing what values and causes they would prioritize, and allows them to work analytically in that more limited context.

They can assess how much of their charitable allowance money is going to actually support a cause or choose to hold it until they feel more prepared. They can determine what charitable organizations best achieve what it sets out to do and give to those when ready. It gives them an opening to engage with any charities of their choice and even develop key community networks out of that.

Perhaps the most important aspect of this program for advisors is the fact that the charitable allowance can be funded with securities as well as cash. Not only is the donation of securities more tax-efficient than the cash generated by selling a security, giving an allowance of shares allows a child to get an early exposure to investing in a more controlled environment. Now the child has choices around holding that security as an investment in their DAF or donating the proceeds from selling that security to one or more charities they have chosen to support.

“It’s a great way to teach the family values component while starting to get them engaged in the more serious financial literacy side of things without necessarily exposing them to large amounts of wealth,” Bromley says.

While the relationships and values that these programs are built for are within one family, Bromley notes that advisors are still crucial stakeholders. He highlights the simple fact that all parents know, at a certain age it can be easier for a trusted third-party to give advice that resonates with kids. They can also add educational value when the charitable allowance holds securities or other investments. Advisors can offer guidance on investment decisions, answer questions, and use the practical example of what’s being done in these accounts to teach wider financial literacy concepts. In doing so, they can establish their own trusted relationships with the next generation and cement their role in the wealth transfer.

“Advisors should be interested in adding value for a family beyond just asset management. One way to do that is in developing the family’s financial literacy,” Bromley says. “By focusing on the kids, the advisor can help add value for parents in educating their children, and building their own authentic relationships with the next generation, which can help down the road when that generation decides what to do with their wealth.”