Social capital is the money or time you contribute to worthy causes that improve society. A favorite saying around charitable causes is the phrase “give or get” which means members can either contribute an amount of money toward the goal or they can go out and raise that sum of money from people they know. The saying recognizes that the time expended raising money is often as important as contributing the money itself.
But the social capital I want to talk about in the context of estate planning emanates from my friend’s philosophy that “money is only a tool.”
Although it is often unexpected, when I initiate conversations with estate planning clients my goal is to begin each relationship by learning what each new client values.
Commonly, they are proud of the manner in which they have provided for their family and their intention to provide financial support after they die. However, they often worry that their descendants won’t use their inheritance wisely; and sometimes clients feel that their descendants don’t really need an inheritance anyway.
The concept of social capital solves many issues. It allows you to contribute money to causes you believe in and set up your descendants to be caretakers of the capital for the future. It benefits the descendant that doesn’t need your money by speaking from your heart to their own. It benefits the spendthrift by substituting personal responsibility for temptation.
There are 2 schools of thought about the use of social capital. Some clients are just not interested in the concept, believing they have supported their causes during their lifetime and it is their descendants’ turn to decide how to act. Others see the use of social capital as a key tool to building a legacy through strength of character. Depending on the client’s perspective there are different ways to use this tool.
One way is to purchase life insurance and name a favorite cause as the beneficiary. This allows small amounts of premium dollars to blossom into a large gift that can provide major support for a favorite cause. This works well in many situations, but it does not build responsibility in your descendants.
There are tax motivated strategies such as naming a charity as the beneficiary of a retirement account that has not yet been taxed. Leaving the descendants post-tax assets and gifting the as of yet untaxed retirement plan can yield a good income tax and estate tax result. Creating charitable remainder trusts as a technique to avoid capital gains on appreciated property is a good strategy when contemplating the sale of highly appreciated real estate or a business. These strategies share the defect of providing social capital, but not involving your descendants.
A good way to speak to your descendants is to set aside a portion of your wealth in a donor advised fund and name your descendants as the advisors to the fund. Your voice comes through because you leave your descendants the responsibility of making decisions about how, when, and to whom to give money. It encourages them to honor your legacy by becoming involved in the causes they support.
However you choose to create a philanthropic legacy, you will be speaking in a clear voice to your descendants about your values and making a difference the way you decide best suits your own perspective.