Don’t Ignore Next-Gen as the Wealth Transfer Begins

With so many dollars at stake in the Great Wealth Transfer, it’s easy to see why charities and community foundations are focusing most of their attention on the baby boom and silent generations. After all, those two aging generations will transfer $100 trillion, or 81 percent of the total transfer, in the next 24 years, according to projections by Cerulli Associates, a financial-research firm.

But experts say it’s a mistake to ignore the people who will inherit most of the wealth in the transfer — primarily millennials and members of Generation X.

And that’s not just because these younger generations will be inheriting big sums. It’s also because they will have a lot of say about how their parents’ philanthropic capital gets allocated — both before and after their parents die.

The challenge for fundraisers? They might steward an aging donor who is happy to simply write checks and attend galas — only to see that person hand off philanthropic oversight to a younger family member who wants to be hands-on and demands to see evidence of charitable results.

A report released last fall about Grand Street, a program for next-gen donors that’s been in existence for more than 20 years, found that 83 percent of the program’s participants were actively involved in their family foundations.

Sharna Goldseker, founder of the charity 21/64, which created the Grand Street program, says fundraisers should tell their older donors that they want to meet younger members of the family so they can start building relationships. Next-gen donors typically aren’t looking to take full control of the family’s philanthropy, but they want to offer input — and have fundraisers take them seriously.

“It’s like dating,” Goldseker says. “You’re not going to just wake up one day and get married. As you can imagine, you need to court over time.”

Charities often focus on the older generations because that’s where the wealth is, but they do so at their peril, says Michael Moody, a professor of philanthropic studies at the Lilly Family School of Philanthropy at Indiana University.

“If you wait, the next generation is going to have already developed that relationship with somebody else,” Moody says. “They’re looking right now for those organizations that engage them, where they can get their hands dirty, and where they can propose new ideas and have those ideas taken seriously. It sounds trite, but that is the most important recommendation we make: Don’t wait.”

A new report by the Giving USA Foundation on generational differences in giving found that younger donors are far more likely than older donors to want to be engaged with a nonprofit. When donors were asked if they would be open to receiving a monthly mailing from a charity after they’d made a gift, 64 percent of millennials and 36 percent of Gen Xers said yes, compared with only 19 percent of boomers, according to the report.

Keith Beverly, a financial planner with expertise in multi-generational philanthropy, says next-gen donors are pushing their parents to think more carefully about how they can use all their assets to make an impact — rather than the traditional, siloed approach of using investments to make money and philanthropy to do good.

“The younger generations are asking: Are there ways that we can deploy that money in financial markets or in private markets and make a similar type of impact that we’re making on the charitable side?”

Different Priorities

Younger generations provide both opportunities and challenges for community foundations.

Private foundations are expensive and can be a pain to manage — which provides an opening for community foundations. Joanne Florino, a distinguished fellow at the Philanthropy Roundtable, thinks many young people may choose to wind down private foundations when they inherit oversight.

“Are they going to be more inclined to sunset them?” she asks.

The Community Foundation of Anne Arundel County is talking to a few families that may transfer their assets from a private foundation into a donor-advised fund, says John Rodenhausen, the foundation’s director of gift planning. “The next generation doesn’t want to inherit that effort and expense,” he says.

But some next-gen donors aren’t happy about the costs at community foundations, either.

The Pittsburgh Foundation is one of several community foundations around the country that have found that younger donors are less comfortable with fees than older donors are. At the Pittsburgh Foundation, administrative and investment fees on a donor-advised fund worth $1 million or less could cost more than 2 percent of assets per year.

The foundation requires that its donor-advised funds be permanently endowed — which means it has plenty of experience working with next-gen donors who inherit the right to advise on funds established by their parents. The transition isn’t always smooth, says Lindsay Aroesty, vice president of development and donor services.

“Baby boomers prioritize the personal relationship with advisors, and they appreciate that the foundation has its pulse on the neighborhood work. They’re more willing to pay a little more for that — they know it’s expensive,” Aroesty says. “Younger generations approach philanthropy differently — they value participation, volunteering, grassroots environments. When they get hit with a fee, they’re like, ‘Wait a minute — I could go to Fidelity [Charitable] and pay a lot less.’”

The Pittsburgh Foundation’s legacy investment option, embraced by many older donors, invests some assets in private equity, hedge funds, and international equities, and Aroesty believes it’s a good bet to do well over time. But younger donors are so resistant to that fund’s steep investment fee that the foundation now typically recommends a cheaper index-fund option to them “in an attempt not to lose the business,” Aroesty says. The index-fund option drops the total cost for administrative and investment fees to about 1.3 percent per year for an account worth $1 million or less.

“Then we can talk about the community foundation from the philanthropic model,” she says, “which is where we thrive.”