The Three Best Charitable Giving Opportunities for Philanthropic Millennials

It is well established that people tend to become more philanthropic in their golden years when time, accumulated wealth, and motivation to support charitable causes becomes more relevant.[1] While this remains true, the Millennial generation has begun to participate in major giving as a way of changing society through the power of their wallets.[2] This trend is evidenced by recent findings that nearly 75% of Millennials donated money to friends, family, or nonprofits during the Covid-19 pandemic.[3]

With each passing year, the Millennial and Gen Z generations continue to replace the Baby Boomers and Gen X as the primary demographic in the American workforce. As the face of the American workforce continues to transform, it is estimated that Millennials will inherit $68 trillion from Baby Boomers over the next 25 years.[4] This “Great Wealth Transfer” is anticipated to be the largest transfer of wealth ever seen in human history;[5] and by 2030, it is anticipated Millennials will hold five times as much wealth as they hold today.[6] Given these trends, it is vital that institutions of higher education find ways to make it easier for these socially conscious prospective donors to give back to their alma maters. This article explores three simple avenues for donors under age 45 to become major donors at educational institutions and satisfy their desires to become more philanthropically inclined without experiencing major disruptions to their finances.  

Appreciated Securities

The Millennial generation is the day trader generation. Millennials accounted for nearly 20% of all stock market trading in 2020, a 5% increase from 2019.[7] Polling also reveals that  Millennials have created record usage on trading apps like Robinhood, which have reported daily trading volume northward of 300% compared to previous years.[8] Due to the pending Great Wealth Transfer and demographic changes in how society invests, unique opportunities for institutions of higher education to solicit major gifts of publicly traded securities from Millennials are greater than ever.

Gift of appreciated stocks, bonds or mutual funds that have been held for more than one year can constitute a popular alternative to cash donations from cash-strapped Millennials because younger investors can obtain double the tax savings: 1) avoiding capital gains tax, and 2) receiving a charitable income tax deduction (assuming the taxpayer itemizes).  If the underlying security has appreciated in value, donation of the security avoids capital gains tax that normally apply upon sale of the security. The donor may also earn a charitable income tax deduction for the full market value of the security.

If the donor is uncomfortable with parting with his or her underlying shares, and instead favors a donation of cash, savvy gift planning can assist the donor with obtaining the best of both worlds. Under this scenario, the donor can give their shares of stock to the charity and repurchase additional shares with the amount of cash that otherwise would have been used for their donation. By employing this strategy, the donor will have avoided capital gains tax and will now hold new shares with a higher purchase price and thus “stepped up their basis” in their stock. Now, when the time comes for the donor to sell their shares, they will enjoy paying less capital gains tax than they would have before.

Finally, a recent Schwab Stock Plan Services’ survey on equity compensation reveals that 56% of Millennial equity plan participants say equity compensation is a “main reason or one of the main reasons” for taking their current job, compared to 27% of older participants.[9] Creative ways of giving back to charity exist for workers under age 45 paid in incentive stock options (ISO) and non-statutory stock options (NSO). For more information, please see the UF Office of Estate & Gift Planning fact sheet linked here.

Life Insurance

Life Insurance remains a model tool in charitable planning and a common benefit offered to workers across the United States. This asset provides an opportunity for donors under 45 to make a philanthropic impact. This can be accomplished in several ways. Consider the following:

By naming a charity as a revocable primary beneficiary of an existing whole life insurance policy, a donor under the age of 45 can leave all or a portion of their death benefit to charity. For example, Gary Gator is a single 40-year-old with a $200,000 permanent life insurance policy he owns that was offered to him through his employer. Gary desires to use the cash value of his policy to meet any “rainy day” obligations that may arise during the day-to-day happenings of life. However, if Gary does not need the cash value, he would like UF to receive the death benefit of his policy to support scholarships for UF students.

Since Gary is the owner of his whole life policy and preserves control over naming the beneficiaries of the policy, Gary is not afforded an income-tax deduction for the policy’s value or for premium payments.  However, the largest benefits to Gary Gator (aside from the satisfaction of changing the lives of students through his endowment) is being recognized as a $200,000 level donor at age 40 and being thanked for his gift by enrollment in the UF Legacy Society and UF’s President’s Council.

As an alternative to the above approach, Gary Gator can apply for a new life insurance policy and designate UF as the irrevocable policyowner or transfer the ownership of his existing policy to UF. Under this scenario, Gary would pay the premiums of the policy by making contributions (equal to the premium) to the UF Foundation. An advantage to this approach is that Gary Gator would be entitled to a charitable income tax deduction for the value of the premium payments he sends to UF on an annual basis (assuming he itemizes on his annual tax return). Like the first example, Gary will be recognized as a $200,000 level donor through membership in UF’s Legacy Society and President’s Council. Finally, since the policy is owned by UF, the value of the policy will not be included in Gary Gator’s estate. That means the value of the policy will not count towards the value of his estate if Gary ever develops an estate tax dilemma decades later.

Beneficiary Designation of Retirement Plan Assets

Traditional pensions continue to fall by the wayside in favor of retirement plans such as IRAs, 401(k)s, and 403(b)s. While a record number of workers (including those under 45) continue to participate in tax-favored retirement plans, few consider the ultimate distribution of such assets and the tax consequences of that distribution. Since the passage of the SECURE Act and SECURE Act 2.0, leaving retirement assets directly to natural persons generally has become a much less tax efficient way of transferring wealth to an individual’s loved ones. For the younger worker who is charitably inclined, utilizing retirement assets to support charity is an attractive and easy alternative to having a large percentage of that retirement account needlessly lost to tax.

If you are under 45 and want to make a gift using your retirement plan assets, simply contact your plan administrator and request a Change of Beneficiary Designation form to sign. If you are married, your spouse must waive his or her right to survivor benefits from the plan (though this is not the case for IRAs).  When you designate a charity as a beneficiary, you often have the flexibility to indicate a specific amount or a percentage.

Example: Gayle Gator, a 45-year-old engineer, has $300,000 in her IRA and $300,000 in publicly traded stocks with her local financial planner. Gayle purchased the stocks for $100,000. Gayle wants to equally divide her estate between her daughter and UF. The following chart illustrates Gayle’s benefits of leaving the stock to her daughter and naming the University of Florida as a beneficiary of her IRA. In this example, the daughter would inherit Gayle’s stock valued at the date of her mother’s date of death, not the original $100,000. This is referred to as “stepped-up” basis.

By leaving the stocks to her daughter and the IRA to UF, Gayle avoids taxes that otherwise would have been incurred on the funds contained in her IRA. At the same time, her daughter receives a step up in basis on the inherited stocks. On top of all the above, 45-year-old Gayle is acknowledged as a $300,000 level donor and recognized as a member of the UF Legacy Society and President’s Council. Since Gayle is only 45 years old, her gift to UF may also increase with time based on underlying market performance of the investments that constitute her IRA.

Conclusion

Societal trends demonstrate that philanthropy among the Millennial generation is an important trend that institutions of higher education need to utilize in the coming years. While current cash giving for Millennials remains an elusive pursuit for most, the three opportunities outlined above constitute several strategies that should be presented by development professionals to Millennials as a way of helping them give smarter and easier to institutions of higher learning prior to retirement.

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[1] Who Gives Most to Charity?, Philanthropy Roundtable (last visited Jan. 19, 2024), https://www.philanthropyroundtable.org/almanac/who-gives-most-to-charity/#:~:text=People%20are%20generally%20more%20philanthropic,26%2D45%20years%20old)(Giving peaks at ages 61-75, when 77 percent of households donate, compared to just over 60 percent among households headed by someone 26-45 years old).

[2] Lori Collins, Giving Trends: The Role of Age and Income in Charitable Giving, Giving USA (September 6, 2023), https://givingusa.org/giving-trends-the-role-of-age-and-income-in-charitable-giving/.

[3] Megan Leonhardt, Nearly 3 out of 4 millennials have donated money during the pandemic, CNBC (September 30, 2020), https://www.cnbc.com/2020/09/29/more-millennials-donated-money-during-the-pandemic-than-other-generations.html.

[4] Millennial donors: Your guide to major gifts & Millennial giving, Free Will(last visited January 19, 2024), https://www.nonprofits.freewill.com/resources/blog/millennial-donors-and-millennial-giving-major-gifts.

[5] Id.

[6] A Look at Wealth 2019: Millennial Millionaires, Coldwell Banker (September 19, 2019), https://blog.coldwellbankerluxury.com/wp-content/uploads/2019/10/CBGL-Millennial-Report_SEP19_FINAL-4a.1-1-1.pdf.

[7] Millennial donors, Id.

[8] Karen Gilchrist, Millennials are piling into stock trading to beat the market. Here’s what you need to know, CNBC (April 27, 2020), https://www.cnbc.com/2020/04/28/investing-advice-millennials-are-stock-trading-to-beat-the-downturn.html.

[9] Amy Reback, Equity Compensation: Why Millennials Like It and How Entrepreneurs Can Use It, Entrepreneur, (March 18, 2021), https://www.entrepreneur.com/money-finance/equity-compensation-why-millennials-like-it-and-how/365709.

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