By the end of 2013, Warren Buffet and the Bill and Melinda Gates family will have encouraged over one hundred billionaires in the U.S. and around the world to sign on to the Giving Pledge, a commitment by the world’s wealthiest individuals and families to dedicate the majority of their wealth to philanthropy.

Signatories include three Canadians: eBay founder Jeff Skoll, Edgar Bronfman, and Charles Bronfman. According to the organization’s website, “the pledge encourages signatories to find their own unique ways to give that inspire them personally and benefit society.”

“High net worth individuals generally support a variety of charities, but often they opt to go beyond charitable giving, wanting to leave a lasting, personalized legacy,” said Marvi Ricker, Vice President of Philanthropic Services at BMO Harris Private Banking.

Wealthy people are often reluctant to leave everything to their children because of the consequences it could have. The Center on Wealth and Philanthropy at Boston College has probed the psychology of numerous wealthy Americans. In 2011, Graeme Wood of The Atlantic Monthly was granted access to preliminary findings of a long-term project at the Center, headed by sociologist Paul G. Schervish. Of 165 households (possessing an average net worth of $78 million) that responded to the Center’s questionnaire, the “overwhelming concern mentioned by nearly every parent” was the effect that inherited wealth would have on their children. In the words of one respondent, “Money could mess them up—give them a sense of entitlement, prevent them from developing a strong sense of empathy and compassion.”

Philanthropy may be just what the doctor ordered. When helping families create private foundations, Ricker explained, the first step is to interview family members and discuss their experiences, values, and aspirations in order to develop a mission statement to which all family members can relate. The more focused the statement, the better. For example, three-quarters of the foundations that Ricker has helped to create mention “youth at risk” as the mission. Self-made clients know that luck has been part of their success, and they “tend to have a real sympathy for kids who have been unfortunate,” said Ricker. Giving to hospitals and universities is relatively straightforward, but effectively funding help for at-risk youth requires strategy and some structure.

Effective giving

The next stage is to educate families on effective philanthropy: “how to make good grants, what to fund, and how to evaluate.” Ricker said her department works for as long as two years to help a family to establish its philanthropic program. Governance is important, not only for the success of the granting mission, but also because it allows young family members to learn about stewardship of wealth. “The family’s foundation becomes the family’s identity within the community.” It can be a fulfilling process for all family members involved. “Slowly, methodically, they can see their money make a difference,” she said.

According to Ricker, financial advisors are often the first to raise the issue of philanthropy with a client. Typically, a client with charitable inclinations is undergoing a transitional wealth event such as an inheritance, divorce, or sale of a business. It’s important to identify the philanthropic interest early in order to start the legal process needed to establish a foundation within the calendar year in order to take advantage of tax-saving opportunities.

Regulatory Changes: Charitable and Philanthropic Donations