Breaking the Mold: How Donors of Color Are Shaping Philanthropy

Despite making up 14.4% of US millionaires, high-net-worth individuals of color have often been overlooked in studies of the philanthropic world.¹ But a recent survey of 113 high-net-worth donors by the Donors of Color Network (“DCN”) reveals a shift in the tide.² What does this research reveal about these donors’ relationship with charitable planning?

First-Generation Wealth Creation

When it comes to the origins of wealth, donors of color don’t often fit the traditional mold. A staggering 65.5% of the high-net-worth donors of color reported that their wealth was self-made, compared to just 25% of wealthy Americans surveyed in a separate study.³ And while many successful families leave an inheritance, roughly 90% of DCN participants reported that no portion of their wealth was passed down to them.⁴

How might these dynamics influence giving patterns? DCN researchers noted the following challenges that disproportionately impact donors of color:

• Sizing Their Surplus: Many did not consider themselves wealthy or viewed their wealth as transitory. For some, this made it difficult to estimate their true giving potential.
• Extended Support Networks: A majority of the DCN participants provided financial support to friends and family members for living expenses, education, and major life events. In one case, such gifts totaled $1.2 million a year! This extended support may add a new wrinkle when solving for a donor’s charitable giving potential, as it increases the number of variables impacting their ongoing liquidity needs.
• Seeking Systemic Change: Many of the DCN participants shared experiences of overcoming bias and discrimination, which informed their desire to seek greater equality and systemic change. Indeed, several participants noted that efforts to bring about meaningful change must address the economic, institutional, and political causes at the root of injustice in their own communities,⁵ making their giving plans more multifaceted.

From Success to Significance

Take Alina Hernandez, a successful 55-year-old entrepreneur who currently has $6 million in investable assets and $2 million in real estate and other illiquid holdings. For Alina, wealth is more than just a number. She’s thinking about her values and how she can utilize her hard-earned success to make a difference. Here are some of her goals:

• Since her upbringing instilled a desire to remain self-sufficient, Alina wants to prioritize her own lifestyle, including saving for retirement and her children’s education.
• As the most prosperous family member, she frequently provides financial assistance to her parents, siblings, and close family friends—and wants to keep doing so.
• Alina also wants to give back to her community, which she credits for her success, by establishing a charitable vehicle that supports economic development and empowerment in her hometown.

When Alina consults with an estate planning attorney, she’s introduced to a Bernstein advisor who helps determine her core capital based on annual spending of roughly $110,000 (including contributions to her retirement fund and her children’s college tuition payments). With a liquid portfolio of 70% stocks and 30% bonds, our analysis shows that Alina needs to retain $4.3 million of liquid core capital to endow her lifetime spending. This leaves her with $1.7 million in “surplus capital” to gift to loved ones and charity (Display).

Empowering Loved Ones

Next, Alina’s advisory team helps her size the right gift amount to support her friends and family. Based on projections of their needs, Alina’s estate planning attorney suggests funding an irrevocable gift trust—a friends and family trust (“FFT”)—with $1 million. This funding level is designed to support both a one-time distribution of $150,000 in the near future—to help the trust beneficiaries cover home purchases, debt repayment, and tuition—as well as ongoing annual distributions of $40,000, with $25,000 earmarked for Alina’s parents. To avoid saddling Alina with an ongoing income tax liability, Alina’s advisory team recommends making the trust a separate taxpayer. Alina also liked the idea of using the trust as a “family bank” to provide low or no-interest loans for its beneficiaries alongside other outright distributions, which may allow her to extend the trust’s lifespan and its ultimate impact.

Based on our modeling, the FFT is likely to meet Alina's distribution goals for at least 20 years but may struggle to sustain such distributions beyond 30 years (Display). However, by structuring half of the trust’s initial $150,000 outlay as no-interest loans, Alina can boost the probability of the trust’s continued existence by an extra 10%. With this impact in mind, Alina’s estate planning counsel documents her preferred prerequisites for a beneficiary loan, including presentation of a business plan and other supporting materials.

Making a Lasting Impact

With her loved ones taken care of through the FFT, Alina turns her attention to her philanthropic goals. Alina wants to support existing nonprofits in her community of origin along with offering a scholarship to students at her former high school. Given her objectives, her Bernstein advisor suggests that she create a private nonoperating foundation. She initially considers contributing $500,000 to fund the foundation and asks her advisor to estimate the longevity of such a plan. The analysis shows that with the assets invested in 70% stocks and 30% bonds, the foundation will have a remaining value of $600,000 in year 20 if it makes annual distributions of $25,000—but nearly run dry with annual distributions of $40,000 (Display).

Alina’s counsel proposes an alternate approach—redirecting $500,000 from the FFT’s initial funding to create a charitable remainder unitrust (“CRUT”) for the benefit of her parents, with any remaining assets passing to the foundation at their death. If Alina’s parents receive a 5% annual unitrust payment, this replaces the $25,000 distribution from the FFT and allows the FFT’s trustee to invest for a longer time horizon suited to the trust’s younger beneficiaries. What’s more, based on her parents’ joint life expectancy, the CRUT is likely to direct over $500,000 to the foundation after 15 years, extending its solvency period by an additional 11 years.

Donors of Color: A Shift in the Tide

While not alone as first-generation wealth creators, the donors of color in the DCN survey exhibited certain philanthropic patterns and behaviors that seem to relate to their self-made status and ongoing community connections. Although these attributes may add certain complexities to the question of how and how much to give, working with the right professional advisors can provide much-needed clarity. Your Bernstein advisor can help personalize your giving plans to reflect both past learnings and your vision for the future.