A novel approach to legacy donations with long‐term benefits supported by numerical illustrations

Abstract

Philanthropic donors face challenges in matching the causes to which they donate, the time horizon-and thus impact-of their donations, and the charitable vehicles they choose for making contributions. Wealthier donors may elect to create their own foundations and customize their charitable support. Less wealthy donors have limited choices: they may contribute to a nonprofit's current operations or to existing nonprofit endowments. We present a novel approach for making charitable donations, blending aspects of each of these strategies. Our approach has potential long-term financial benefits, allows donors to control their charitable donations in a convenient and easy-to-implement manner, can be established through an existing nonprofit organization, expands opportunities for more donors because it requires a smaller corpus contribution with lower management costs than creating a foundation, provides tax savings in the United States and other countries (e.g., the UK, Canada, and Australia) comparable to other planned giving vehicles, and may be implemented during one's lifetime using donor advised funds or as part of a legacy plan through the donor's estate documents, which is when the long-term benefits accrue.

Mathematical results for the ‘Master Fund Strategy’ for legacy donations under the assumption of annual compounding

“…Solow et al (2023, 2024) propose a novel way to structure a legacy donation, the Master Fund Strategy (MFS). Under continuous compounding and rather general conditions, they prove the MFS to be more beneficial in net present value terms than a traditional strategy (TFS), while also presenting, in their 2023 article, numerical results under yearly compounding.…”

“…Finally, note that to determine the transition year t T , it is necessary to find numerically the first value of t so that Equation 6 is positive: Solow et al (2023) provide an excellent example of such an approach. Solow et al (2023Solow et al ( , 2024 propose a novel way to structure a legacy donation, the Master Fund Strategy (MFS).…”

“…Finally, note that to determine the transition year t T , it is necessary to find numerically the first value of t so that Equation 6 is positive: Solow et al (2023) provide an excellent example of such an approach. Solow et al (2023Solow et al ( , 2024 propose a novel way to structure a legacy donation, the Master Fund Strategy (MFS). Under continuous compounding and rather general conditions, they prove the MFS to be more beneficial in net present value terms than a traditional strategy (TFS), while also presenting, in their 2023 article, numerical results under yearly compounding.…”

A novel approach to legacy donations with long‐term benefits supported by mathematical analysis

“…My co-authors and I have recently published a paper entitled "A novel approach to legacy donations with long-term benefits supported by numerical illustrations (see Solow, Symes & Webb 2023)." In that paper, we propose a novel approach, called the "Master Fund Strategy" for making legacy donations and show, through numerical examples, that this approach is potentially "better" than a traditional approach in the sense that the net-present-value of the stream of distributions to the charities under the new approach eventually exceeds that of the traditional approach.…”

“…Additional context and literature is given in the companion paper by the authors (see Solow, Symes & Webb 2023). We now provide the details of the proposed strategy, including mathematical analysis and a discussion of how our strategy can generate superior funding to NPOs.…”