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Will a $9 Trillion Transfer of Wealth Benefit Communities?

Travis Green | September 15, 2018

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Community foundations are an important piece of the localism movement across the United States. Although they account for just 1% of foundations in the United States, they have 10% of foundation assets, make 11% of grants, and today receive 16% of new gifts, according to the Foundation Center. They are champions of local causes, local institutions and local giving.

As a field, however, they are not yet consistent champions of local investing.

To map a strategy for leveraging more of these assets for local investing, it’s useful to remember what distinguishes community philanthropy from large national foundations. Community philanthropy was born out of a simple idea: if we are going to build prosperous, thriving places, communities need the philanthropic resources to do it themselves. Unlike large private foundations that benefit from a one-time philanthropic windfall, community foundations remain tethered to community because of their ongoing donor development efforts.

Since their beginning, but with greater rigor starting in the early 2000s, community foundations looked at wealth transfer as one of the most important opportunities for asset development. Except for incredibly wealthy donors, the most likely time to consider a substantial gift is toward the end of one’s life – when assets are liquid and no longer needed to sustain income, and one’s legacy is being considered.

As much as $9 trillion will transfer from one generation to the next by 2028—the largest household wealth transfer in U.S. history

From Nebraska to New York, Texas to South Dakota, community foundations have used Transfer of Wealth™ estimates (which estimate how much wealth in a city, county, state or other defined region is likely to change hands over a given period) to energize and inform donor development strategies. They have, for instance, asked all families to leave just 5% for the community. This focus greatly increased the size of many community foundations. It also contributed to the development of community endowments and unrestricted assets that could be granted based on community need and opportunity.

Investing Locally

Can this same analysis be used to encourage more local investing by foundations? Anticipating that shift, our team at LOCUS Impact Investing, a national social enterprise working with place-focused foundations to invest their capital locally, began integrating local investing examples in our decades-old Transfer of Wealth™ studies. The idea was to help community foundations develop language and use data to engage donors early on with an endowment, grant making and local investing focus.

These conversations have fresh urgency. A recent analysis completed by LOCUS and detailed in a report published by the Chronicle of Philanthropy estimates as much as $9 trillion will transfer from one generation to the next by 2028. That will constitute the largest household wealth transfer in U.S. history. As community foundations start to strategize about capturing just a portion of that wealth, it’s worthwhile to consider how local impact investing may align with the vision and philanthropic strategies of current and next generation of donors.

Donors may be shocked to learn that their gifts to many local community foundations result in a net-divestment from their local economy

The relevance of local investing to these kinds of donor conversations and estate-planning development practices may be obvious to some but is not yet widely understood or a regular part of foundation strategy. Take the most obvious connection: donors may be shocked to learn that their gifts to many local community foundations result in a net-divestment from their local economy. Wealth that they had held in a local business, a farm, or stock in a local company is liquidated and placed in a globally invested portfolio of equities and bonds with little attention to how it contributes to the local economy.

As place-based philanthropic institutions with $82 billion in assets, largely gathered from donors who care about their communities, it’s appropriate for donors and communities to ask community foundations to redeploy some of those dollars into community investments.

The first steps taken by many community foundations are often small local “test” investments and a growing number of community foundations have really committed to the cause. But the field has yet to express that local investing for impact is and should be a core practice of community foundations.

More impact-focused community foundations are going further. The Community Foundation of Boulder County offers a socially responsible investment fund for donors. Baltimore Community Foundation now offers donors local investment funds and has committed a portion of their overall portfolio to local investment. Hutchinson Community Foundation gave current donors an opportunity to redirect some of their donor-advised funds into a local affordable housing project alongside funds from the foundation’s endowed assets. Incourage Foundation created a Community Impact Investing Fund to allow donors – large and small – to invest in their community.

“Impact First”

Community foundations are logical champions for local investing. They are important partners with community development organizations, Community Development Financial Institutions and even municipalities as they work to create more impact in the places they serve. Whether driven by enlightened donors, board members or their own staff, more foundations, with help from organizations like LOCUS Impact Investing, are moving along a pathway from (1) exploring the new tool of local impact investing to (2) unlocking capital via social impact funds, due diligence on specific deals or partners, and loan guarantees to (3) deploying investment capital into local affordable housing projects, small business loans, cooperative grocery stores and daycare facilities.

As anchor institutions in a community capital ecosystem, a growing number of community foundations are embracing an “impact first” approach to their missions, to the benefit of the communities they serve. However, with almost 800 community foundations across the United States, there is a tremendous opportunity to engage more of these organizations as local investment partners – partners with a long-term and mission-driven commitment to growing healthier, more prosperous communities now and into the future.

Travis Green is a member of the consulting and community analytics teams with LOCUS Impact Investing. LOCUS is a social enterprise with a mission to empower place-focused foundations to invest their capital locally to build prosperous, vibrant communities. (LOCUS is a Locavesting sponsor).

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