Innovative Strategies for Smart Philanthropy and Impact Investing with Sanem Alkan

Discover how to align your charitable intentions with your investment goals as we chat with Sanem Alkan on smart philanthropy and impact investing. Sanem's expertise brings to light the transformative shifts in philanthropy, from the pivotal 1969 Tax Reform Act to today's cutting-edge trends like the United Nations' Sustainable Development Goals (SDGs), blended finance, and venture philanthropy. Learn how to merge financial returns with social impact, leveraging strategic philanthropic tools such as program-related and mission-related investments. Sanem also explores the critical role of planning and advisory support for achieving tax-efficient charitable giving.

For business owners, Sanem unveils advanced strategies like charitable remainder trusts, donor-advised funds, and corporate foundations, which not only offer tax benefits but also bolster legacy planning and business reputation. She provides a wealth of resources for those eager to deepen their knowledge in this evolving field, including books, organizations, and certification programs. Tune in and transform your approach to philanthropy and impact investing on this month's Financial Perspectives episode.

If you'd like to learn more about the show, have a topic or speaker to suggest, or would like to leave us a comment, email podcast@cfa-sf.org.


This podcast is produced by CFA Society San Francisco, a not-for-profit professional association, providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website or connect with us on LinkedIn.

The information contained in this podcast does not constitute financial or investment advice. Please consult your own financial advisor for information concerning your specific situation.

Chapters

• 0:04 Impact Investing and Philanthropy Strategies
• 13:11 Advanced Philanthropy and Impact Investing
• 18:39 Listener Engagement and Feedback Request

Transcript

Lindsey Helman: 0:04

Hello and welcome to Financial Perspectives, a CFA Society San Francisco podcast, where we interview and discuss trends with leaders from across the investment and finance industry. This month, our host, Tanya Suba-Tang, membership Director with CFA Society San Francisco, had the pleasure of speaking with Sinem Alkan, board advisor, venture partner and senior impact advisor for Silicon Valley-based philanthropist Sheri Sobrato. Listen in as they discuss smart philanthropy and impact investing.

Tanya Suba-Tang: 0:40

Hello Sanem, welcome to our podcast.

Sanem Alkan: 0:43

Hello, nice to see you.

Tanya Suba-Tang: 0:45

It's great seeing you. Actually, I probably should say great seeing you again and welcome back to the show.

Sanem Alkan: 0:51

That is correct. It's great to be back here.

Tanya Suba-Tang: 0:53

So, for our listeners who might not realize, Sanem was actually one of my first interviews and it's so great to see you. I think we recorded our first one back in season two. So, wow, a lot of things happened since then, and today we are going to talk about smart philanthropy and impact investing and, honestly, I can't think of a better person to have this conversation with than you, Sanem, because your background is extensive when it comes to investment management, technology and philanthropy.

Sanem Alkan: 1:24

Thanks so much. It's been a pleasure to be on this career path. I did start my career in alternative investments and traditional investments and then moved into philanthropy. In recent years it's been a great learning experience and also coming at a time when the industries, the sectors, have changed a ton and almost found a middle point. There's a lot of convergence happening, which I'd love to go into in this podcast in different ways, but everything I've learned, everything I've experienced, now I get to put in action. So it's a lovely time to be where I am.

Tanya Suba-Tang: 1:58

So kind of jumping right into your conversation Now, many philanthropist families tend to look for ways to make social impact while they make for-profit investments. So what are some ways they can combine charitable intent with investment goals?

Sanem Alkan: 2:12

Yeah, this has become an exciting topic in the US in recent years. I'd like to share some context. For several decades, families have set up private foundations to make donations. This is a very common way to basically make charitable investments in the US and these foundations have historically had annual distribution requirements to comply with tax regulations. What changed the sector quite a bit was a Tax Reform Act in 1969. This allowed private foundations to support for-profit ventures if their goal was aligned with the mission of the foundation. The Tax Reform Act refers to this as program-related investments, pris for short. Foundations can make loans, equity investments or use other forms of financial support to businesses, nonprofits and even individuals, as long as these investments are charitable and even if there may not be a financial return. But then came another concept organically, in the late 90s and early 2000s, as the sector moved towards what's called impact investing, foundations started making what we call mission-related investments MRIs for short to further their mission and also achieve financial returns. So while PRIs the first concept I mentioned they're governed by the US tax law. Mris are made from a foundation's endowment and they're used to generate market rate or near market rate returns. So slightly different concept by 2015 or so, irs issued clarifications to affirm that MRIs could be made without jeopardizing a foundation's fiduciary responsibility. By this time, a lot of MRIs had been done, but this was a clear turning point and since then, mris have been a popular tool, as investors have paid more attention to responsible investments and we always talk about ESG, environmental, social and governance criteria. So this has really been a great point where MRIs have been very popular.

Sanem Alkan: 4:10

Since early 2000s, several new trends have emerged making impact investing an exciting area for more families, and also versus setting up a private foundation. And let me explain what impact investing really means in this context. This is the practice of generating returns with social or environmental impact. Investments can be made in projects, companies or funds that seek to generate measurable positive outcomes and financial returns. So there are numerous ways one can make impact and generate returns. For example, in 2015, the United Nations established Sustainable Development Goals SDGs for short, setting ambitious global targets requiring trillions of dollars in investment. This in turn catalyzed the need for innovating financing mechanisms, which includes concepts like blended finance. So let me explain what blended finance is. This is the use of philanthropic capital to leverage private or public funds for large scale projects in underfunded areas like infrastructure, healthcare and climate resilience and de-risk investments, and investors can get involved by using grants, loans, guarantees or equity investments and moving closer to this era 2020s.

Sanem Alkan: 5:33

Another great tool for families is venture philanthropy. This is the merger of venture capital and philanthropy. Donors invest in nonprofits or social enterprises, expecting social returns that they can measure and, like venture capital investors, they tend to focus on hands-on enrollment, capacity building and multi-year commitments. It's a lot more hands-on than the prior concepts. Another concept that I see a lot is collaborative giving. This is when individuals and families form partnerships with each other and other foundations, organizations, to not only pool resources and expertise, but to really just create momentum. They could take many forms, but they tend to use donor advice, funds, giving circles, joint ventures to do stuff like this. I think maybe the final one is advocacy and policy philanthropy. A lot of philanthropists direct funding to influence policy, support advocacy efforts to create systemic change, they provide funding for research, public campaigns and they support think tanks so many different ways, depending on how involved the families want to get.

Tanya Suba-Tang: 6:43

So can you describe some complex gifting strategies for families to leverage?

Sanem Alkan: 6:48

Yeah, actually, the tax reform I mentioned, the Tax Reform Act of 1969, was pivotal in creating very robust, complex giving environment as well. This allowed philanthropists to form various tax-efficient, tax-related charitable giving vehicles to maximize the impact of their donations for both their beneficiaries and the nonprofits they wanted to support. One caveat, one disclaimer these methods require a lot of planning and generally it's an army of advisors around these families, from legal financial planning advisors like tax advisors, attorneys, to even financial planners. It's very important to understand the donor's goals and plan around it while navigating state and federal tax laws. But I just want to share a couple of examples. There are maybe five key ones that I would highlight. Some are similar, but the payments or who gives the benefit may be different depending on the context. So I'll be a little bit technical here, but it might be helpful for the audience.

Sanem Alkan: 7:47

First category charitable remainder trusts. So a donor transfers property which could be real estate, stocks, some property into a trust. The trust then provides income to the donor or beneficiaries for a specified period of time and after that income period ends, the remaining assets go to the charity. Donors receive or putting these assets into the trust, they receive an immediate charitable tax deduction and they also avoid capital gains on the appreciated property. So this is very, very valuable for a lot of families. A similar concept is charitable lead trusts. Instead of remainder trust, it's a lead trust. In this case, same exact process the owner transfers property into a trust and there's an income for a set period of time, but the income, instead of going to the beneficiary, it goes to the charity and after that term ends, the remaining assets in this case go to the donor and beneficiaries, so the parties are reversed. This also reduces the donor's taxable estate and provides an immediate charitable deduction. So these two are very commonly used, especially in the US.

Sanem Alkan: 8:50

Another idea is bargain sales. The donor sells a property to a charity at less than fair market value, as the name suggests, and the difference between the sale price and the fair market value is as the name suggests. And the difference between the sale price and the fair market value is considered a charitable contribution, and this is what the donor uses to take a tax deduction. The charity benefits from acquiring a property at a reduced cost. So it's pretty straightforward. Another one is called retained life estate. A donor transfers a deed, a property deed, to a charity but retains the right to live in or use that property for life, and when the donor passes, the charity takes full ownership of the property. But when this transfer is made, the donor takes an immediate tax deduction on the property's current value minus the value of the retained life estate. So it's an interesting strategy and a lot of people do that with their families with property, but in this case, instead of a family member, this is a charity benefiting.

Sanem Alkan: 9:43

And then maybe the final category is outright gifting of real estate. This can be made to a charity just like it can be made to any person. This way, the donor avoids capital gain taxes, receives a charitable deduction and removes the property from the taxable estate. Again, this one, much like the others, can be pretty complicated and in this case in particular, people have to pay attention to the charities real estate acceptance requirements. They have to actually also get a valuation and assess environmental risks. So complexity of transfers vary from strategy to strategy, but these are some of the ways.

Sanem Alkan: 10:21

One other interesting topic is use of LLCs limited liability companies. I put this in complex gifting because this wasn't a popular concept in the past, but it is one of the most flexible strategies for philanthropists today. It is actually flexible, private and gives the philanthropists a ton of control. So the way this works the donor funds an LLC with cash, appreciated assets, any other property, and then the LLC in return can donate money, property or even invest in social enterprises, as long as they align with the donor's philanthropic goals. Now this is an amazing tool, but there's one caveat Taxation is different.

Sanem Alkan: 11:01

So in the US we make donations private donations or use a foundation we take an immediate tax deduction. When we use an LLC, the deduction occurs only if the LLC makes a donation to a qualified charity and the LLC member takes the deduction on their personal tax returns. It flows through to the tax return of the donor. So there has to be an extra step there.

Sanem Alkan: 11:24

But there are amazing advantages. Donor retains control over the LLC assets to the point of how they should be invested and distributed, so that's a huge plus. This can make it more strategic and long-term for philanthropic purposes. And then there's a lot of privacy. Unlike in other foundation type entities, there's no public disclosure requirements, so you could basically have a ton of privacy and even make political donations, support for-profit social enterprises, lobby, without the restrictions that a typical 501c3 foundation would have. And also maybe this is interesting for our international audience LLCs can support individuals and international organizations which, as some people may know, can be very tough for foundations in the US to do. So international philanthropy becomes an opportunity and it's a very powerful multi-generational tool. There are also no self-dealing rules that foundations tend to face, where there are some restrictions between founder and related party interactions with the foundation. So LLCs could be a great way for families to do complex giving.

Tanya Suba-Tang: 12:31

So we talked a little bit about strategies and families. So what kind of strategies could business owners use to manage and transfer assets more efficiently?

Sanem Alkan: 12:40

Yeah, this is a great question, especially after we just went through a bunch of topics that help any philanthropist. Business owners generally try to take advantage of taxable solutions and also really care about multi-generational or succession planning, and charitable giving is an amazing way to do this. For example, business owners can donate their interest in the business partially or fully. If they have an S corporation, they could donate that stock. There are some issues with unrelated business taxable income. This is more for accountants to address, but there are many ways one could put a private stock or other assets from the business into trusts, llcs, donor advice funds. They can certainly create charitable remainder trusts what I discussed earlier or charitable leave trusts. Essentially, they have appreciated assets and charitable giving is a very natural way to not only avoid capital gains tax but also really empower other generations in these families to benefit. They can also set up what we call donor advice funds. I touched on that briefly without really explaining, but it is a much simpler, cheaper way to do philanthropy. A business owner can contribute cash stock assets to what we call DAFs. In short, they receive that immediate tax deduction but retain the ability to recommend grants to charities over time. They're very flexible, easy to set up, and you could use Fidelity, schwab type of intermediaries to do this, and it's actually not just for business owners but for anybody, a great strategy. And, of course, as business owners, they could set up a corporate foundation and what we call corporate social responsibility programs. So it doesn't have to stop with a personal philanthropic goal. It could be a corporate philanthropic goal.

Sanem Alkan: 14:28

A lot of companies benefit greatly and Maybe this is a good time to mash and just list a couple of benefits of charitable giving for business owners. So tax benefits, which we've been talking about at length, legacy planning, business continuity and succession, enhanced reputation, especially if they're local and community-based donors, and, I would say, personal satisfaction. A lot of people I've worked with over the years really benefit from combining their business and personal philanthropy and they can really make a lot of impact that way. And, of course, as with the first category, tons of challenges and considerations and probably an army of advisors necessary, even more so in this area. And there are also liquidity issues that business owners tend to navigate, especially if they are private business owners. So I would say, very similar to the first category, but a little bit more holistic and comprehensive.

Tanya Suba-Tang: 15:22

Wow, what a wealth of knowledge you just shared with us, asanem. So obviously in our podcast, we always like to kind of wrap things up with actionable items or even resources that our listeners can use to read more and learn more. So what, if you have any, you're willing to share some recommendations for our listeners to kind of learn more about smart philanthropy and impact investing?

Sanem Alkan: 15:45

Thanks for asking. There are so many amazing resources nowadays, especially in planned giving and combining lifetime giving with estate planning. There are some books maybe I'll mention those. The Art of Planned Giving by Douglas E White is a good one. It offers insights into the psychology of donors and various planned giving techniques, like complex giving. Planned Giving for the Small Nonprofit is a good one by Jordan and Quinn, two writers. It's a practical guide to setting up and managing plan giving programs and complex giving strategies and there's a simpler guide Bruce Hopkins wrote charitable giving law made easy. It's an accessible overview of the legal aspects of things.

Sanem Alkan: 16:27

But I think beyond that there are organizations like the American Council on Gift Annuities or National Association of Charitable Gift Planners even IRS, and the Council on Gift Annuities or National Association of Charitable Gift Planners even IRS, and the Council on Foundations where people could search for information resources. You know, especially on complex gifting strategies. A lot of great content that way. And I also really migrate to certification, educational programs. I think it's. I mean I've collected quite a few myself over the years in terms of learning experience. It can be amazing. But there's chartered advisory in philanthropy. It's a really good program and certified specialist in plan giving. That's another one that people could get and, of course, you could be part of organizations like Partnership for Philanthropic Planning or Association of Fundraising Professionals to do a lot of lifelong learning.

Sanem Alkan: 17:18

There are also some online courses and webinars, especially in plan giving. Foundation Center is a good one. So, yeah, there are quite a few resources, but I would say generally, it's a very rapidly evolving space, and what I've learned in the last decade in particular is the worlds of investments and philanthropy are coming to the middle. A lot of people are now using entities that we used to think as structured high finance. They're using those for philanthropy now, and the type of collaboration we used to see, the type of structuring we used to see in the traditional or alternative investment world, are now applying to philanthropy and impact investing. So keeping an open mind and constantly learning and reading about these topics could be very smart.

Tanya Suba-Tang: 18:03

Well, thank you again so much for joining us today and for really sharing your insights and knowledge regarding this space.

Sanem Alkan: 18:10

It was great seeing you and yeah, thank you so much for giving me the opportunity to share a little bit of insight.

Lindsey Helman: 18:23

Thank you for listening to this month's episode with Sanem Alkan, and thank you so much, Sanem, for all of your insights. You've given us a lot to consider when it comes to charitable giving strategies. Join us next time for another Financial Perspectives episode, airing on the last Tuesday of the month.

Lindsey Helman: 18:39

We love hearing from our listeners, so be sure to click the link at the top of each episode description to send us a message or reach us by email at podcast@cfa-sf. org. We look forward to hearing what you thought about this episode and receive any suggestions you may have on future topics you'd like us to cover. Thank you for being a dedicated listener.

Lindsey Helman: 19:06

This podcast is produced by CFA Society San Francisco, a not-for-profit professional association providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website at cfa-sforg or connect with us on LinkedIn.