Giving Options for Wealthy Donors
As a wealthy donor, the options available for charitable giving multiply.
You can have more control over how your donations will be spent, even potentially directing how each charitable dollar is allocated. While some of these options may require more planning and administrative work than direct giving, they also provide the potential for a deeper charitable impact and the chance to leave behind an enduring charitable legacy. Before deciding to use one of the following options in your charitable giving strategy, take time to learn about the obligations and resources each will require as well as the potential tax benefits each can offer.
Both private foundations and public charities have the same overall mission. They serve a particular public interest or they enhance the common good. However, while public charities are funded by the general public, private foundations depend on a principal fund that is generally backed by a single source, such as an individual, family, or corporation. This specialized source of funding means that private foundations can be much more selective about the causes they support. Since they don’t need to appeal to the public to remain funded, private foundations allow donors to truly focus on the causes they believe in most.
Beyond simply donating money, starting a private foundation also requires a significant amount of time. Foundations are managed by a board, which can include family members, friends and financial advisors, who defines charitable goals and manage donations. This board is responsible for investing and managing the principal fund and using it to make grants to individuals or public charities for charitable activities. By investing charitable dollars, you have the opportunity to enlarge your charitable donations, which can allow individuals or families to give more than initially planned. Unlike other investments, a private foundation’s investments are only taxed at a rate of 1–2 percent, allowing your investments to grow faster inside a private foundation than outside. Private foundations, as a unique form of charity, have specific restrictions according to the IRS. They must distribute at least 5 percent of the fair market value of their assets each year to qualifying charitable organizations. Donations to private foundations are also deductible at a lower rate than donations to public charities—30 percent of a donor’s adjusted gross income for cash gifts and 20 percent for capital gain property. It’s important to note that private foundations are watched closely by the IRS for misconduct and can have complicated tax restrictions when it comes to the relationship between board members and the foundation. You should be sure to consult with legal and tax professionals before and during the planning process.
If you or your family decides that a private foundation is the right fit for your charitable strategy, it’s important to make sure you have sufficient initial funding to cover the administrative costs as well as the time to devote to serving on the board. If you believe you and your family can contribute these resources, choosing a private foundation for your charitable strategy can provide you with a built-in way to pass on your charitable values by developing an intergenerational board of family members. For individuals or families who have specific charitable interests and a large pool of resources, private foundations can also be an opportunity to make a true impact on a personal cause.
Private operating foundations
While private foundations offer the opportunity to direct funds to specific charitable activities, that’s not all they can do. Private foundations fall into two different categories, depending on how they function: operating and non-operating. The type of private foundation discussed in the previous section is nonoperating. Rather than carry out their own charitable activities, this type of foundation seeks to raise funds and provide money for other established charities.
Private operating foundations, on the other hand, use the bulk of the money they receive from
donors to run their own charitable programs or services. For example, two common types of private operating foundations are museums and libraries.
Although private operating foundations may choose to donate to other charities in addition to their other charitable activities, they must actively run their own programs to qualify as a private operating foundation with the IRS. The IRS also has strict qualification requirements regarding private operating foundations’ net income and assets, which should be researched thoroughly and discussed with a legal and financial advisor before making any final decisions.
Private operating foundations will likely take time and resources beyond those of a private non-operating foundation, since you will have to plan and allocate resources toward charitable activities on your own. However, private operating foundations provide an additional opportunity to become involved in your community and to directly interact with the people or cause you want to serve. The extra effort can also pay off in terms of tax benefits. Private operating foundations are eligible for the same tax deductions as public charities (50 percent for cash donations and 30 percent for capital gain property). Private operating foundations appeal to many families because this unique structure is a hybrid of public charities and private foundations.
Donor-advised funds (DAFs)
Donor-advised fund, similar to private foundations, are designed to allow you to grow your donation to charity through investment. However, DAFs offer less time commitment than private foundations, which can be especially appealing if you don’t have time to serve on a board.
Donor-advised funds are administered by a sponsoring organization, so donors also avoid the burdens of fund management and administration. Although these sponsors charge fees for the creation and management of DAFs, the investment returns they produce help to build the value of the fund and to generate more money for charity than a simple gift. The flip side of this added convenience is that donor-advised funds, as the name implies, are only subject to a donor’s advisements. Although most sponsoring organizations will do what they can to follow the donor’s wishes, they do not have a legal obligation to do so. Therefore, putting your money into a donor-advised fund rather than a private foundation does somewhat limit your control over these funds.
DAF donations are subject to the same deductions as donations made to public charities and offer the full 50 percent income tax deduction for donors. In addition, money within a donor-advised fund can grow tax free and has no minimum distribution requirements. Unlike private foundations, which make it hard to give anonymously due to the tax reporting required, donor-advised funds make it possible to retain donor anonymity, because donations can be made in the name of the fund rather than the individual.
Donor-advised funds may be a good choice for your charitable giving strategy if you feel strongly about making a large charitable impact, but don’t have the time to commit to a private foundation. If you are starting on your charitable strategy later in life, donor advised funds may also be more appealing because they allow you to start your donations right away and avoid the start-up period of a private foundation. DAFs also easily allow for a wide variety of charitable interests. Private foundations generally have a focus (although they may not be legally bound to give inside that focus), but DAFs allow you to share your wealth in a variety of ways by dividing your fund’s assets and giving them to multiple sources. However, depending on the donor-advised fund you choose, DAFs may limit your opportunity for intergenerational giving, since some have restrictions on successions. Consulting a legal and financial professional before choosing a
DAF can help you determine which DAF is best for you, including helping you find those that offer the opportunity for intergenerational succession.
If your family is able to donate a large amount of wealth to charity, you may want to consider one
of these extended options for charitable giving. Each provides a way to potentially involve multiple generations of your family in your giving activities, uniting your family behind your charitable vision and strategy.