We have all heard, “Should an emergency situation occur, you need to put on your own oxygen mask first before attempting to help those around you.” This principle also applies when we assess an investor’s financial plan before supporting their philanthropic goals. Many retirees see their savings grow beyond expectations and feel eager to contribute to meaningful causes. However, ensuring the investor’s future stability is our priority before contributing to charities.
We analyze projected cash flow, market growth, inflation, health care costs, taxes, and more to confirm that spending remains well within sustainable limits. Once we establish that their spending is far below their feasible maximum spending, we can then explore how best to channel toward charitable goals.
For some investors, philanthropy is a deeply personal commitment. They dedicate significant portions of their wealth to a cause close to their heart, often through ongoing donations and legacy planning. This drive to create lasting change reflects a legacy they hope to leave behind.
Two effective tools to establish a charitable legacy are family foundations and donor-advised funds (DAFs). These vehicles allow donors to support multiple tax-exempt 501(c)(3) organizations and public charities under 509(a) without limiting them to a single cause. Both options can continue long after the donor’s passing. DAFs can have individual or charitable successors, while family foundations may pass through generations or appoint a board of trustees. Both take the initial donation and subsequent annual contributions and grow the assets through conservative investments, maximizing impact over time.
The primary difference lies in the initial setup. DAFs require as little as $5,000 and have minimal administrative requirements. DAFs are managed by a sponsoring organization, which generally services multiple DAFs in a community, taking care of money management, administration, and tax reporting. Contributions may include cash, cash equivalents, publicly traded securities, real estate, crypto, restricted stock, and more. With no annual minimum distribution requirement, DAFs provide immediate tax benefits and the flexibility to take time to select specific charities. Annual contributions also allow donors to manage their tax obligations over time. Donors technically don’t have direct control over donations made through a DAF, as they are submitting a recommendation. Nearly all DAF recommendations—around 99%—are approved, and the DAF issues the grant accordingly.
Family foundations generally requiring a minimum of $250,000 to start and also accept a broader range of assets, including real estate, closely held stock, stock options, insurance policies and cash and securities. Foundations can also use holdings in their current form rather than liquidate them, such as renting the real estate to generate income. As family foundations are legal entities, they are subject to strict guidelines on investment strategies, reporting, annual distributions, and an annual excise tax on net investment income; however, they are more flexible as they can make grants directly to individuals, organizations outside of the United States, and provide funding to for-profit businesses that support the foundation’s charitable mission, in addition to traditional 501(c)(3) organizations.
If you have questions about using charitable vehicles like a donor-advised fund or family foundation for your philanthropic efforts, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the October 26, 2024 “Henssler Money Talks” episode.