The true spirit of giving is based in generosity. Public recognition can often be a by-product of significant donations to a charity; however, many wealthy donors do not desire such publicity. Anonymous donating is one of the many benefits of giving to charity through a donor-advised fund.
Donor-advised funds are private funds administered by a community foundation or third-party financial institution that manage charitable donations for a number of unrelated contributors. Accounts are kept separate, with minimal administrative costs paid by the donors.
Minimum initial and ongoing contributions vary among different funds. Donors can transfer cash, marketable investment shares or other assets to the fund. Donor-advised funds are ideal for charitable stock donations because assets can be transferred relatively quickly with an immediate effect for tax planning purposes. While assets are considered immediately removed from the donor’s estate, donors can then take their time finding a charitable cause, as grants from the donor-advised fund do not have to be instantaneous.
These types of funds have numerous benefits for the donor, considering the charitable organization is the true beneficiary. Donor-advised funds generally handle the bookkeeping, tax reporting and ongoing investment decisions. Benefactors can make recommendations to the fund regarding the grants the fund makes to charities; however, the fund ultimately controls the grants. Most donor-advised funds will follow a donor’s wishes as to when, how much and to which charities grants are given. Many funds do not limit the number of grants you can recommend per year.
Additionally, some donor-advised funds allow the donor to give guidance as to how the assets should be invested. Because donor-advised funds do not have a minimum distribution requirement, a donor can choose to let their account grow tax-free for several years before distributing funds to charities. Grants to qualified nonprofit organizations can be made in the patron’s name, on behalf of a loved one or, as mentioned, given anonymously upon request.
Furthermore, donor-advised funds provide an opportunity for ongoing philanthropy after death, as a donor may designate a surviving family member to recommend grants. If the donor-advised fund is an endowed fund, only income is distributed, not principal, which creates a lasting testament to your charitable giving. Non-endowed funds can give grants up to the entire fund balance.
Like other charitable donations, gifts to a donor-advised fund are considered donations to a public charity for tax purposes, which means the donor is allowed to take and immediate income tax deduction of up to 50% of adjusted gross income for gifts of cash and 30% for gifts of long-term capital gain property. However, any investment growth of the funds in a donor-advised fund are not eligible for a charitable deduction.
A private foundation, or a family foundation, is a tax-exempt legal entity created, funded and operated by a high-net worth family or business. While it helps to have a certain amount of wealth to establish a private foundation, the decision should be based on what best fits a donor’s philanthropic goals.
Private foundations are non-profit charitable organizations, but they are not considered a public charity because they do not receive donations from the public. They are solely funded by an individual, a family or a business. Like a donor-advised fund, the general purpose of the foundation is to bestow grants to charities; however, the donors have complete control over how contributions are invested and how grants are made. Private foundations have more latitude when deciding which charities or causes to fund. Under certain restrictions, they are allowed to give to individuals and to for-profit entities for charitable purposes. In contrast, donor-advised funds are restricted to giving to 501(c)(3) public charities.
Foundations are considered “non-operational” when their main effort is focused on giving grants, or “operational” when they mainly run charitable programs. This classification is determined annually by reviewing the foundation’s use of income and assets over the past four years. This distinction is important, as it affects the deductibility of contributions. Cash donations to a non-operational private foundation are deductible up to 30% of the donor’s adjusted gross income, while gifts of appreciated stock and real estate may be deductible up to 20% of adjusted gross income. Gifts to operating private foundations are deductible up to 50% of AGI for cash and up to 30% of a donor’s AGI for appreciated stocks.
While I’m sure we are all eager to establish the “Angel Wings of Wounded Animal Amnesty and Children’s Education of Minority Military Heroes for the Blind Foundation,” private foundations come with a downside—they must adhere to very strict rules outlined in the Internal Revenue Code, and any violations or unintentional missteps could result in taxes and harsh penalties. Needless to say, foundations require an attorney’s and a tax professional’s assistance from the beginning.
The IRS also imposes stringent rules regarding a foundation’s investment style, reporting requirements, required annual distribution amounts, transactions with disqualified persons, and how much stock a foundation can own of any one single company. Foundations are also subject to a 1% to 2% annual excise tax on net investment income.
Despite the many regulations, the fundamental reason for family foundations is the ability to control where your money goes and how it is distributed. How you help your cause and community may be the most significant part of your legacy. Private foundations can preserve a family’s name and benefit a favored cause for many generations because they are designed to exist in perpetuity.
Before establishing a donor-advised fund or family foundation, you should discuss your tax strategy with your C.P.A. If one of your goals is to reduce your taxable estate, you may also want to discuss your intentions with an estate planning attorney. If you have questions regarding the charitable gifts you’d like to give the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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