By Erin Itkoe, Senior Investment Counselor
Spring is time for warmer weather, blooming flowers, and spring cleaning — sorting through our belongings and donating unwanted items. It’s also a great time to plan for other charitable giving options. There are many charitable giving vehicles that allow you to take advantage of up front tax deductions (perfect for high income years) without having to make large gifts to one or more charities today. Charitable giving vehicles are also excellent opportunities for next generation education and family involvement in your philanthropy goals.
Donor-Advised Funds vs. Private Foundations
The two main charitable giving vehicles you can establish are a private foundation or a donor-advised fund. Simply put, a donor-advised fund is an account in a public charity and a private foundation is an actual charitable organization. There are pros and cons to each, so you first need to understand what each vehicle is most closely aligned with your goals.
Donor-Advised Funds
A contribution to a donor-advised fund is an irrevocable contribution to a sponsoring organization that administers the fund. A sponsoring organization can include a financial custodian (such as Charles Schwab, Fidelity, and Vanguard) or a local community foundation.
The minimum investment required to establish a donor-advised fund is usually $5k to $10k, although some funds may require an initial contribution of $25k. Contributions to donor-advised funds are typically limited to cash, publicly traded securities, and some mutual funds. The tax deduction for all annual combined contributions is limited to 50% of AGI (the deduction is limited to 30% of AGI if appreciated securities are contributed).
With donor-advised funds, you can recommend eligible charities as grant recipients, but the donor-advised fund governing body is free to accept or reject any grant recommendation. You can also recommend how the charitable assets are invested within a pool of investment options. For larger accounts, you may also be able to nominate an independent advisor to manage the investment portfolio.
Since a donor-advised fund is not a separate legal entity, there are fewer administration requirements. There is typically no minimum distribution requirement; however, the sponsoring organization may enforce a minimum distribution requirement. Additionally, you are not required to file separate tax returns for the donor-advised fund.
Most sponsoring organizations will allow the original donor to appoint advisors (number of advisors may be limited – also may not be able to include just family members), as well as successors (may be for a limited number of generations).
Private Foundations
A private foundation offers more control and flexibility than a donor-advised fund. With a private foundation, you retain full control over charitable donations and investments. You can also appoint a board of directors, hire staff, reimburse expenses, set-up scholarship and award programs, and make grants directly to individuals in times of need.
The minimum initial amount required establishing a private foundation is much higher than that of a donor-advised fund. Many supporting organizations require at least $250k, but the general rule of thumb is $1M to be more cost efficient. Contributions to private foundations are not limited — you can contribute a wide variety of assets. The tax deduction for all annual combined contributions is limited to 30% of AGI (the deduction is limited to 20% of AGI if appreciated securities are contributed).
Because a private foundation is a separate legal entity, there are more administration requirements (you can hire a supporting organization to help). For example, the IRS requires private foundations to meet an annual 5% minimum distribution requirement. Private foundations are also required to file annual tax returns.
With a private foundation, family members can be appointed to the board of directors. Additionally, the donor’s family can maintain legal and financial control of the private foundation in perpetuity.
If you have philanthropy goals, charitable giving vehicles provide many options for meeting them. They provide the opportunity to involve family members and educate the next-generation, which is an important benefit! Please contact Versant to discuss your charitable giving options. Happy Spring!
