Charitable Planning: Donor Advised Funds vs. Private Foundations
When you give $100 to your favorite charity, you are probably not concerned about how your donation is spent, as long as it advances the general mission of the charity. On the other hand, if you are making a large donation, it is likely that you have more specific goals in mind with regard to the use of your money, whether it’s to fund a particular program, building project, or other endeavor. However, satisfying this desire for control without jeopardizing the ability to claim an income tax deduction requires proper planning.
If you want more control over how your donation is used, then consider either Donor Advised funds or Private Foundations. Donor Advised Funds
Many larger public charities, particularly those that support a variety of different charitable activities and organizations, offer donor advised funds. This type of fund is an agreement between the donor and the charity that the charity will consider the wishes of the donor with respect to the ultimate use of the donor’s funds. However, the agreement is non-binding and the charity must exercise final control over the disposition of the funds, consistent with the charitable purposes of the organization. In some cases, the donor can name someone in the family to give direction after the donor is gone.
Private Foundations
A private foundation may be a better choice for donors who don’t want to rely on the ultimate discretion of a public charity regarding the use of their contributions. This is particularly true when substantial contributions are contemplated and the specific charities have not been determined. Because the board of directors or trustees of a private foundation are determined by the donor, a private foundation can also serve as a “family enterprise,” where members of the family can participate together in supporting charitable causes over the long term.
The benefits of increased donor control through the use of a private foundation come at a price. There are a number of rules designed to ensure that private foundations serve charitable interests and not private interest, such as:• Private foundations are generally required to pay out for charitable causes at least 5% of their asset value annually or be subject to a penalty.• Substantial penalties are imposed on transactions between the foundation and its donors or managers, although payment of reasonable salaries is permitted.• Private foundations are generally prohibited from benefiting a private individual.• A private foundation is responsible for making sure that the funds it distributes to an organization that is not a public charity are expended properly. (Schools, hospitals, and churches are examples of public charities.)• An excise tax of up to 2% of investment income is imposed annually on investments.• There are restrictions on the types of investments that a private foundation may make The deductibility of contributions to private foundations is somewhat more limited than for gifts to public charities. Depending upon whether cash or property is being donated, deductions to private foundations are limited to 20% to 30% of adjusted gross income, whereas deductions to public charities have higher limits of 30% to 50%. Finally, the administrative and legal costs of creating and managing a private foundation must be considered.
Under the right circumstances, a private foundation might be just what you are looking for. It gives you greater control over how your money is spent. And a private foundation can be a highly rewarding experience for people with a strong personal and financial commitment to charitable endeavors.
If you want more control over how your donation is used, then consider either Donor Advised funds or Private Foundations. Donor Advised Funds
Many larger public charities, particularly those that support a variety of different charitable activities and organizations, offer donor advised funds. This type of fund is an agreement between the donor and the charity that the charity will consider the wishes of the donor with respect to the ultimate use of the donor’s funds. However, the agreement is non-binding and the charity must exercise final control over the disposition of the funds, consistent with the charitable purposes of the organization. In some cases, the donor can name someone in the family to give direction after the donor is gone.
Private Foundations
A private foundation may be a better choice for donors who don’t want to rely on the ultimate discretion of a public charity regarding the use of their contributions. This is particularly true when substantial contributions are contemplated and the specific charities have not been determined. Because the board of directors or trustees of a private foundation are determined by the donor, a private foundation can also serve as a “family enterprise,” where members of the family can participate together in supporting charitable causes over the long term.
The benefits of increased donor control through the use of a private foundation come at a price. There are a number of rules designed to ensure that private foundations serve charitable interests and not private interest, such as:• Private foundations are generally required to pay out for charitable causes at least 5% of their asset value annually or be subject to a penalty.• Substantial penalties are imposed on transactions between the foundation and its donors or managers, although payment of reasonable salaries is permitted.• Private foundations are generally prohibited from benefiting a private individual.• A private foundation is responsible for making sure that the funds it distributes to an organization that is not a public charity are expended properly. (Schools, hospitals, and churches are examples of public charities.)• An excise tax of up to 2% of investment income is imposed annually on investments.• There are restrictions on the types of investments that a private foundation may make The deductibility of contributions to private foundations is somewhat more limited than for gifts to public charities. Depending upon whether cash or property is being donated, deductions to private foundations are limited to 20% to 30% of adjusted gross income, whereas deductions to public charities have higher limits of 30% to 50%. Finally, the administrative and legal costs of creating and managing a private foundation must be considered.
Under the right circumstances, a private foundation might be just what you are looking for. It gives you greater control over how your money is spent. And a private foundation can be a highly rewarding experience for people with a strong personal and financial commitment to charitable endeavors.
There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, contact us today!