Wealthy individuals are often philanthropically inclined but must navigate a myriad of options other than a direct charitable gift. Here we address two common techniques: donor advised funds and private foundations.
A donor advised fund, or DAF, is a private fund administered by a third-party and created for the purpose of managing charitable donations on behalf of an organization, family, or individual. A DAF is easily and quickly implemented, and typically inexpensive in terms of ongoing administration. The donor can contribute an array of assets to her or his fund including cash, appreciated securities, and real estate. The donor receives an immediate tax deduction for the year in which the contribution occurs (currently 30% of adjusted gross income for cash gifts and 20% of AGI for securities and real estate).
In addition to the tax deduction, another advantage of a DAF is that although the donor can make contributions at any time, she/he does not need to immediately designate a specific charity to support. A donor can contribute assets to the DAF, allow them to appreciate, tax-free, and subsequently determine the recipient(s). This deferral potentially produces additional charitable funds.
DAFs allow donors, within parameters established by the third-party, to suggest how money is invested and to whom granted. This is a disadvantage for a donor uncomfortable not being in complete control of the account. If you are such a person, it may be worthwhile to consider a private foundation for your charitable needs. For most people, however, especially where a family legacy of philanthropy is not contemplated, these restrictions are not burdensome or problematic.
A private foundation, unlike a DAF, is an independent legal entity set up solely for charitable purposes. It is a Section 501(c)(3) not-for-profit organization under the Internal Revenue Code and is required to file an annual tax return. The funding of the entity typically comes directly from an individual or family. It can be funded in the same manner as DAF. Importantly, the donor or the donor’s family, if appointed as board members, control the private foundation. Self-dealing is not permitted, but there is no requirement to obtain third-party approval to make investments or select recipients. This freedom can be especially relevant for high-net-worth donors contemplating significant lifetime gifts and/or testamentary charitable bequests. There are more administrative requirements and thus higher costs involved with a private foundation than a DAF, so the donor must decide if the advantages are worth the greater time and expense. Moreover, the tax deductions can be less for a private foundation than for DAF. Of course, everyone’s tax situation is unique, so a foundation may not necessarily be less favorable from a tax perspective.
It is important to have a financial and tax advisor help determine which is the best gifting vehicle for a donor to best achieve her/his philanthropic goals. This article is not meant to be all-encompassing. There are other advantages or disadvantages to consider before making a charitable gift, and often other strategies to consider, including charitable trusts, but this article highlights a few key points for a donor’s consideration.
**Letizia Carlisto is a Wealth Advisor Associate at Navis Wealth Management, LLC. David Bruckman is a Senior Consultant at Navis Wealth Management concentrating in Wealth Transfer and Risk Management.
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