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Maximizing Your Legacy Of Giving

October 16, 2015

Choosing the right vehicle for your charitable giving is a crucial step toward establishing your philanthropic legacy.

One of the most rewarding aspects of my job is helping our clients maximize their positive impact on their communities and others. We work closely with our clients to help them align their investment strategy with their philanthropic mission. Whether it’s a nonprofit looking to build their endowment to serve those in need, an entrepreneur seeking to invest in tandem with their values, or a family wanting to dedicate a portion of their wealth to charitable endeavors, it is our privilege to help our clients achieve more impact with their dollars.

For clients who wish to establish a charitable legacy, the conversation often includes a wide variety of topics including developing a financially sound and tax-efficient gifting strategy, crafting their specific philanthropic mission, finding organizations to support that are aligned with their mission, and determining the right giving vehicle that can help maximize their impact.

Paul Sullivan, the popular New York Times financial writer, once wrote: “After all, how you help favored causes could be as much a part of your legacy as which groups you support.” We have certainly found this to be the case with our clients.

In considering the best philanthropic structures, we most often consider either do- nor-advised funds or private foundations. Each offers its own advantages and disad- vantages, with a donor-advised fund offering greater support and operational flexibili- ty, and a private foundation offering a greater amount of control. The ultimate decision of which vehicle to use depends entirely on the donor’s unique situation, preferences, and goals.


Donor-Advised Funds

A donor-advised fund (DAF) is a philanthropic account established at a public charity with the day-to-day operational issues administered by that public charity. The main benefit is the simplicity of administration. DAFs are a good choice for those who are dedicated to a specific cause (or set of causes) but are not interested in or capable of taking on a heavy operational or organizational burden.

The structure and ease of opening a DAF allows you to decouple the tax benefits of a charitable donation from the decision to support a specific charity. Once the DAF is set up and funded, you receive an immediate tax benefit as the contribution to your DAF qualifies as an actual donation to a qualified charity. The decision of which charity to ultimately support, though, can be made at a later time. This flexibility can benefit those who face a financial event in the current year and wish to offset a taxable gain with a charitable donation, but are not ready to make decisions about how to disburse those funds.

DAFs are also a good tool for those who want to remain anonymous in their charitable giving, as DAFs are private accounts held within a public charity. When the charitable sponsor administers a grant on behalf of the donor, the charity is legally distributing its own assets, meaning the donor can choose to remain anonymous or to be recog- nized publicly. In comparison, private foundations must file annual reports that dis- close members of their board, grant recipients, and other information that prevents them from remaining anonymous.

Along with ease of administration and privacy benefits, DAFs include low required fund minimums and high limits on the deductibility of contributions. Cash donations to DAFs are deductible up to 50% of your adjusted gross income (AGI), whereas stock and property gifts are deductible up to 30% of your AGI. Compare these benefits to the operating costs and administrative requirements that private foundations require, and it’s clear why DAFs have quickly gained popularity over the better part of the last decade. According to The National Philanthropic Trust, DAFs held more than $53.7 bil- lion in assets at the end of 2013, a 62% increase since 2007.

However, it’s important to note that contributions to a DAF, from a legal standpoint, are an actual donation and you relinquish legal control over those assets. Donors are able to make recommendations to the public charity that administers the funds but lack the legal right to actually direct to whom grants are made and how assets are invest- ed. We have found that grant recommendations are almost always accepted by the public charity, though there are restrictions in recommending a charitable grant to an individual, or receiving any goods or services in exchange for the grant (like a ticket to a gala). Additionally, most public charities offer several investment options, including the option to have an investment advisor of your choice manage the funds if your DAF is above a certain value. Further considerations are included in the table that follows.


Private Foundations

Private foundations are ideal for clients who desire complete control over the disposi- tion of their funds, and who have the desire and capability to play an active role in the management and administration of their contributed assets. Private foundations are also the choice for clients who seek to ensure their legacy is passed on to future gener- ations, as private foundations offer unlimited succession for control of the foundation, whereas DAFs may have limitations on successions.

A private foundation is a tax-exempt charity that is founded and controlled by an individual or a family and must be approved by the IRS as a tax-exempt organization. Although the financial and organizational burdens associated with creating and man- aging a private foundation can be substantial and the tax deduction limits are lower than DAF limits, private foundations provide donors complete, unmitigated control of the management, distribution, and use of their contributed assets. For many, this additional administrative work is well worth the investment. Today, more than 75,000 private foundations in the U.S. hold more than $500 billion in assets. 

In addition to the substantial responsibilities that accompany establishing and run- ning private foundations, including filing annual tax returns and disclosures, they don’t benefit from the same deductibility limits as do DAFs or public charities—with a 20% deduction limit of AGI for contributions of stock and property and a 30% limit of AGI for cash contributions. Private foundations are also required to annually distribute 5% of their total assets and pay a variety of annual operating costs.


In Summary

Our advice in choosing the right philanthropic vehicle is just one step in helping our clients to identify their charitable giving goals and to make a difference. Ultimately, we focus on what is best for our clients’ specific situations, and their goals, tax situa- tion, and desire to stay actively involved in charitable activity will determine if a DAF or a private foundation is the best choice. With either option, we believe our clients will have the opportunity to increase their impact and establish a charitable legacy.