Charitable giving is a deeply personal and gratifying experience and is best accomplished with clear objectives and a process.
Many philanthropists either begin with or chose the straight-forward approach of “checkbook philanthropy.” Direct giving, such as writing checks each year to charities, may be the best approach for some. However, donors interested in taking a more strategic or hands-on approach to giving may want to consider common giving vehicles such as a donor-advised fund (DAF), private foundation, charitable trust, or a combination of strategies.
Thinking through the questions of control and administration and considering the income, gift, and estate tax benefits of various strategies can help you determine the best gifting solution for your needs.
Donor-Advised Funds (DAFs)
Donor-advised funds are the most common charitable vehicle in the United States due their ease and low cost. DAF accounts are established with a public charity – often with community foundations, a religious organization, or a national sponsor such as Fidelity Charitable – with an initial contribution of $0-$25,000. Donors may make ongoing charitable contributions to their DAF account and receive an immediate and maximum tax-deduction. Since the contributions are legally owned and controlled by the sponsoring public charity, donors may only recommend investments based on the options provided, and distributions may only be made to qualified public charities for qualified purposes.
While DAFs may be a suitable solution for any wealth level, they are typically a best fit for donors who plan to give less than $10 million over their lifetime. DAFs are also a good option for donors who prefer to outsource the administration and grantmaking components of giving and want the option of anonymity for grantmaking.
Benefits of donor-advised funds:
- No start-up costs and less administrative burden for donors
- Receive the maximum charitable deduction for contributions
- Flexible grantmaking, with donors recommending anonymous grants or receiving recognition
- Donors may establish accounts to help educate the next generation about philanthropy
Private Foundations
Private foundations are typically established by donors who plan to donate significant assets with a long-term, multi-generational time horizon and who want to retain a degree of control over investments and grantmaking. Private foundations are legal entities that may be structured as trusts or corporations to provide income, gift, and estate benefits to the donor. They are often part of an overall estate planning strategy and are used to establish a family legacy with multi-generational participation. Donors can determine the time-horizon of the foundation, which could be in-perpetuity or spent-down based on parameters. Additionally, donors can determine governance and succession for their private foundations.
Private foundations may allow donors to become more involved in their areas of giving and offer more flexibility than DAFs on the types of grants and the potential grantees. However, privacy may be a tradeoff. While donors can minimize their visibility by not naming their private foundation after the family and gifting anonymously, detailed annual foundation tax returns with a record of contributions and gifts and recipients are available to the public.
Due to the complexity of establishing a private foundation and ongoing administrative oversight, private foundations are typically more expensive to administer than a donor-advised fund. Additionally, private foundations are required to distribute 5% of assets annually and their investment income is subject to an annual excise tax.
Benefits of private foundations:
- Donor retains a high degree of control over the structure
- Ability to hire and pay staff, including family members
- Opportunity to establish a family legacy over multiple generations (or in perpetuity)
Trusts
Charitable lead trusts (CLTs) allow donors to select one or more charities, which could include a donor-advised fund or private foundation, to receive an annual income stream distribution from the trust for a fixed period of years. After this period, the remaining assets are passed to family members or other non-charitable beneficiaries. Many donors utilize CLTs as part of their estate plan, as it enables them to pass appreciated assets to the trust’s beneficiaries at a reduced gift tax cost, since the heirs will not receive the trust distribution for some time. CLTs are not tax-exempt entities; depending on the structure, either the grantor or the trust will pay the annual tax on the income.
Benefits of charitable lead trusts:
- Wealth planning strategy to pass appreciated assets to beneficiaries
- May reduce gift and estate taxes
Charitable remainder trusts (CRTs) allow donors to receive an income stream, either for a specific duration or for their lifetime, with the remainder assets passing to one or more charities, which could include DAFs and private foundations. These trusts enable donors to gift highly appreciated securities, eliminate capital gains on sales within the trust, and realize an immediate charitable deduction against the gift.
Benefits of charitable remainder trusts:
- Provides an income stream to the donor, potentially for life
- Receive an immediate charitable deduction
- Charitable beneficiary(ies) can be changed during the trust term
As you continue on your philanthropic journey, RMB Capital is available to help you determine the appropriate charitable vehicle based on your interest, financial circumstances, and goals. Start a conversation with your advisor today to learn more.
The opinions and analyses expressed in this newsletter are based on RMB Capital Management, LLC’s (“RMB Capital”) research and professional experience are expressed as of the date of our mailing of this newsletter. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. RMB Capital makes no warranty or representation, express or implied, nor does RMB Capital accept any liability, with respect to the information and data set forth herein, and RMB Capital specifically disclaims any duty to update any of the information and data contained in this newsletter. The information and data in this newsletter does not constitute legal, tax, accounting, investment or other professional advice. Returns are presented net of fees. An investment cannot be made directly in an index. The index data assumes reinvestment of all income and does not bear fees, taxes, or transaction costs. The investment strategy and types of securities held by the comparison index may be substantially different from the investment strategy and types of securities held by your account. RMB Asset Management is a division of RMB Capital Management.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
