91ÊÓƵ

Many Americans have now seen the lack of impact that charitable deductions have had on their income taxes when taking the higher standard deduction, which doubled with the Tax Cuts and Jobs Act of 2017. Because they’re missing a bang for their charitable buck, many are “bunching” — donating several years of charitable gifts in one year and itemizing the charitable deduction that year. (For the next few years, the taxpayer takes the standard deduction until the next bunching year.)

But this poses a potential problem. If the charitable organization doesn’t realize the gift is intended for multiple years of support, it might expect the same gift next year. Of course, clients can inform charities about multi-year giving plans. But if the message doesn’t get through, the donor could be solicited for a repeat gift.

That’s why those who want the tax advantages of bunching along with a regular giving schedule consider funding a private foundation and a donor advised fund (DAF). They’re similar in that the funds set aside qualify for an immediate tax deduction and the donor can choose when to make the gifts.

If your clients are contemplating one or the other, consider these four factors:

1. Dollar amounts
In the past, donors with $3 million or more to give would start a private foundation. Today, many professional advisors say DAFs are more efficient and just as effective unless the donor has at least $10 million to give. The initial contribution for DAFs is usually significantly lower, some as low as $5,000. The 91ÊÓƵ Donor Advised Fund Program starts at $25,000.

2. Tolerance for administration and costs
Cost and effort can differ greatly between a private foundation and DAF. A DAF will incur a percentage-of-account fee from the sponsoring charity and often from the investment advisor, but that’s it. It’s as simple as an irrevocable charitable savings account, managed online or with paper forms.

With some DAFs, the donor (or investment advisor managing the funds) is responsible for researching the qualified charities and confirming details before the DAF’s sponsoring charity approves a grant request. Renaissance Charitable Foundation, sponsoring charity for the AHA Donor Advised Fund Program, does the research. The investment advisor simply liquidates the funds to cover the grant and electronically transfers the funds to RCF, which sends the grant to the charity.

Federal oversight makes a private foundation much different. A team of advisors is generally required, which can be an exciting venture for some and a natural fit for those already running their own businesses. Careful recordkeeping is a must, including tracking the required 5% per year payout of grants (compared with no required payouts for a DAF). Additional duties and associated expenses include annual tax returns, portfolio management, administering grants, holding board meetings and keeping minutes.

With a private foundation, what starts as doing public good can quickly become burdensome. For this reason, many smaller private foundations are transitioning their Private Foundation into a DAFs, with no tax consequences.

3. Family involvement
Bringing a family together for giving decisions is a wonderful benefit of philanthropy. Children of all ages can research charities and give input on causes or organizations they’re passionate about.

Take time to decide the level of family involvement, including which generations and which branches of the family tree are involved. Are there family members with the time and inclination to run a foundation? Some philanthropists think employing family members is important. (If so, only a private foundation may employ family members.) For others, especially geographically diverse families, a DAF with future generations listed as successor grant advisors might make more sense.

Funding multiple DAF accounts (e.g., one for each child) may help avoid ill will when charitable interests don’t converge.

4. Privacy
Private foundations can’t maintain privacy about administrators, holdings and grants. The required Form 990-PF is public information. That’s great for those who want their name tied to their giving. But getting grant requests that aren’t aligned with the foundation’s charitable goals is an undesired effect.

DAFs allow for anonymity. The account name doesn’t have to include personal information, grants can be anonymous and there are no public records.

Which gift vehicle to choose?
Other considerations include differing tax deduction limits and valuation of gifts (except for publicly traded stock), where a private foundation doesn’t fare as well as a DAF. The start-up time also varies from immediate (DAF) to weeks or months (private foundation), which could be a crucial factor at the end of the calendar year.

In the end, informed decisions about how to give lead to a fulfilling, tax-wise philanthropic experience. To learn more about the 91ÊÓƵ Donor Advised Fund Program, request a copy of the brochure, A Smarter Way to Give.

Lauren Iwema, CAP®

Senior Advisor, Charitable Estate Planning
91ÊÓƵ
630-212-7864
[email protected]

“I work with professional advisors to develop personalized solutions for their clients’ tax and charitable-planning needs.”

Lauren Iwema has been with the 91ÊÓƵ since 2005 and has seven years of charitable estate planning and client engagement experience. She was inspired to join the organization during her niece Maggie’s struggle with cardiomyopathy at 2 months old. Fifteen years later, she’s as passionate about the AHA’s lifesaving mission as Maggie is for reading.