Ah, the end of the year approaches. A time filled with holiday cheer and old fashioned tax planning. For the philanthropically inclined, the year-end usually includes gifts made to favorite charities. A direct gift to charity is clean and gets right to the point. But, if your annual giving is in excess of $10,000 you may want to consider a gift that could create an ongoing charitable legacy. Legacy gifts by design keep you and your family in the philanthropy game for as long as you want—even through multiple generations. And once they are funded, Legacy Gifts can continue to benefit charities without any additional funding from you.
My two favorite types of legacy gifts are Donor Advised Funds and Charitable Gift Funds. Both approaches make charitable giving simple, effective and painless. Donor Advised Funds were originally developed by Community Foundations across the country as a way to provide a low-cost alternative to Private Family Foundations for donors who wanted to create a meaningful perpetual giving program but didn’t want to commit huge sums of money, or pay the substantial fees associated with a Private Family Foundation. They have become pretty popular. Donor Advised Funds are the fastest growing charitable giving vehicle in the United States with more than $17 billion in assets.
In essence, a Donor Advised Fund falls under the umbrella of a public charity (i.e., your local Community Foundation). This allows you to gain the maximum tax deductions without the restrictions and costs of a Private Family Foundation. You get to use that organization’s administrative staff and legal team to cut your operating costs to about 2% or less. In exchange, the fund takes over complete control of the assets and you retain advisory status. Your choices of investments are restricted to those offered by the umbrella foundation. You recommend to the fund what grants you wish to make to other public charities each year. The fund will do the due diligence on the charity you wish to support and will almost always follow your recommendation – unless the charity does not qualify or falls on some restricted list.
Charitable Gift Funds act just like Donor Advised Funds and are often discussed interchangeably. They also enjoy the same tax benefits as direct gifts to charity. Unlike their sister Donor Advised Funds, they are offered through some of the largest brokerage firms in America, like Vanguard and Fidelity. Gift funds usually allow for smaller initial contributions and may have lower administrative costs. The Fund will make distributions to your selected charities as you request. Fidelity’s gift fund even allows you to make your charitable contributions from your fund on-line. The sponsoring company’s gift fund website will be loaded with information. I suggest you take a look if you’re interested.
While Donor Advised Funds and Charitable Gift Funds are almost identical, they differ substantially from another form of legacy gift, the Private Family Foundation. When we talk about Private Family Foundations, we are talking about funding with major sums of money and lots of rules and restrictions. A Private Family Foundation itself is qualified as a charity under IRS§501(c) (3). As such, any contributions you make to it are as tax deductible as they would be to any other charity.
I asked my friends at the Lehigh Valley Community Foundation here in Pennsylvania to put together a chart that would help you differentiate between a Donor Advised Fund and a Private Family Foundation. With their permission, I have reprinted it below. Remember, this is an irrevocable transfer so you better be sure of what you’re doing before you do it! Always consult with your qualified tax and legal advisors before you act.