Navigating Charitable Giving

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John Maddison
August 3, 2021
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Some of the most rewarding conversations I have with my clients surround the idea of philanthropy and how to make the biggest impact with their dollars. Perhaps in response to the coronavirus pandemic, the frequency that this topic is mentioned in meetings has certainly increased. There are many incredible ways to give to charity, though by virtue of our focus on entrepreneur clients, we tend to have more conversations around the use of charitable vehicles such as Donor Advised Funds (DAFs) and Private Foundations (PFs).

We are strong proponents of the use of charitable vehicles such as DAFs and PFs for several reasons. Generally, contributions to charitable vehicles are timed around the sale of a business, significant liquidity event, or an unusually large tax liability. Donors receive a charitable deduction in the year of the gift yet can spread out support to their favored philanthropies over many years. They also provide an effective method for teaching children the importance of being philanthropically active and passing along important family values. Most charities are unable to accept gifts of complex assets like private company stock or real estate and would-be donors must turn to DAFs and PFs hold these assets prior to sale. We also encourage clients with concentrated or low tax basis stock positions to consider using these assets to fund a charitable vehicle to permanently avoid paying capital gains tax on what is contributed.

Large gifts to charitable vehicles are not for everyone, however. The gifts are irrevocable and there is no way to pull back funds if they are needed in the future, which is why we typically encourage only families and individuals with a history of giving or an articulated desire to be charitably active in the future to make them.

Once someone has determined that a charitable vehicle makes sense, the first question posed to us is, “Which one? A Donor Advised Fund or Private Foundation?” My default choice is usually a Donor Advised Fund for numerous reasons, though there are several important distinctions between the two that can tip the scales to a private foundation depending on the donor’s priorities.

Donor Advised Fund

A Donor Advised Fund may be most appropriate for anyone prioritizing a desire to:

  • Donate a complex asset, like private stock prior to the sale of their company;
  • Maintain flexibility to remain anonymous with their giving;
  • Open and fund a vehicle quickly, often because they learn of the tax benefits for doing so late in the sale process of their company; or
  • Start with a smaller amount. While some DAFs can be opened with as little as $5,000, the cost and administrative burden to create a private foundation means that initial funding makes most sense at levels exceeding $1 million.

Private Foundation

A Private Foundation may be most appropriate for anyone prioritizing a desire to:

  • Make more creative gifts beyond public charities. Foundations are eligible to make hardship grants to individuals, provide scholarships, give to a larger number of international organizations, and make program-related investments such as low-interest loans to needy students or small businesses owned by economically disadvantaged groups;
  • Maintain greater control, with full discretion over grant-making and investment options;
  • Hire staff, frequently family, to manage the entity; or
  • Create a family legacy that can last beyond many generations.

Despite the differences between these two charitable vehicles, there is no one-size-fits-all approach to philanthropic support and many charitable families utilize DAFs in conjunction with their foundations in order to benefit from both structures.

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