This shall be the last of my discussions of developing human capital and charitable planning, for a while at least. Once families have developed their charitable mission plans, they will need to determine the best way to make their gifts. One obvious possibility is to just make donations each year as the motivation arises. Another may be to contribute to a community foundation. Many families with substantial assets have chosen to establish their own private foundations. Each of these methods of giving has its own merits and drawbacks. Ad hoc gifting may not generate either the desired charitable impact or tax benefits. Community foundations can provide a significant amount of control, but often with minimums of $500,000 or $1,000,000. Private foundations can pay expenses and hire staff, which may include relatives. However, private foundations are costly, complex, and subject to significant IRS oversight. Still, in some cases a private foundation may be able to make hardship grants to individuals, again with IRS oversight. Finally, private foundations are subject to a 1% to 2% excise tax.
An alternative is to establish a Donor Advised Fund (DAF). A DAF can be a powerful tool for estate and income-tax planning. Also, DAFs provide flexibility in the timing of both contributions and distributions to charities. Donors gain significant control over the investments and the entrance costs are as low as $10,000. Cash donations can be deductible up to 60% of Adjusted Gross Income (AGI) and other assets can be deductible up to 30% of AGI. There is no need to make minimum annual distributions from a DAF, so those who seek to make a sizeable charitable distribution in the future can accumulate assets for that purpose. There is no excise tax on a DAF and unlike private foundations, DAF donors can remain anonymous. A DAF is also not required to make annual tax filings, while a private foundation must file form 990PF.
DAFs also work well for those who need a charitable deduction now, but have not identified a specific charity. Conversely, those who don’t need a deduction this year can set aside assets for a year that they will need a deduction by bunching together tax years. If the DAF is already in place, donors don’t have to have a specific charity in mind when making tax-driven decisions. Obviously, the primary motivation needs to be the desire to help others through charitable gifts. After all, we are all generally better off financially when we pay taxes and make no gifts, at least at current tax rates, since all we save by gifting is the tax, the gift itself has gone to help others. Don’t forget, it is always prudent that you check with your tax and estate planning advisors before utilizing any of these strategies.