Like life, your clients’ financial experiences aren’t static — an ideal solution can become cumbersome and a burden as life situations change.
For the past 50 years, individual donors and families have used private foundations to carry out their philanthropic priorities. Organized either as trusts or corporations, private foundations have served families as the vehicle that has provided ways to make substantial tax-deductible contributions while spreading out the actual contributions to charitable organizations.
To determine if a private foundation is still the best option for your clients, you can use the acronym DECIDE:
D – Determine if your clients have new needs.
The ongoing responsibility of managing assets, keeping records, selecting charities, administering grants, filing the federal form 990PF, holding board meetings and keeping board minutes that are all required to maintain the tax-exempt status of a private foundation can be overwhelming for older family members. At the same time, younger family members may want to simplify the process and have access to nimble structures that allow them to fulfill their philanthropic goals quickly and efficiently without the requirements associated with a private foundation.
E – Establish the criteria: cost, control, recognition and simplicity.
Helping your clients to identify their priorities relative to cost, control, recognition, and simplicity may help them identify the best solution. Are they concerned about the time and cost associated with maintaining the Foundation? Do they want to retain control of the assets or find a simpler solution? Is anonymity an important consideration for them? Are they comfortable with the grantmaking process or would they like a more streamlined approach?
C – Consider an alternative.
Donor Advised Funds have become increasingly popular in recent years because they offer many of the same benefits of private foundations but without the administrative burdens. They provide families with an alternate structure that, like private foundations, allows immediate tax deductions while spreading out their giving over time. Also, a variety of organizations sponsor Donor Advised Funds, including commercial entities, community foundations, charitable organizations and independent programs.
Many elements of a private foundation are also in Donor Advised Funds. The family name can easily be associated with the Donor Advised Fund. The private foundation directors and trustees can retain advisory roles in the new fund. In a similar manner, the fund can establish giving parameters consistent with those in a foundation. With many sponsoring organizations, the fund could continue to use the investment advisor who manages the foundation assets.
Positive aspects of a Donor Advised Fund include the:
- Substantial reduction in administrative burdens and costs
- Ability to make gifts anonymously when desired
- Simplified processing of grants and grantee due diligence
I – Identify the best alternative.
To help clients make an informed decision, they may want to experience how a Donor Advised Fund operates before making a final decision. Before terminating a private foundation and transferring assets to a Donor Advised Fund many families decide to test drive the new approach by setting up a Donor Advised Fund to be sure it meets their needs. They can do it with a relatively small investment to see if the new structure meets their needs.
D – Develop an action plan.
When considering transferring the assets of a private foundation to a Donor Advised Fund, the first step is to see if provisions in the trust agreement align with the contemplated changes. To avoid the assessment of any special taxes on the termination of a private foundation, the organization needs to be sure that the process adheres to requirements in Section 507 of the Internal Revenue Code.
After careful consideration, if terminating a private foundation is determined to be the next step, the entire balance should be distributed to the new Donor Advised Fund and the final 990PF should show a zero balance. The foundation should obtain receipts from the Donor Advised Fund sponsor showing all transfers and a statement that the sponsoring organization meets the requirements of Code Section 507(b)(1)(A).
E – Ensure long term impact
Many families introduce their children to philanthropy at an early age. Providing kids with a budget that grows over time that they can use to make gifts to organizations that they are interested in provides the experience needed to develop a mindset of giving back. As they grow, tools to help them identify, research, and evaluate charities that will make the best use of the funds that they give can be introduced.
By preparing the next generation to eventually become a decision maker of a family’s Donor Advised Fund or private foundation assures the legacy of giving will continue for many generations.
To learn more about the American Heart Association Donor Advised Fund Program, request a copy of our A Smarter Way to Give brochure to share with your clients now and get our 2022 Federal Tax Pocket Guide as a bonus!
About the Author
As a Senior Advisor on the Charitable Estate Planning Team Charlie Goldsmith works with Professional Advisors throughout the Southwest Region. Charlie is based in Denver, CO.