Although many people handle their charitable contributions using a personal checkbook, there are many advantages that come with the use of a planned giving vehicle. These typically include:
- A current-year tax deduction for gifts that are made in the future
- Favorable tax treatment of assets within the vehicle
- A consolidation of donation substantiation receipts
This section provides an overview of four common planned giving vehicles.
For over 100 years, having one’s own private foundation has been viewed as the quintessential sign of success.
A private foundation gives donors complete control over granting and investment decisions. It can be funded with, and continue to hold, most any kind of asset, including private equity, tangible assets, real estate, and intangible personal property.
A foundation can exist in perpetuity, creating an enduring family legacy, and the collaborative board structure encourages family engagement. It can also engage in a wide array of philanthropic activities not available through other giving vehicles, such as:
- Grants to individuals
- Scholarship programs
- Program-related investments
- Direct charitable activities
- International granting
Donor-Advised Fund (DAF)
A donor-advised fund is a giving account—similar to a bank account—that is created and maintained within a public charity, such as a community foundation, university, or religious organization. Large financial institutions, such as Fidelity and Vanguard, have also created donor-advised funds.
Under current tax law, donations to a donor-advised fund are treated the same as donations to a public charity. Donors get a current-year charitable income tax deduction, up to 60% of AGI for cash and 30% for securities.
Once deposited in the account, the donor is able to make recommendations to the sponsoring organization as to how those funds are invested and granted out, but actually cedes all legal control. Presently there is no IRS requirement as to when those funds must be granted out to public charities.
Investment and grant requests must be approved by the sponsoring organization’s board of governors (hence “donor advised,” not “donor directed”).
Sponsoring organizations may place restrictions on granting activity, such as a minimum dollar amount, maximum number of grants per year, and number of successor advisors that may be appointed before any remaining funds revert to the sponsoring organization.
Other considerations include:
- Complex assets that are used to fund an account are typically liquidated upon donation, which can result in additional transaction fees.
- Can only grant to 501(c)(3) public charities
- Limited choice of investment options
- Does not create a permanent legacy
- Cannot convert to private foundation
- Cannot reimburse expenses or pay staff
Private Foundations vs. Donor-Advised Funds: Critical Differences
Although donor-advised funds increasingly market themselves as being “just like” private foundations, there are important differences—including some that could be CRUCIAL to your HNW clients!
Charitable Remainder Trust (CRT)
A charitable remainder trust (CRT) provides the donor or others with cash flow while obtaining a current-year personal income tax deduction. The donor contributes assets to a trust that makes annual distributions to the donor (or other individuals) for a stated number of years (or for the beneficiary’s life). After this period, any assets remaining in the trust pass to one or more charities, chosen by the donor. In most cases, a family’s private foundation can be named as the charitable beneficiary as well.
- Setting up a CRT requires the services of an attorney
- Gifts to the CRT do not qualify for the annual gift exclusion
- There are limitations on the income tax deduction based on several factors, including life expectancy, number of heirs, and the type of CRT
- Generally, distributions to the beneficiary during the life of the trust are included in the recipient’s gross income for tax purposes.
Charitable Lead Trust (CLT)
A charitable lead trust is designed to result in tax-free gifts to the donor’s family. This is done by first donating assets into the trust, which then provides one or more charitable organizations, chosen by the donor, with cash flow for a specified period of time. Any assets remaining in the CLT upon its termination pass to the donor’s family, free of estate and gift taxes.
- Setting up a CLT requires the services of an attorney
- Gifts to the CLT do not qualify for the annual gift exclusion.
- The charitable payment must be made each year, regardless of whether there is sufficient trust income available
- There is no income tax advantage for charitable contributions, unless you are both the donor and the owner of the trust, in which case you are entitled to a one-time income tax deduction in the year of the trust’s creation for the present value of the interest to charity. In such cases, the donor would have to include the CLT’s income on the donor’s own income tax return.