“I want to give back and make a difference in the world. I’ve been supporting my favorite charities when they ask for years now, but am I approaching my philanthropy in the smartest way?”
I’ve heard variations of this sentiment from donors numerous times. They reflect on their giving and question whether the approach they have been using to give back is the best for both themselves and the issues that are dear to their heart. Navigating the pros and cons of potential philanthropic vehicles can be confusing. Wealth managers and estate planners do their best to describe the income and tax considerations of giving as an independent donor, or through a private foundation, or by opening a donor-advised fund (DAF). But what about the fine print? Each option has its own strengths and weaknesses that are readily understood only through lived experience.
The easiest approach and where many philanthropists begin is as an individual donor. Even before one thinks of themselves as a philanthropist, they are often giving to their friend’s causes and to organizations in their community, such as schools and hospitals. As assets grow and a desire to give back deepens, it is financially smarter to consider a DAF or creating a private foundation. Both options have important elements to understand.
A private foundation is a great option for larger estates—above $3-4 million—due to the administrative costs required at the outset and to ensure compliance throughout. If it costs significant money and time to have a private foundation, then what are the main benefits? Private foundation leaders emphasize the following as most valuable to them:
- Expanded giving opportunities: Unlike individual donations, foundations can use funds for which they have already received a deduction to give to individuals, non-US nonprofits, and for-profit companies
- Control: As trustee, they remain in control of how assets are invested and which organizations to support
- Opportunities to invest in addition to grantmaking: Private foundations engage in “impact investing” – or investing in companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return (Global Impact Investing Network (GIIN) is a great resource on the topic)
- Engaging the family: Private foundations provide a way to include the broader family in philanthropy
The two main concerns voiced about having a private foundation are: (1) It is not always easy to engage family, especially when family members are not involved in identifying which issues the foundation will address. (2) Secondly, private foundations have to payout a minimum of 5% of the value of their endowment. While donors want to give, this immediate requirement can cause stress if they have not identified the causes and charities they want to support at the creation of the foundation.
To give donors time to plan their giving while still providing immediate income and tax benefits, many wealth advisors and estate managers will tell clients to open a DAF, often at a community foundation. Unlike a private foundation, donors with a DAF do not need to payout 5% annually. Being part of a community foundation also provides two benefits that can help donors give smarter: (1) donors can tap into the dedicated staff’s local knowledge of issues, and (2) they can connect with like-minded philanthropists to learn from each other and potentially pool resources for an issue. On the other hand, many DAF fundholders are frustrated when they cannot manage their fund’s investments with the same independence as before. While some community foundations allow you to keep your investment manager, many do not or have limitations. Second, most community foundations only allow one (maybe two) generation of successor advisors. This means that very often, your children can inherit and give from your fund, but not your grandchildren.
Deciding on the best vehicle for your philanthropy is a personal decision that takes into account more than just the size of your assets. It is important to sit down with your advisors and those you want involved in your philanthropy to determine what the best path forward is for you that will help you have the highest impact you want.
For more private foundation advantages, see the Top Ten Advantages from Foundation Source
For more information, Community Foundation of Greenville has a great chart comparing community foundations with private foundations