There are many ways to make charitable contributions that can benefit both you and the charity receiving the contribution. Some of the more popular options include outright gifts, charitable remainder trusts, charitable lead trusts, and charitable gift annuities. Two other options appear to be gaining in popularity, at least in our practice. Those options are “donor advised funds” and “private foundations.” The popularity of these two options may be growing because they allow the donor to have some control over the manner in which his or her gift is used after it is made.
Donor advised funds generally allow you to make a gift to an existing charity which is immediately deductible for income tax purposes and arrange to have that charity make smaller, incremental gifts to recipients you help to select over a period of time. Thus you could make a lump sum gift to a charity offering donor advised funds with the understanding it would be used to fund scholarships for students meeting the requirements you help to create in perpetuity. Or you could make a lump sum gift to such a charity with the understanding that the income generated by your gift will be used funds grants to a number of different charities each year.
Many charities offer donor advised funds. Community foundations are prime examples. We have a number of community foundations in Southwestern Indiana. Many private companies with widely recognized names have formed charitable entities to offer donor advised funds. Contributions to such organizations do not ordinarily require a great deal of work by your attorney since the basic vehicle for the gift (the charity receiving the gift) already exists.
Private foundations allow you to, in effect, create your own charity to either support other charities or actually perform charitable functions you select. They come in a variety of shapes, sizes, and colors. The two basic forms are operating and non-operating foundations. Non-operating foundations basically use their funds to make grants to other qualified charities on an on-going basis. Operating foundations actually perform hands-on charitable functions themselves. Both types must comply with a multitude of special tax laws to remain qualified for tax purposes, but the rules governing operating foundations are even more stringent.
Private foundations are an attractive alternative for a person with significant wealth who is charitably inclined, but who does not wish to surrender complete over the funds being contributed. While neither the donor nor persons close to him can receive gifts from the foundation, they can be actively involved in its management and activities in many different capacities, including serving as trustees and employees. Creating a private foundation is generally more expensive than contributing to a donor advised fund because the basic vehicle must be created from scratch and approved by the IRS.
There are advantages and disadvantages to all of these options. We can discuss those factors with you and help you select the best option to fulfill your goals. We can also help you create the necessary documents and entities. If you have any questions regarding these matters, please contact the author, David E. Gray.