Charitable Giving Options
Outright Gifts to Charity, Private Foundations, Community
and Donor-Advised Funds Provide Significant Philanthropic Alternatives
Charitable giving declined markedly in 2003. Yet, the needs of the poor and underprivileged, opportunities for significant breakthroughs in medicine and science, and the importance of providing our children with first-rate educational and cultural opportunities have never been greater. If you plan to help these worthy causes by making significant charitable gifts before year end, you should consider the following alternatives and determine which best meets your goals and objectives.
The first and simplest option is to make an outright gift to a public charity. This gives the donor complete control over the gift itself, an immediate tax deduction and no administrative or investment responsibility. The second option is to create and fund a private foundation and use the foundation as a grant-making vehicle.
This option imposes certain administrative burdens on the donor but provides the foundation’s Board of Directors with complete control over investments and grant-making activities, subject, of course, to Internal Revenue Code and fiduciary law requirements. A donor-advised fund, at the other end of the control spectrum, allows the donor to make only grant recommendations, but gifts by the donor are treated as gifts to a public charity and, as such, provide the donor with the more favorable tax deduction incident to such a gift. Finally, a community foundation, which often includes donor-advised funds as options for giving, combines favorable tax deductibility with the advice of philanthropic experts and a geographically focused grant-making program. The following chart shows the major differences among these types of outright giving.
|Federal Tax Implications
|Cash or property donated to a public charity.
|Deduction for cash donated up to 50 percent of adjusted gross income. Deduction for property used by the organization or publicly traded stock up to 30 percent of adjusted gross income.
|A private, nonprofit grant-making organization that receives most of its funding from one source, usually an individual or family.
|Subject to federal excise tax, usually two percent of investment income, as well as strict Internal Revenue Code regulation of activities. A minimum amount must be distributed for charitable purposes each year. Deduction for cash donation to foundation up to 30 percent of adjusted gross income; for publicly traded stock up to 20 percent of adjusted gross income.
|Public charities with broad-based community support, usually making grants within a specified geographic area. Giving options through community foundations include donor-advised funds and future gifts.
|Depends upon structure of gift, but outright gifts to foundation result in immediate income tax deduction; same as cash or property gift to a public charity.
|Public charity, often a community foundation, that pools donations with other donors’ gifts and invests them tax-free. The fund makes grants to charitable recipients upon recommendations of donor. Donors may choose among investment options and may dictate timing of disbursements.
|Immediate income tax deduction; same as cash
or property gift to a public charity.
When establishing and donating to a private foundation,
deductibility limits and Internal Revenue Code excise taxes on investment
income and submission to regulation of activities are the fundamental
trade-offs for complete control over contributions, investments and
expenditures. Establishing a private
foundation entails a fair amount of administrative responsibility in overseeing
the foundation’s operations and ensuring compliance with the Internal Revenue
Code. On the other hand, private
foundations are not accountable to the general public, nor are they required
continuously to raise funds. Giving through
a private foundation can be done with greater anonymity than through direct
gifts, and a foundation manager can refer grant seekers to her foundation,
where she can evaluate proposals based on the foundation’s charitable
mission. Many of these features also are
present in a slightly altered form if a donor chooses to give through a
donor-advised fund, while the administrative burdens, deductibility limitations
and excise tax regime are all absent.
A donor-advised fund is a charitable giving vehicle through which a donor makes non-binding grant recommendations to a sponsoring charity suggesting which organizations should receive grants from the donor’s fund. The donor is relieved of all administrative and investment responsibilities and the associated costs and burdens. The trade-off, of course, is that ultimate control over the funds rests with the donor-advised fund. Because a donor-advised fund resides inside a public charity, which is usually a community foundation, gifts to donor-advised funds allow the donor the more favorable tax deduction described in the chart. This deduction is available immediately upon making a contribution to a donor-advised fund, but the gift can remain in the fund and, with the donor’s chosen investment options, can appreciate over time to increase the charitable gift. The gift given by the donor-advised fund to the grantee charity (or charities) is based on the donor’s own timetable, as opposed to the annual distribution requirement.
Community foundations are tax-exempt public charities that serve large numbers of people who wish to improve the quality of life in their geographic area. Individuals, families, businesses and organizations create permanent charitable trusts and funds that help their region meet certain challenges; the community foundation invests and administers the funds. As the name suggests, this option is appropriate for donors who wish to focus their charitable giving on a particular community. As shown on the chart, above, donor-advised funds are among the options available for giving through a community foundation. The community foundation provides other giving options as well, and, as opposed to many donor-advised funds, are generally overseen by volunteer citizens and professionals with specialized knowledge of philanthropy and their community’s particular needs. In addition to making charitable grants, community foundations also identify current and emerging issues, stimulate resources to address those needs and help their regions prepare for the future.
When weighing charitable giving alternatives, donors should
consider the amount of control desired, the income tax consequences of the gift
and the ultimate charitable impact of the gift.
Regardless of the option chosen, the outcome will be a tax benefit to
the donor and a philanthropic benefit
to the community at large.