Considerations for philanthropic vehicle decisions.

• Author: Sarenski, Theodore J.

Practitioners who work with clients considering lifetime philanthropic engagements need to know what should be taken into account when choosing a desired charitable vehicle. Options are quite different if a client does not want to or cannot afford to irrevocably part with significant capital--with the exception of using a testamentary charitable lead trust with a private foundation being used as the beneficiary.

Other options span from unrestricted gifts and donor-advised funds (DAFs) to private foundations. Unrestricted gifts do not require significant planning, so this column assumes the client wants continuing involvement in the endeavor.

Quite often, the philanthropic decision boils down to three main factors.

First factor: Importance of the client's retained control

Charitable gifting strategies can often be separated by the level of retained direct or indirect control.

Testamentary charitable planning

The first rung of gifting is simply retention until death, i.e., testamentary charitable planning. Retention maximizes the donor's retention of control over the property as well as his or her access to the capital represented by the estate, and the use and enjoyment of the property and any income or gain therelrom. Charitable testamentary gifts result in a total loss of the income tax charitable contribution deduction.

Family limited entity, LLC, or FLP

The second rung of lifetime charitable gifts is formation of a family limited entity, limited liability company (LLC), or family limited partnership (FLP), followed by gifts of interests in the entity. Such gifts are ordinarily subject to valuation discounts for lack of control and lack of marketability, and they permit the donor (or someone else) to control the cash flow paid out by the entity attributable to the gifted interest.

However, gifts of this type are often difficult to make to either public charities or private foundations. Public charities want an immediately monetizable asset and are often fearful of unrelated business taxable income, so they rarely accept gifts without a short, clear path to monetization. With private foundations, tax problems increase to include the world of prohibited transactions under Sec. 4941 and the excise tax on excess business holdings under Sec. 4943.

Private foundation

The third rung on the charitable side is the creation of a private foundation, where the assets donated to the private foundation must be expressly set aside exclusively for...