Mcle Self-study Article the Broad Array of Charitable Giving Vehicles Demystified
| Publication year | 2023 |
| Author | Written by Margot Edwards* and Aaron Hegji** |
Written by Margot Edwards* and Aaron Hegji**
We, the authors, intend this article to review various vehicles that donors use to engage in philanthropy and to highlight the practical implications of each option. We recognize that a variety of charitable vehicles are routinely recommended by practitioners to assist donors in fulfilling their unique charitable intentions. No single method is a universally perfect solution and donors may wish to utilize more than one structure. We hope this article provides a roadmap for advisors to help clients match their individual goals to the best structure for them.
In this article you will find, first, a framework for discussing a donor's philanthropic intentions; second, a description of the various charitable vehicles used; and third, charts comparing the various vehicles to identify when each option might best be utilized.
I. THE FRAMEWORK
Prior to considering establishing specific charitable vehicles, the donor should consider and prioritize his or her goals and motives related to philanthropy. These may include supporting one or more specific causes or benefitting particular individual charities. Alternatively, the donor may also have a generalized intention to engage in charitable giving but not yet have had the opportunity to define their specific plans.
The donor may also wish to instill philanthropy in future generations as part of their giving and should consider how much engagement by others he or she wishes to require or encourage. They may also be interested in the tax benefits of charitable giving. Those tax goals may be focused on income tax planning, or wealth transfer planning may also be a priority.
Next, it is important to consider how the donor wishes to engage in philanthropic activity. This may be through direct charitable activities, or it could be through making grants to established individual charities that are well positioned to further the donor's mission.
Finally, the donor should also consider how much complexity they are willing to tolerate as part of achieving their philanthropic goals. Important factors include what degree of maintenance of the charitable vehicle is reasonable for the donor and what level of scrutiny the donor is comfortable enduring.
After taking stock of these considerations, the donor is ready to explore the philanthropic landscape.
II. TIMING AND VALUATION
It is important to note that the timing of a gift of appreciated assets to any charitable vehicle is key. The donor cannot be obligated to sell the asset at the time of its transfer, or they may be deemed to have recognized gain upon the charity's sale of the asset.01
The donor will need to obtain an appraisal to support a fair market value deduction for any gift of a non-marketable asset (even if an arms-length transaction takes place relatively close in time to the charitable gift).02 Finally, the specific charitable recipient must be able to accept the asset. When gifting a non-marketable asset, this may mean working with a more sophisticated charity (such as a sophisticated Donor Advised Fund) and may also require some due diligence before the gift is made.
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III. DIRECT GIVING
A. What Is It?
The simplest option for charitable giving is to give directly to individual public charities. This can be accomplished through writing a check, using a credit card, or gifting other assets such as marketable securities.
B. What Are Its Pros/Cons?
One of the primary benefits of direct giving is simplicity. There is no expense involved and there are no ongoing structures to maintain with this approach. In addition, a donor can generally deduct a larger portion of his or her adjusted gross income ("AGI") by gifting directly to public charities rather than certain other charitable recipients.03Finally, a direct gift to a public charity of appreciated securities held longer than a year, rather than giving cash, allows the donor to avoid recognition of gain on those securities, as well as to take a fair market value income tax deduction.04
This approach lacks customization and doesn't allow for the creation of an interactive philanthropic plan for the donor and their family. Direct giving does not provide the donor the ability to separate the timing of the deduction from the timing of the transfer to individual charities. Furthermore, when making a direct gift, the donor must already know the specific charity and have a desire to benefit that charity immediately. By contrast, the donor may utilize other charitable options to achieve the deduction in a high-income year but take the time later to make decisions about individual charities they wish to benefit. Finally, many charities cannot accept gifts of complex assets, such as closely held stock, which may limit the donor's options for maximizing their gifts and the related tax benefits.
C. When Would I Use It?
Many donors utilize direct gifts for smaller or individualized gifts that are not part of their overall philanthropic plan. The simplicity can be very appealing when the giving to this specific charity is likely to be limited or transactional in nature.
IV. DONOR ADVISED FUND
A. What Is It?
A Donor Advised Fund (sometimes called a "DAF") is an account held by a recognized charitable organization.05The account lists advisors (usually the donor(s) or family members selected by the donor) who can recommend investments and charitable grants over time.
B. What Are Its Pros/Cons?
A DAF is a relatively simple and inexpensive approach to charitable giving. Setting up a DAF does not require establishing a separate legal entity, such as a trust or nonprofit corporation, which means that contributing to a DAF is as easy as setting up an account. Many financial institutions have donor advised funds through a related charity or charitable partner. Additionally, community foundations often have DAFs and, in many cases, provide assistance with exploring philanthropic goals and the individual charities whose work furthers those goals.
When a donor makes a gift to a DAF, they receive an immediate tax deduction. Over time, the donor makes recommendations regarding grants to specific charities. Technically, the donor only recommends, and does not direct, those grants. From a practical perspective, so long as the recommended grant recipient is a recognized charity, the DAF typically follows the recommendations of the donor.
A DAF permits the donor to separate the timing of the charitable deduction from the actual grant to an individual charity. This means that the donor can make the gift to the DAF when it provides the greatest tax benefit to the donor but decide later which individual charities should receive funds from the DAF (and, potentially, involve family in the decision-making).
Some other frequently cited benefits of a DAF are:
- A DAF does not require a minimum distribution amount to charities each year.
- The AGI (adjusted gross income) limits that apply to charitable gifts are higher with a DAF than with some charitable vehicles (see chart below comparing DAFs and private foundations). Specifically, a donor gifting appreciated assets to a DAF may deduct up to 30% of his/her AGI.06
- The deduction available for a gift of non-marketable assets (such as interests in a closely held business) held longer than a year is equal to the asset's fair market value and not limited to basis.
- There are minimal set up and ongoing administrative costs in connection with a DAF.
- DAFs provide enhanced privacy because investments, expenses, individual grants, and donor names are not publicly available.
- The application of the complex "private foundation rules" to DAFs is limited.
When a donor gifts appreciated assets to a public charity, including a DAF, they may effectively realize two tax
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benefits: (a) avoiding the recognition of gain on the asset once it is sold, and (b) a charitable deduction. For assets held longer than one year, the deduction is generally equal to the fair market value of the asset gifted. When the asset is held less than one year, the deduction is equal to the amount of the donor's basis.07 In addition, if the asset is gifted to a private foundation, it must be readily marketable in order to qualify for the fair market value deduction.08 For a gift of an interest in a closely held business, this means that the deduction available when gifting to a private foundation will typically be limited to basis, while a gift to a DAF will provide a full fair market value deduction.
Like direct giving, the DAF does not easily lend itself to succession planning for the family's philanthropic legacy over time. As noted above, while some sponsoring organizations of DAFs provide support in researching individual charities and engaging in philanthropy as a family, without this, the DAF structure doesn't provide a robust opportunity for a family to be collectively involved in their philanthropy the way a private foundation structure does. As a result, a DAF may not be the ideal structure for a family looking to create a multi-generational philanthropic legacy.
C. When Would I Use It?
Donors often use a DAF when they wish to have more flexibility related to timing gifts, and more structure around their charitable giving overall, but do not want the complexity of a private foundation. In particular, if a donor's philanthropic plans are straightforward and primarily designed for the donor's own lifetime, a DAF can be a great option.
V. PRIVATE FOUNDATION
A. What Is It?
A private foundation is a privately funded charity and a separate legal entity, such as a nonprofit corporation or trust. It is often funded by a single or series of gifts from an individual (person or company) possessing a predetermined charitable philosophy. Typically, the donor controls every level of its formation, implementation, organization, and activities, until such time as the donor terminates their involvement...
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