Giving It Away: Three Options For Charitable Donations

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Most people haven’t heard of businessman Chuck Feeney. That’s because many aspects of his life are unremarkable. He travels in coach, carries reading materials in a plastic bag, and avoids expensive restaurants. Yet, over the course of his life, Mr. Feeney has given approximately $8 billion to charity, and he has done so discretely. In fact, his charitable giving was initially so secretive that Forbes magazine dubbed him “the James Bond of philanthropy.

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Mr. Feeney made his fortune in the “duty-free” shopping industry. Despite the vast wealth he acquired, Mr. Feeney never lost his penchant for generosity or his desire to give the majority of his money away while still living. Most of Mr. Feeney’s charitable work was accomplished through his private foundation, Atlantic Philanthropies.

Like Mr. Feeney, some high net worth families and individuals use private foundations to accomplish their philanthropic goals. Others use public charities or donor-advised funds. Each method has its advantages and disadvantages, and the method that is most suitable to a particular person or family will depend on the facts and circumstances of each case.

Public Charities

A public charity is a charitable organization that qualifies for tax exemption as described in Internal Revenue Code section 501(c)(3). It is usually funded by the general public and advances public interests. Hospitals, churches, and research organizations are examples of entities that may be organized as public charities. St. Jude Children’s Research Hospital is one of the most well-known public charities. It solicits public funds to advance cures and means of prevention for pediatric catastrophic diseases.

Private Foundations

A private foundation is also a charitable organization that qualifies for tax exemption under section 501(c)(3). Private foundations are often established with a large initial gift and then operated or advised by one or more members of the donor family. For example, Bill and Melinda Gates started The Bill & Melinda Gates Foundation, one of the largest private foundations in the world. The idea for their private foundation was born when one of Bill Gates’ children sent him an article about unsanitary drinking water in India. Various members of the Gates family continue to participate in the foundation’s operations.

Donor-Advised Funds

A donor-advised fund (DAF) is a charitable vehicle that is sponsored by a public charity. Generally, a person or family makes a charitable donation to a DAF, realizes an immediate tax deduction, and then makes ongoing recommendations on grants from the fund throughout the fund’s lifespan. DAFs can only make grants to public charities. In most respects, a donation to a DAF is identical to a donation to a public charity. Both involve an irrevocable gift by the donor to realize the full tax deduction of the gift.

However, there are two key differences between DAFs and public charities. First, the assets in a DAF can be invested, and the donor can usually choose the manager and/or the types of investments the fund should make. Second, the donor is usually able to recommend the recipients of fund grants. In contrast, once a donor makes a gift to a public charity, he or she has no control over the assets and the public charity determines how the assets will be used.

Additionally, there are key differences between a DAF and private foundations. Donations to a DAF entitle the donor to a higher tax deduction than donations to a private foundation. Consequently, DAFs are a sort of hybrid between public charities and private foundations as charitable vehicles.

Charitable Donations

Comparing Charitable Vehicles

Public charities offer several unique advantages as philanthropic vehicles. First, public charities offer the highest tax deductions for donations. Second, because public charities are independently funded and operated, there are no direct legal or administrative expenses to the donor. Third, public charities’ independence from donors also means that donors do not have to invest time overseeing or operating them. For example, a high net worth family seeking to make a large charitable donation can give to a public charity, claim the full deduction permitted by law, and see an immediate impact of the gift, all without having to be personally involved in the organization. In contrast, if the same family wanted to start a private foundation to accept the large charitable donation, it would incur legal and administrative fees and be required to participate in the setup of the foundation.

The biggest advantage of private foundations is that they offer the donor greater control over the disposition of donated assets. Unlike public charities or DAFs, private foundations can make grants to other private foundations and to individuals. Donors can also appoint family members to oversee operations of the foundation and/or hire them as employees. Subject to IRS regulations, donors have control of the name of their foundation and its charitable goals. For example, a donor with a passion for stage theater could establish a private foundation with his or her name that awards scholarships to college students who participate in their school’s theater program. In contrast, a public charity usually has its charitable goals and methods established, and donors simply contribute their time and money to accomplish them.

As a hybrid between public and private charities, DAFs offer some of the advantages of each. Contributions to DAFs, like donations to a public charity, offer higher tax deductions than contributions to a private foundation. DAFs allow donor advisory in ongoing grant making, and come with no administrative requirements for the donor. However, depending on the size of the assets in the fund, a DAF can be considerably more expensive than a private foundation. DAFs offer more control over grant making compared to a donation to public charity, but is far more limited than a private foundation.

Building a Legacy with Black Cypress

Public charities, private foundations, and DAFs each offer unique benefits. Private foundations generally offer more control and superior legacy planning, while public charities offer ease of giving and superior tax advantages. DAFs take up the middle ground, offering some of the benefits of both public and private charities. Whether these vehicles are an ideal means of charitable giving for a family or individual will vary on a case-by-case basis.

In addition to investment advice, Black Cypress has advised its high net worth clients on charitable giving strategies. We also assist our clients with legacy planning so that their wealth can continue to benefit generations to come. If you have any questions about the services we provide our clients, including how to plan your legacy, please contact us at (843)-259-2009 or [email protected].

Article by Black Cypress Capital Management

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