Personal basis, donor-advised fund or each: The best way to determine

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At some point, charitable individuals may find that writing checks here and there to various nonprofits is no longer enough.

For those looking for a more permanent way to help the common good during their lifetime and perhaps beyond, either a private foundation or a donor-advised fund is an option. While they are similar, there are a few differences that can help you figure out whether one (or maybe both) is right for you.

“Both are devices that you can use to donate money now and spend it over time,” said certified financial planner Mitchell Kraus, co-founder of Capital Intelligence Associates in Santa Monica, California.

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“The biggest difference is that a fund recommended by donors is more of a simplified solution … but doesn’t offer as much flexibility,” said Kraus.

Here are some tips to help you decide.

Funds advised by donors

These are generally easy to set up and maintain: you fund your account and receive a tax deduction, and then over time you can decide when and how much to donate to charity.

These funds are sponsored either by a community foundation or other group (i.e., a hospital or church), or a national not-for-profit organization that may be affiliated with a financial company such as Fidelity Investments or Vanguard. Some funds can be more restrictive as to where your grants go.

“Say it’s sponsored by a religious organization – there may be charities that don’t support it,” said CFP Howard Hook, principal and senior wealth advisor, EKS Associates in Princeton, New Jersey.

“Just make sure beforehand that the grants you recommend are accepted,” Hook said.

You can receive a tax deduction for contributions of up to 60% of your Adjusted Gross Income (AGI) to a donor-advised fund. For estimated assets, the maximum deduction is 30%. If you exceed these donation limits, you can carry over excess deductions for up to five more years.

It’s also worth noting that a temporary rule (for 2020 and 2021) that allows cash contributions to charity worth up to 100% of your AGI doesn’t extend to money you put in a donor-recommended fund, Hook said .

These funds may have a minimum amount you need to set up, although they all generally come with an annual cost. For example, at Fidelity Charitable – one of the largest sponsors of these funds – there is no minimum and the cost is around 1% of your credit annually. This includes administration costs and investment fees and will be deducted from your account.

By donating a highly valued property, you are essentially avoiding paying the capital gains tax that you would have had to pay if you sold the asset.

David Mendels

Head of Planning at Creative Financial Concepts

You can also donate assets that you have held for more than a year, such as stocks or real estate, to the fund advised by the donor and generally deduct the value of the asset for tax purposes.

“By donating a treasured property, you are essentially avoiding paying the capital gains tax that you would have had to pay on the sale of the asset,” said David Mendels, CFP and director of planning, Creative Financial Concepts in New York.

You can also donate anonymously from your account if you wish. And there is currently no schedule for how the money you contribute will be distributed. (This aspect of donor-recommended funds has been criticized by critics who claim that individuals contribute and receive tax deduction, but do not necessarily provide grants in a timely manner.)

Private foundations

In general, setting up a private foundation is associated with more effort and costs. This can make it less attractive to those with more limited resources.

For example, according to the American Endowment Foundation, you could spend anywhere from $ 4,500 on a service specializing in foundation administration to $ 25,000 on private attorneys to handle the process.

“I generally won’t start seriously talking to a client about a foundation until they have about $ 2 million or $ 3 million in donation,” said Kraus of Capital Intelligence Associates. “You could end up spending more on accountants and lawyers than on the causes that matter to you.”

In addition to the ongoing administrative costs, there are tax declaration requirements that are not associated with funds recommended by donors. And, in general, 5% of property must be distributed annually and an excise tax of 1.39% on net investment income may apply.

The tax deduction for donations to your foundation is lower than for foundation-oriented funds: limited to 30% of the AGI for cash and 20% for publicly traded securities. (Although you can transfer excess amounts for up to five years.)

Even so, “some people get a lot out of running a foundation,” says Hook of EKS Associates.

This also includes the flexibility of private foundations as to which concerns you would like to support.

“You have more control because you can basically give who you want,” Hook said.

You can also choose who to sit on your board of directors and make decisions about charitable activities.

Depending on the type of foundation, you can donate to existing public charities, award international scholarships, grant scholarships, or even give funds directly to individuals for disaster relief and emergency relief, according to Foundation Source. Some private foundations also create their own operating programs, but most do not.

“For someone who wants to have full control or was an entrepreneur and wants to build something from scratch, a private foundation can be attractive,” said Kraus.

With both methods

Some people may decide that it makes sense for them to have both a foundation and a donor-advised fund. One reason is privacy.

“Sometimes a person wants to advertise a donation from their foundation, but they can also support a cause that they don’t necessarily want to make public,” said Kraus. “And that can be done on an anonymous basis with a donor-indexed fund.”

For example, he said, a person could support a cause that is controversial – that is, on one side or the other of gun law or abortion law – and would rather keep that fact out of the public eye.

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