Donor-Advised Funds and Private Foundations
Achieve Your Philanthropic Goals While Optimizing Tax Benefits
Supporting causes by donating your time and/or money can be a satisfying way to express your values. The organization receives the benefit of your time, skills, and/or monetary gift, and you witness the impact of your contribution both on the organization and in creating a philanthropic legacy for your family to model.
If you are charitably inclined, there are many ways to donate. We recommend that you identify an approximate dollar amount you would like to give periodically or on an annual basis.
In this article, we evaluate the various methods and vehicles through which you can make charitable donations, so you can achieve philanthropic goals while optimizing tax benefits.
Methods of Giving
Cash — The quickest and easiest method of giving is to donate cash or write a check. For small donations, this can work very well; however, for larger donations, there are more tax-efficient methods. Based on IRS limits, donations of cash are limited to a 60% deduction against adjusted gross income (AGI).
Appreciated Securities — By gifting appreciated securities, you can avoid the capital gains that would be realized by selling the assets, while also securing a charitable deduction in the current year. Deductions for donations of long-term capital gain property are limited to 30% of AGI. Contributions that cannot be deducted in the current year, because they have exceeded your AGI limits, can be carried forward for up to five years.
Qualified Charitable Distribution (QCD) — For IRA owners over age 70½, a QCD offers an alternative method of donating to charity. A QCD made directly from your IRA to a charitable organization does not qualify for a deduction against AGI as outlined above. However, it does count toward your required minimum distribution (RMD), up to $105K for 20241. To the extent that you do not rely on an RMD for your cash flows, a QCD can fulfill your charitable giving objectives while lowering your income tax liability2. A QCD must be made directly to the charitable organization and cannot be made to a donor-advised fund (DAF).
It may be more beneficial to donate a highly appreciated non-cash asset to a DAF rather than a private foundation. A DAF allows you to deduct the fair market value of the appreciated asset, whereas donating the asset to a private foundation would limit the deduction to the asset’s cost basis.
Charitable Vehicles
Two highly popular vehicles for charitable giving are DAFs and private foundations. As illustrated in the comparison chart, there are many factors to consider as you assess your primary objectives, which could include ease of administration, minimization of cost, privacy, greater level of control, and maximizing the involvement of family members.
For some donors, choosing between a DAF and a private foundation may not be an either/or decision. Some sophisticated donors may decide to have both and then choose which to use for a given donation depending on the specific circumstances.
Collapsing a Private Foundation into a DAF
In recent years, there has been a gradual shift from private foundations toward DAFs. This certainly does not mean that private foundations are dying entities, as there are still many compelling reasons to run them as highlighted in the comparison chart. However, a primary issue for some is regarding the continuation of the private foundation after the original donors no longer manage it. If the intent is for family members to continue the private foundation and the next generation does not have the time or interest in managing it, a DAF may be a more attractive option. Other reasons why donors might consider collapsing a private foundation into a DAF include:
1. Reducing the cost of or eliminating responsibility for day-to-day administration.
2. Anonymizing charitable donations.
3. Taking advantage of higher AGI deductions.
In some instances, a private foundation can be split into multiple foundations to enable different family branches to manage the entities. This often occurs when multiple generations of a family are involved in the management of the foundation, as it helps to ease the burden on those who are doing so from the different locations in which they reside. While many states permit a split, the laws surrounding it are specific to the state in which the foundation was created. A court proceeding and/or permission by an attorney general may be required.
First Manhattan – Stay in the Know
There are many ways to support your charitable beliefs while deriving tax benefits. We encourage you to contact your First Manhattan Wealth Management team and your attorney and accountant to ensure that your donation achieves your investment, charitable, and tax goals.
1 $100K, indexed annually for inflation
2 Your accountant can help you determine whether gifting appreciated securities or using a QCD makes the most sense for you.
These materials are furnished for informational purposes only. They have been compiled from sources believed to be reliable; however, First Manhattan does not guarantee the accuracy or completeness of the information presented. Nothing contained herein should be considered a solicitation to purchase or sell any specific securities or investment related services.
Information in this white paper is current as of November 1, 2024.