When making charitable donations, it’s natural to hope your contribution furthers a cause close to your heart. While smaller donations might not raise concerns about how funds are allocated, larger gifts often come with specific intentions. If you wish to direct how your donation is used, planning carefully to maintain your eligibility for an income tax deduction is crucial.
By opting for donor-advised funds or private foundations, you can significantly influence the use of your donation. This choice empowers you to align your giving with causes that resonate with you. Let’s delve deeper into these options.
Donor-Advised Funds
Many large public charities, especially those supporting diverse activities and organizations, offer donor-advised funds. These funds operate under an agreement between you and the charity, where your preferences for the use of the funds are taken into account. However, it’s important to note that the charity retains ultimate control over how the funds are allocated, which aligns with its mission.
Private Foundations
A private foundation is a nonprofit entity typically established by a significant donation from an individual or a business. The process of setting up a private foundation involves creating a legal entity, obtaining tax-exempt status from the IRS, and appointing a board of directors or trustees. Unlike public charities, the donor or their appointed trustees or directors manage the foundation’s funds and programs, giving you greater control over how the assets are used.
Private foundations generally fall into two categories: operating and non-operating. Operating foundations actively manage and run the charitable programs they fund, such as educational initiatives or healthcare services. Non-operating foundations focus on distributing funds to other charitable organizations, supporting causes like environmental conservation or poverty alleviation. A private foundation can also serve as a ‘family enterprise,’ where family members collaborate to support charitable causes over generations.
However, it’s important to note that the increased control provided by a private foundation comes with a sense of responsibility. This is because the foundation is designed to serve the public good, and as such, it must adhere to certain regulations:
- Annual Distribution Requirement: Private foundations must distribute at least 5% of their asset value annually to charitable causes or face penalties.
- Transaction Restrictions: Penalties apply to certain transactions between the foundation and its donors or managers, though reasonable salaries are allowed.
- Prohibition on Private Benefit: Foundations cannot benefit private individuals.
- Oversight of Grants: Private foundations must ensure their grants to private charities are used appropriately (public charities like schools and churches are generally exempt from this requirement).
- Excise Tax: An excise tax of up to 2% on investment income is imposed annually.
- Investment Restrictions: There are limitations on the types of investments a private foundation can make.
Additionally, the tax deductibility of contributions to private foundations is more restricted than contributions to public charities, with limits of 20% to 30% of adjusted gross income, depending on the nature of the donation. This contrasts with higher limits of 30% to 50% for public charities. It’s also essential to consider the administrative and legal costs associated with establishing and maintaining a private foundation.
Donor-advised funds and private foundations offer unique opportunities to influence how your contributions are used. However, these options have complex considerations requiring careful planning and expert guidance. At Legacy Private Trust Company, we specialize in helping individuals and families navigate the intricacies of charitable giving. Our team supports your philanthropic goals, ensuring that your legacy is impactful and aligned with your values. Contact us today to explore how we can assist you in making informed and meaningful charitable decisions.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or connect@lptrust.com.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.
