The United States is continuing to grow as a philanthropic society that promotes individuals serving their communities through both time and money. As part of their lifetime and at-death philanthropic efforts, a donor can select among multiple options to make a charitable gift. Several common options for a monetary gift to a charity are an outright gift, a donor advised fund, or a private foundation.
Outright Gift
The most obvious way for a donor to make a gift to a charity is an outright gift. An outright gift can be made either during the donor’s lifetime or at the donor’s death in the donor’s estate planning documents. A gift to a charity is often cash, but could be any item or asset, such as a vehicle, real estate, or stocks.
If the donor is making an outright gift to a charity at his or her death, the donor should designate the charity as a specific beneficiary in the donor’s trust or will. The donor should list the name of his or her preferred charity with the wording “or any successor entity thereto” in case the charity is replaced by or merged with another charity. In addition, the donor should provide sufficient identifying information, such as the address and the tax identification number of the charity, for the trustee to easily determine the designated charity after the donor’s death.
Donor Advised Fund
A donor advised fund, which is a charitable account held by a 501(c)(3) organization (i.e., the sponsoring organization), is a good option for an individual who would like to make a charitable gift, but would also like to provide ongoing recommendations on how the assets are invested and distributed. It is crucial to note that the donor may only make recommendations for the investment and distribution of the donor advised fund. The sponsoring organization may consider the donor’s recommendations, but the sponsoring organization has the ultimate authority over the donor advised fund. A sponsoring organization can be a community foundation, such as the Community First Foundation, or a charitable branch of an investment company, such as Fidelity Charitable. A donor advised fund is not required to make any annual distributions.
Some sponsoring organizations will not make distributions from a donor advised fund until a certain number of years after the donor advised fund is funded. Therefore, if the donor advised fund is to be used to fund a particular project, the donor should create the donor advised fund sufficiently in advance of the project start date. Sponsoring organizations may also limit the annual distributions from a donor advised fund to a certain percentage of the donor advised fund’s assets. As a result, if the donor advised fund will be used to fund an ongoing annual payment, such as a scholarship, the donor should fund the donor advised fund with adequate assets to cover the ongoing annual payment during periods of market decline.
Private Foundation
A private foundation is a unique means for a donor to create an ongoing charitable legacy. A donor can use a private foundation to educate the donor’s family members about charitable giving by having family members serve as officers or directors of the private foundation.
The private foundation can grant board members the right to make an annual designated grant to a charity selected by the board member. For example, if each board member could make a $5,000 annual designated grant, Jane could chose to give her $5,000 designated grant to the humane society and Bill could chose to give his $5,000 designated grant to the food pantry. Annual designated grants are a useful means to promote individual responsibility in board members and to encourage board members to investigate a variety of charities.
However, a private foundation is subject to an additional layer of rules and regulations including filing for 501(c)(3) status with IRS, distributing at least 5 percent of its assets each year, and filing an annual tax return (Form 990-PF).1 Therefore, a private foundation is best suited for donors who wish to make a large charitable donation in order to justify the work to create and administer the private foundation.
1 26 U.S.C. § 4942(d).