Getting serious about your giving?

Cash Management

Are you looking for ways to make sure your charitable donations are used efficiently and effectively? Although cash or check donations remain by far the most common ways to give, planned charitable giving vehicles have become increasingly popular, especially for those who are looking for ways to maximize their generosity and establish charitable legacies.

Which is the right option if you want to be more systematic about your giving? Here we look at the advantages and potential disadvantages of the more common methods of giving, though other means may be more suitable for your specific needs. For example, the use of trusts can provide a useful structure for both current and future charitable giving.

Cash or check donation

Along with participating in volunteer activities, most individuals donate to charities through “checkbook giving”—writing a check, or donating cash, to organizations or causes they care about on an individual, case-by-case basis.

This type of giving clearly offers the maximum degree of flexibility: Each donation is an individual decision, and you give where, how, and when you want. However, it requires the individual to carry the record-keeping burden when it comes to taxes. Each household or family must keep careful track of their contributions and report them on their annual return; in the unfortunate event of an audit, recently passed laws require each taxpayer to keep a record of every charitable gift made, regardless of the amount.

If you’re planning to donate only a small amount, and to donate to just one or a few charities, then using the checkbook approach may be easier for you. But this approach can be challenging if you plan to make multiple contributions, because you will have to track exactly how much you contribute, and to which charities. Also, if you want to involve other family members in the charitable giving process, the checkbook method may make it harder, because it is such an individualized way of giving.

This approach also places much of the burden of charitable research on the donor. Unfortunately, charitable fraud among illegitimate charities is not uncommon. Therefore, each time you make a charitable donation, be sure to do so with full information. Support only charities that you recognize or have researched, confirm that the organization is a qualified 501(c)(3) charity, and do not respond to unsolicited inquiries or provide personal information.

Donor-advised fund

The donor-advised fund (DAF) is the “next step up” for those looking to approach their charitable giving more seriously and strategically. It is a program at a public charity that allows donors—with as little as about $5,000 to contribute (different DAFs have differing minimum requirements)—to use a dedicated account for their philanthropy, and to plan their giving over time in order to provide continuing support to the charitable organizations of their choosing.

There are three basic components to a DAF:

1. Give:Donors make an irrevocable, tax-deductible contribution to the public charity that sponsors the donor-advised fund program. The charity then establishes a DAF account that the donor can name as he or she chooses. Donors can make additional, tax-deductible contributions at any time.
2. Grow:Donors advise the DAF-sponsoring charity how they would like their contributions allocated among various investment options. Any investment growth is tax free.
3. Grant: Donors are then able to recommend grants over time from their DAF to other selected nonprofit organizations—generally speaking, any IRS-qualified 501(c)(3) public charity.

By employing a DAF, donors are able to engage in more thoughtful charitable planning. For example, if you are nearing retirement, selling a business, receiving an inheritance or bonus, or simply experiencing a high-income year, contributing to a DAF allows you to “front-load” your giving—enabling you to potentially offset the one-time income effect on your taxes. Subsequently, this single contribution could support multiple charities for years to come.

Many DAF programs also have internal processes in place to make it easy for donors to forgo cash contributions and instead donate long-term appreciated securities—either publicly traded (stocks, bonds, or mutual funds) or non–publicly traded (private stock, business partnership interests, or other personal assets). Contributing long-term appreciated securities directly to charity typically allows donors to take a full fair market value charitable deduction for the donated asset, and eliminates capital gains taxes on the appreciation—with those tax savings being passed on to charity.

Once the initial contribution is made, DAFs have virtually no overhead costs to donors apart from an annual administrative fee (most often 0.6% or less, though many DAFs have balance-based fee schedules that are considerably higher than 0.6%). Making all your annual contributions to one charity (the DAF sponsor) consolidates your recordkeeping for income tax purposes, often eliminating paperwork for the donor and simplifying compliance with IRS requirements. Most DAF-sponsoring charities also confirm that the charities you ultimately decide to support are in good standing with the IRS. Also, in most cases, DAFs allow donors to create a charitable legacy by passing their account on so that family members can continue the philanthropic tradition.

DAF programs can be local or national in their purpose. They can be found at community foundations and at national charitable organizations started by financial services firms. Fidelity Charitable^®, established in 1991, was the first national DAF program in the United States.

Private foundation

A private foundation is a free-standing entity, a corporation or trust, and must apply for and obtain its own tax-exempt status. The foundation is “private” in that it receives its funding from one or very few donors (usually an individual, family, or business) rather than from a broad segment of the public. As a result, a private foundation comes with certain administrative responsibilities and requirements; foundation managers must rigorously follow IRS reporting and compliance requirements. But private foundations also have certain freedoms that can be advantageous.

The primary advantage of a private foundation is the ability of the donor to maintain some level of control over it. If a family, for instance, establishes a private foundation, that family can determine the foundation’s mission, and decide how the assets are managed and granted—within the laws that govern such foundations. For example, a private foundation has the ability to grant money to individuals or for-profit organizations for charitable purposes, which would be outside the type of grants donor-advised funds can make.

Like DAF donations, foundation donations are irrevocable, but foundations may pay a family member (or other employee) a reasonable salary for management of, or other services provided to, the foundation.

Given the ongoing and considerable management responsibilities, establishing a private foundation is typically reserved for the wealthy, or for someone who has the time and energy to devote to philanthropy. Typically, the establishment of a foundation involves a $1 million (or more) charitable donation.

How a donor-advised fund can complement a private foundation

In recent years, many individuals or entities who had previously established private foundations have found it advantageous to set up a donor-advised fund to work in concert with the foundation. On a practical level, making certain of the foundation’s grants to a DAF may relieve the foundation of some paperwork and due diligence, as well as potentially lessening the expenses of the foundation.

The other advantages of maintaining a DAF to complement a foundation stem from the different rules and regulations that govern contributions to each. The tax deduction limit for gifts of cash to a DAF is 50% of the donor’s adjusted gross income (AGI); for a private foundation, it is only 30%. For DAFs, the deduction limit for gifts of long-term appreciated securities is 30% of AGI, while the limit is 20% for the same contribution to a foundation.

Donor-advised funds also afford more privacy to donors than foundations do. Grants from a DAF can be made without reference to the recommending donor, while foundations must report their grants to the IRS on a return that is publicly available. And because the returns of private foundations are a matter of public record, information about the foundation’s contributors may be revealed, rather than kept private.

The table below compares three methods of charitable giving.

Comparing methods for charitable giving

In conclusion

How you approach your charitable giving is largely dependent on personal considerations and preferences. For some, simple “checkbook giving” provides maximum flexibility with no fixed costs. Donor-advised funds offer philanthropically minded people who have a relatively modest sum to donate—as little as $5,000, depending on the DAF program—a way to plan and prioritize their giving, thoughtfully and strategically. Private foundations are an option for individuals or families with more time and resources to devote. In the end, each giving vehicle has its own advantages, and for many serious philanthropists, the best strategy may be a combination of strategies.

Source: Fidelity Viewpoints 06/12/2013