We recommend waiting to choose a giving vehicle (or vehicles) until you have a clear sense of your family’s philanthropic objectives. Once identified, those philanthropic goals, in addition to tax and operational considerations, will inform the selection of the right vehicle for your family. This segment will provide an overview of a few of the most common charitable giving vehicles and how you can decide which one may be right for your family.

There is no one-size-fits-all approach to charitable planning, and often pragmatic concerns regarding administration, oversight, compliance and control come into play. Expect your advisor to be interested in your thoughts regarding the following questions:

  1. How much control do you want to retain over the way your charitable funds are used?
  2. What amount of administrative responsibility do you wish to maintain?
  3. Would you be willing to give up some control in order to decrease the number of administrative tasks you are responsible for handling?
  4. Do you want future generations to have the flexibility to change the way the funds are used?
  5. What types of assets do you think you will use to fund your giving?

There are three common giving vehicles to consider: private foundations, donor-advised funds and giving circles.

Private Foundations

  • A private foundation is a separate legally entity, and is typically funded by a single donor or a small group of donors.
  • The governing body of a private foundation, often comprised of members of the donor’s family, decides how the foundation’s funds are used to accomplish its charitable purposes.
  • As a separate legal entity, a private foundation incurs some costs that are generally not incurred by the donor of a donor-advised fund or giving circle. These include the costs of forming the private foundation, applying for recognition of tax-exempt status from the Internal Revenue Service and maintaining that exemption by complying with annual recordkeeping and filing requirements. If you are considering the creation of a private foundation, consider whether the amount you wish to set aside for charitable purposes can easily absorb start-up and ongoing administrative costs.
  • The creation of a private foundation and recognition of its tax-exempt status from the IRS may take up to several months to complete.
  • In addition, private foundations are subject to several tax rules not currently applicable to donor-advised funds or giving circles, which include: the charitable income tax deduction for a donation to a private foundation is limited to a 20-30 percent of a donor’s gross income; the value of a gift of closely held stock or real estate is limited to a donor’s cost basis for most private foundations; private foundations are subject to a 1-2 percent excise tax on all investment income; and private foundations must distribute five percent of the fair market value of their investment assets each year.
  • A private foundation may last in perpetuity, and successive generations of family members can easily be incorporated into the governance of the foundation.

Donor-Advised Funds

  • A donor-advised fund, or DAF, is a separate fund sponsored by an existing public charity.
  • One or more individuals identified as the advisors to the donor-advised fund, typically the donor and perhaps additional members of the donor’s family, may recommend how the assets of the fund should be distributed over time to any IRS-qualified public charity. Under the federal tax rules applicable to DAFs, the ultimate decision regarding how the DAFs are used must be made by the public charity and not by the donor.
  • The sponsoring public charity manages any administrative responsibilities of the DAF and evaluates qualified organizations. In addition, many sponsoring entities have geographic or subject matter expertise to assist in identifying worthwhile charities working in your areas of interest.
  • Since a DAF is housed in an existing public charity, there are few start-up costs.
  • Depending on the sponsoring public charity, a DAF may have limits on how long it may remain in existence, or may have a limit on the number of successive generations of family members that may make recommendations for how the funds are distributed.

Giving Circles

  • Giving circles come in many shapes and sizes. Generally, a giving circle is a group of individuals who pool funds, then decide as a group where to donate those funds.
  • Giving may be very informal. For example, members of a giving circle may choose to meet casually to select organizations they wish to fund. If the members of an informal giving circle wish to maintain the ability to take a charitable income tax deduction, each member should write a separate check directly to the charitable organization (or organizations) the group has chosen to fund.
  • A giving circle may be housed within a community foundation or other sponsoring entity. For example, members of a giving circle may choose to pool their resources in a fund at a community foundation, and then make recommendations about how such funds should be distributed in the community.
  • A giving circle may be a useful tool to start talking about philanthropy with your family. Children of all ages can be encouraged to contribute what they are able to the pool of funds, which can help them begin to understand the impact and rewards of charitable giving.
  • Since a giving circle may be very informal, there are few if any start-up or ongoing administrative costs.

These are by no means the only options available to you, and there are many creative options available to help you to maximize your charitable impact.

In addition to the decision you make about charitable giving, the decisions that you make about how to manage your business, invest your personal assets, volunteer your time and engage civically can all work together to help you achieve your philanthropic goals. In our experience, family businesses often already have strong practices that drive the bottom line while improving the local community. As a family business owner or advocate, you bring a unique set of skills to the world of philanthropy. We encourage you to think about the ways in which you can incorporate your valuable experience from the private sector into your charitable planning.