ELITE ADVISOR BEST PRACTICES
The Family Foundation of Choice - Part Three
Private foundations and donor advised funds together—a powerful combination
By Michael King
- For many, the DAF has quickly become the charitable vehicle of choice for philanthropically inclined individuals and families, effectively replacing the PF.
- However, for families with PFs, a DAF can be an important and strategic enhancement to a PF when they are used in conjunction with one another.
- The use of DAFs and PFs together provides a powerful combination, allowing individuals and families to maximize the benefits and flexibility of their charitable endeavors.
In Part Two, we saw how private foundations (PFs) can offer important advantages over donor advised funds (DAFs) and other charitable vehicles when it comes to issues of control and compensation. Here, we’ll look at ways that savvy givers and advisors are using both DAFs and PFs in conjunction with one another to maximize the benefits and flexibility of their charitable endeavors.
In situations in which a PF is (or will continue to be) used as a family charitable vehicle, a DAF can be used in conjunction with the PF to expand the flexibility and overall benefits of the family’s charitable initiatives.
Enhanced benefits that can be secured by supplementing a PF with a DAF include the following:
1. Capture deductions in excess of the PF maximums. Givers who have made the maximum deductible contributions to a PF in a given year (30 percent of AGI for cash gifts, and 20 percent of AGI for publicly traded stock), can make additional gifts to a DAF, up to 50 percent of AGI for cash gifts, and 30 percent of AGI for publicly traded stock, closely held business interests and real estate. For example, a giver with AGI of $250,000 could make an immediately deductible cash gift of $75,000 (30 percent of their AGI) to their PF, and then make an additional cash gift of $50,000 to a DAF (for a total of $125,000, or 50 percent of their AGI). The desire to make additional gifts in this context can arise when givers have unusually high income in a given year—perhaps as a result of a particularly good year in their business or the sale of an asset that generates significant income.
2. Deduct the fair market value of gifts of closely held business interests and real estate. Because gifts to a PF of appreciated assets such as closely held business interests and real estate are limited to a cost basis charitable deduction, such assets are generally inappropriate to give to a PF. However, such assets are often some of the best, most tax-leveraged assets to give. Therefore, a giver who owns real estate or a closely held business and who also has a PF might establish a DAF for the specific purpose of receiving gifts of this nature. In this context, the giver might continue to make gifts of cash and publicly traded stock to their PF, while making gifts of closely held business interests and real estate to their DAF. It is not unusual for a business owner or astute real estate investor to have a significant portion of their wealth tied up in their business or real estate investments. Therefore, if a giver in this situation wants to make a particularly sizeable charitable gift, these assets may be the only source for doing so.
3. Ensure that the annual 5 percent distribution of PF assets is satisfied. The failure of a PF to satisfy the annual 5 percent distribution requirement can result in confiscatory excise taxes. In addition, it is not unusual for PFs to approach the end of the calendar year without having satisfied this requirement and without having identified which qualified charities should receive grants. Because a DAF is considered a qualified charity (i.e., it receives public charity status), distributions from a PF to a DAF will satisfy the PF’s 5 percent distribution requirement. Such grants from a PF to a DAF will also provide additional time to determine which charities will receive the ultimate grants and in what amounts.
4. Reduce or eliminate the net investment income excise tax. PFs are subject to a 2 percent (in some cases 1 percent) excise tax on their net investment income. This tax applies to both earned investment income and realized gains upon the sale of a capital asset. DAFs are not subject to this excise tax. Therefore, income-producing assets may be granted from a PF to a DAF and avoid this excise tax on all future income. This strategy may be particularly appropriate and attractive if a PF has a highly appreciated asset that it intends to sell. If a grant is made from the PF to a DAF prior to the sale of the asset, the PF excise tax can be avoided.
5. Allow greater anonymity and privacy. If a PF desires to make anonymous gifts, it can grant funds to a DAF, with the DAF making a subsequent grant to the ultimate charity. The grant check will be issued directly by the DAF, and can exclude any reference to, or identification of, the PF or associated family.
This same approach can be used to ensure privacy with respect to a particular grant. Such privacy may be of particular interest and importance if a PF wants to make a grant to an organization that is itself controversial, or that engages in programs or activities that may be viewed as controversial. Examples of these circumstances might include organizations involved with issues such as abortion, sexual orientation, euthanasia, the legalization of marijuana, etc.
6. Ensure the long-term maintenance of the family’s charitable mission. Because PFs are ultimately controlled by their boards, over time a PF can stray from its initial purpose and mission—particularly after the death of the initial giver. Perhaps the most widely known example of “mission drift” can be seen with the Ford Foundation, which now supports causes and organizations far from auto tycoon Henry Ford’s initial intent and desires. Some would say the foundation now operates in absolute contradiction to many of the causes and principles that Henry Ford embraced.
This potential for mission drift is of growing concern to families that establish large PFs, particularly when they intend for the foundation to continue operations after the initial giver’s death—sometimes for generations into the future, or even in perpetuity. Some DAF sponsors have programs that will significantly increase the likelihood that a family’s charitable assets will continue to support the organizations, causes and principles they care about. Therefore, an individual or family with a PF who has concerns about mission drift can essentially “convert” their PF to a DAF either during their lifetime, or at the time of their death. In these situations, givers can provide the DAF sponsor with instructions, guidance and parameters about how such assets should be used and granted after their deaths.
For example, a family might want the assets in their DAF to be used exclusively for health and medical care purposes. Such a desire can be expressed very broadly or very narrowly—for example, a request may be made that funds should be used exclusively to support the health and medical needs of developing countries, or used to produce a cure for a particular disease.
Once these desires are articulated and documented, the DAF sponsor can provide monitoring and oversight to ensure the family’s desires are carried out.
The DAF has effectively replaced the PF as the charitable vehicle of choice for many charitably minded individuals and families. However, some families are finding the PF used in conjunction with a DAF to be a powerful combination that maximizes the overall benefits and flexibility of their charitable endeavors. In both situations, the DAF, whether standing alone or used in conjunction with a PF, is helping families more effectively and more joyfully fulfill their charitable goals and objectives.