Charitable giving vehicles & Tax Implications

By: Andres Gonzalez and Craig Armstrong

A charitable heart can yield significant tax benefits, and for high-net-worth individuals and families, understanding the intricacies of philanthropic vehicles like private foundations and donor-advised funds (DAFs) is essential. Each option offers unique opportunities and considerations for maximizing impact. Consult with your CPA at Hancock Askew to navigate these choices effectively and ensure your contributions make a meaningful difference in 2024 and beyond.

What is a private foundation?

A private foundation is a non-profit organization that is typically established by a single individual, family, or corporation. It is funded by a single source and is managed by a board of directors or trustees. Private foundations are subject to strict regulations and must distribute at least 5% of their assets annually to charitable organizations.

Benefits of a private foundation include:

• Control: The donor has complete control over the foundation’s assets and how they are distributed.
• Tax Deductions: Donors can receive tax deductions for contributions made to the foundation, subject to limitations. Potential elimination of long-term capital gains for donations of appreciated securities.
• Perpetuity: Private foundations can exist in perpetuity, allowing for long-term charitable giving.
• Ability to accept many types of assets, including in-kind assets.

However, there are also some limitations to private foundations:

• Tax Deduction Limitation: Tax deduction limited to 30% of Adjusted Gross Income for cash donations, and 20% of Adjusted Gross Income for long-term appreciated publicly traded assets. Additionally, contributions of non-public stock may be deductible only at cost rather than fair market value.
• Cost: Private foundations can be expensive to establish and maintain.
• Regulations: Private foundations are subject to strict regulations and must distribute at least 5% of their assets annually to charitable organizations.
• Lack of Anonymity: Private foundations are required to file annual tax returns, which are public records.

What is a donor-advised fund (DAF)?

A donor-advised fund (DAF) is a charitable giving account that is established by a public charity. Donors can contribute to the fund and recommend grants to other charities. DAFs are subject to fewer regulations than private foundations and are more cost-effective to establish and maintain.

Benefits of a DAF include:

• Tax Deductions: Donors can receive tax deductions for contributions made to the fund. Limits of Adjusted Gross Income increases to 60% for cash donations and 30% for publicly traded securities. Nonpublic stock may be deductible at fair market value.
• Simplicity: DAFs are easy to establish and maintain.
• Anonymity: Donors can remain anonymous when making contributions. No public disclosures are required.
• Cost: Relatively inexpensive to create.

However, there are also some limitations to DAFs:

• Lack of Control: Donors do not have control over the fund’s assets and how they are distributed.
• Limited Perpetuity: DAFs are not designed to exist in perpetuity.

In summary, private foundations and DAFs are both charitable giving opportunities that offer unique benefits and limitations. Private foundations offer more control and flexibility but are more expensive to establish and maintain. DAFs are more cost-effective and offer greater anonymity but provide less control and limited perpetuity. Both options offer tax benefits and can be used to support charitable causes.