Charitable Giving Vehicles: How to Make a Difference in the Community

Philanthropy is a great way to make a positive impact on your community, and there are many ways you can make a difference. Legacy Trust can help you navigate and select from these options, and help you administer them successfully.

For many, the first charitable vehicle that comes to mind is a private foundation. Private foundations allow philanthropic families to enjoy multiple benefits. First, the family can define the charitable mission for the foundation and enjoy giving to the community in a way that carries out their values. Second, families often use the foundation as a hub to foster interaction among family members, and to provide education for the upcoming generations of children and grandchildren. Foundations require substantial administrative work, and therefore require an ongoing investment of time and human capital, beyond the financial donation made to fund the foundation. Legacy Trust helps families with this administrative burden by acting as an agent and investment advisor for Foundations.

To function well, foundations need fully engaged board members who can join together and take common action such as selecting grantees and overseeing the investment portfolio. Foundations must be careful to operate in accordance with the tax rules. One rule is that the foundation must distribute at least five percent of its assets to grantees each year, which requires the board to identify and agree on the grantees and the amounts. Another restriction is the self-dealing rules, which affect many aspects of foundation management such as its office lease and the types of meeting expenses it can cover. Because of the substantial administrative burden, a rule of thumb is that a family might consider setting up a private foundation if they wish to fund it with at least $20.0 million in assets.

Another vehicle for managing charitable gifts is a donor-advised fund (DAF). An individual or organization can establish a donor-advised fund at a financial institution, or through a community foundation. Setting up the account online through a financial institution can be quick and easy, both for setup and ongoing administration. When you are ready to send funds to a charitable recipient, you simply sign into your account and enter the name of the organization and the amount to send. The fees for a DAF at a financial institution may also be relatively low. On the other hand, if you decide to establish a DAF through a community foundation, the community foundation may provide additional support in understanding and selecting nonprofits in the community who may work on the causes you care about. If you are not familiar with the organizations in your area, or you would like assistance in learning how to properly vet potential charitable recipients, the community foundation may offer education and personal introductions. The community foundation may provide the opportunity to attend events and join the community of local donors.  Another attractive aspect of donor-advised funds is that they provide a simple tax reporting document that you can use or provide to your accountant when preparing your taxes each year. A donor-advised fund can easily be directed by one individual, or a group of two or three people, with minimal administrative burden.

Finally, a third type of charitable vehicle is a charitable trust. There are two types of charitable trusts: Charitable lead trusts (CLTs) and charitable remainder trusts (CRTs). Charitable lead trusts provide funds to the charity for a period of time, and when the trust terminates after a period of years or a certain event, the remainder passes to your named beneficiaries. Charitable remainder trusts work in the opposite order: your named beneficiaries receive regular distributions for a period of time, and at termination, the remainder of the funds pass to charity.

Whether you choose to give through a foundation, donor-advised fund, or charitable trust, you may be eligible to receive an immediate income tax deduction for the year or years in which you deposit funds into the charitable vehicle. The timing of the tax deduction is based on the time at which you transfer funds into the account (whether it’s a DAF, foundation, or charitable trust), not on the time at which funds are distributed out to the charities.

There is a range of charitable vehicles available for individuals and families to carry out their philanthropic goals. Legacy Trust understands the importance of philanthropy and is committed to helping you navigate these charitable options to support the causes that are meaningful to you.