If You Have the World to Give

September 01, 2021 By Glenn M. Guard, CFA, Relationship Manager
Dad hands the world to their child. West Financial Services.

Have you ever wondered how much wealth is enough? You’ve crunched the numbers and are comfortable that you and your family are going to be well cared for, financially speaking, with the potential for excess wealth. And if so, did you start to consider how you might use that wealth to help make the world a better place? Contributing to individual causes or charities is a great first start, but it takes time and the follow up calls for even more contributions can get frustrating, especially if you are regularly donating.

There is much to consider and it can get really confusing. Basically you have four options: 1) donate to charities from your existing accounts, 2) contribute to a donor-advised fund, 3) create a private foundation, or 4) create a public charity. Each has its own advantages and disadvantages. The options vary in complexity and have different structural, tax, and legal issues. Most people stick with private foundations and/or donor-advised funds — starting a public charity is a huge undertaking (think Salvation Army).

A private foundation is an IRS-registered 501(c)(3) tax-exempt legal entity governed by its own set of bylaws and articles of incorporation. You are free to set it up in a variety of different ways — as a private operating foundation, an exempt operating foundation or a grant-making foundation, for example. You are firmly in control of how to run the foundation, who sits on the board, who receives funds, and when that occurs. There are, of course, the tax advantages. For instance, by donating low-cost-basis stock to a foundation, you get an immediate tax deduction for the full market value up to 20% of Adjusted Gross Income (AGI). Once the foundation owns the donated stock, it can sell the shares without owing capital gains. Finally, a private foundation may exist in perpetuity, giving you an opportunity to involve the next generation in your charitable intent.

That said, there’s some work that needs to get done, first. Tax-exempt organizations are subject to strict regulations and it’s best to hire professionals to help with the organizing documents and necessary filings.

Setting up the foundation is just the first step, after which you need to be aware of the various rules and regulations to follow. For example, there are restrictions on self-dealing, requirements to annually distribute income for charitable purposes, limits on holdings in private businesses, and provisions that investments are appropriate for meeting the charitable intent that creates the exemption and that expenses likewise support the charitable intent. State law may require the foundation to have bylaws, and it is advisable to have internal operating rules to maintain compliance with all current laws/regulations. Filing requirements with the IRS and state are numerous, and, of course, you need to manage the investment funds. In short — private foundations can be a lot of work, and can cost a lot of money to set up and run effectively. This is not a do-it-yourself operation, you will want to enlist professional help in the form of a good accountant, lawyer, and financial advisor.

In contrast, donor-advised funds are a relatively easy way to accomplish much of the same charitable results. A donor-advised fund is an account within an already-established public charity (ex. other foundation, university, financial institution). Similar to the private foundation, you can contribute cash or securities to the fund and get an immediate tax deduction, up to a certain percentage of AGI, with a five-year carry forward. The assets grow tax-free in the account and the charity can sell shares without capital gains tax implications. You are free to recommend donations from the account to pretty much any IRS-qualified public charity. For the most part, clients have been able to make any donations they want. However, technically, the sponsoring organization has the authority to accept or reject grant recommendations. Also your investment options are limited to sponsor-approved investments, unless the account is large enough to meet the threshold for advisor-managed options. And the donor-advised funds only allow one, possibly two, generations of successors, after which the family’s charitable legacy ends.

As my WFS colleague Cheryl Langston detailed in her article earlier this year, there’s a lot to think about when you’re ready to give back. Feel free to reach out to your relationship manager to discuss charitable gifting options to see what works best for you to meet your philanthropic goals.

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