Does your client need a private foundation?
The recent oil boom in North Dakota has created thousands of millionaires. Among those are some who want to give back to their communities, says Paul Jarvis, a CFP who is managing director for United Capital in Fargo, N.D..
"A lot of people want to give, but haven't found a way to really align their values with their capital to have maximum impact in their community," says Jarvis, who is working with a client's foundation to ensure its charitable giving is in line with the client's values.
While the number of donor-advised funds has surged over the past few years, advisors such as Jarvis say a private foundation sometimes just makes more sense.
In other cases, donor-advised funds are being used to complement a private foundation.
Chris Carnal, head of fundraising at Fidelity Charitable, said advisors and clients are "more often recognizing giving vehicles can work together to maximize tax savings and best suit the donor's giving goals."
Perhaps the biggest advantage of a private foundation is that donors enjoy more flexibility and control over their assets and grants than they would if they gave through a donor-advised fund. However, some donor-advised funds, such as the American Endowment Foundation and others, are now allowing donors to have a bigger say in how assets are managed.
Foundations may also make hardship grants, which are not possible through donor-advised funds. And with IRS approval, clients with private foundations can select individual scholarship recipients -- a decision that is made by a scholarship committee at a donor-advised fund.
Foundations can also be used to create a family legacy, says James J. Raaf, managing director of Chicago-based Andersen Tax, which advises on charitable giving from an income and estate tax perspective. "The family can then contribute to charitable endeavors it wants to support."
Of course, there are drawbacks, starting with startup expenses that can range from a few thousand dollars to tens of thousands, depending on complexity. Ongoing legal and other fees can also be substantial with a foundation.
And, on balance, tax benefits are usually less with a foundation than with a donor-advised fund, says Henry Berman, the CEO of Washington, D.C.-based Exponent Philanthropy -- the largest U.S. philanthropic support member organization.
Foundations are required to be much more transparent in their filings than donor-advised fund, making it easier to understand a foundation's activities -- "including to which charities it gives grants and the amounts," says Donald Greene, national philanthropic strategy and product executive for U.S. Trust.
The flip side of this is that donors have less privacy with a foundation than with a donor-advised fund, and can find themselves the targets of unsolicited requests for funding.
At Merrill Lynch and U.S. Trust, both units of Bank of America, private foundations are created for donors intending to put in at least $5 million in assets into the foundation, says Greene. "Below $5 million, often the administrative costs and the required ongoing administration to run the foundation is not worth the benefits," he says.
Bruce W. Fraser is a New York financial writer and contributor to Financial Planning.