Donor-Advised Funds Outperforming Family Foundations
Among the very wealthy, family foundations long have been a common vehicle for charitable giving. However, more families than ever are skipping foundations altogether in favor of simpler and cheaper donor-advised funds.
Credit the convenience factor, say industry executives. They are very operationally easy, says Sarah Libbey, president of Fidelity Charitable, which runs one of the nations largest donor-advised funds. "Theres no paperwork and everything is online."
The funds allow clients to move assets out of their estates immediately through tax-deductible charitable donations; the donors can then defer until later the process of deciding which charities will receive the funds.
For many clients, these funds avoid the work that family foundations entail, including running a board and engaging in audits, Libbey adds. Establishing a private foundation is a real commitment of time and fiduciary responsibility.
The number of donor-advised fund accounts has shown double-digit growth over the past five years, Libbey says. And in the first part of this year alone, Fidelity and Schwab clients combined have given more than $1.5 billion -- an all-time high -- through donor-advised funds.
The funds were also seen as an attractive option during last year's frenzy of estate planning and giving, which came amid widespread fear of tax increases and campaign-trail talk of capping charitable deductions. A rising stock market has also driven greater giving.
I actively discourage people from pursuing foundations unless they have a somewhat specific charitable intent and intend to commit at least $1 million, says planner and estate lawyer (and Financial Planning contributor) Martin Shenkman of Shenkman Law in Paramus, N.J., who says he regularly recommends donor-advised funds. The costs and administrative burdens for lower amounts are often not worthwhile.
The funds also make it easier for families to give anonymously. It is really tough to [give anonymously] with the kind of tax reporting required with family foundations, Libbey says. With donor-advised funds, donations can be made in the name of the funds, and not in the name of the family members gifting the money or assets.
By contrast, foundations are better suited to families with complex giving goals, says Joe Comeau, a Boston-based CPA and managing director of tax accounting firms WTAS. Comeau specializes in advising clients about family dynamics in the context of their tax planning.
He cites one example -- if, for example, you decide you want to run a summer camps for underprivileged kids so they can learn how to use computers, where you have to run a program or hire staff. ... Private foundations can be really important tools for that," Comeau says.
Donor-advised funds are better suited to "routine" charity work, he says. As an example, he cites one very wealthy client who put $10 million into a donor-advised fund, with plans to distribute the money over time to a particular ballet company. He doesnt want to give it to them all up front, he says. Over the next couple of years the ballet will get the $10 million from him. ... This is the practical way to deal with a gift.
For tax-planning purposes, some very wealthy families find it makes sense to have both a family foundation and a donor-advised fund. While federal tax laws permit people to deduct up to 50% of their annual income if it is donated to a public charity, Comeau says, clients can donate only 30% tax-free to private or family foundations. (Donor-advised funds are public charities.)
Now, some families are combining the two strategies by giving 30% of their income to their family foundation and another 20% to public charities, he says, for a total maximum allowable deduction of 50%.
They run in tandem, Comeau says of the two vehicles. If you are very charitably inclined, you want to maximize what you give away annually.
Comeau does offer one caution, however: Shop around. Not all donor-advised funds are created alike, he says, so make sure you're finding the best one for your clients. The good ones will let you designate family members in perpetuity to take over the undistributed funds, he says.