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Private foundations and donor-advised funds: Debunking three myths

Private foundations and donor-advised funds: Debunking three myths

If you’ve been involved with charitable giving for a few years, you’ve no doubt become familiar with both private foundations and donor-advised funds and their popularity as charitable giving tools. As is often the case with tax and estate planning-related topics, the differences between private foundations and donor-advised funds are sometimes the subject of confusion and misunderstanding.

As you work with your advisors and the team at The Community Foundation to establish your immediate and long-term charitable giving plans, take a few minutes to check out how to debunk these three common myths.

Myth #1: Donor-advised funds are all the same and only private foundations can be customized

Private foundations will always differ from donor-advised funds in important ways not only because of their status as separate legal entities and the deductibility rules for gifts to these entities, but also because of the opportunities to customize governance. But it is a mistake to think that a donor-advised fund is a cookie cutter vehicle. Indeed, “donor-advised fund” is simply a term used to specify the structure of a fund and its relationship with a sponsoring organization such as a community foundation. The donor-advised fund vehicle itself is extremely flexible.

  • Donor-advised funds are popular because they allow a donor to make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. The donor can recommend gifts to favorite charities from the fund when the time is right.
  • A donor-advised fund at The Community Foundation is frequently a more effective choice than a donor-advised fund offered through a brokerage firm. That’s because, at a community foundation, you and your family are part of a community of giving and have opportunities to collaborate with other donors who share similar interests.
  • The Community Foundation can work with you and your family on a charitable giving plan that extends for multiple future generations. That is because the team at The Community Foundation supports your family in strategic grant making, family philanthropy, and opportunities to gain deep knowledge about local issues and nonprofits making a difference.

As you explore the many opportunities to deepen your work with The Community Foundation, consider the unique mix of flexibility and services available to you and your family when you establish a donor-advised fund.

Myth #2: Deciding whether to establish a donor-advised fund or a private foundation mostly depends on size

The size of a donor-advised fund, like the size of a private foundation, is unlimited. The United States’ largest private foundations are valued well into the billions of dollars. (Information about private foundations, ironically, is not so private. The Internal Revenue Service provides public access to private foundations’ Form 990 tax returns. That is not the case for individual donor-advised funds.)

Similarly, donor-advised funds are not subject to an upper limit. Although information on the asset size of individual donor-advised funds is not publicly available, anecdotal information indicates that some donor-advised funds’ assets may total in the billions of dollars.

Indeed, a donor-advised fund of any size can be an effective alternative to a private foundation, thanks to fewer expenses to establish and maintain, maximum tax benefits (higher deductibility limitations and fair market valuation for contributing hard-to-value assets), no excise taxes, and confidentiality (including the ability to grant anonymously to charities).

The net-net here is that the decision whether to establish a donor-advised fund or a private foundation–or both–is much less of a function of size than it is other factors that are more closely tied to the objectives a donor is trying to achieve.

Myth #3: Donor-advised funds and private foundations are mutually exclusive

Many philanthropists and their advisors are aware of the many benefits of using both a donor-advised fund and a private foundation to accomplish their charitable goals. For example:

  • Donor-advised funds can help meet the need for anonymity in certain grants, which is typically difficult using a private foundation on its own.
  • A donor-advised fund can receive a family’s gifts of highly-appreciated, nonmarketable assets such as closely-held stock and real estate, and benefit from favorable tax deduction rules not available for gifts to a private foundation.
  • An integrated donor-advised fund and private foundation approach can help a family balance and diversify its investment and distribution strategies to ensure that giving to important causes remains steady even in market downturns.

Some private foundations are even considering transferring their assets to a donor-advised fund to carry on the foundation’s mission. Terminating a private foundation and consolidating giving through a donor-advised fund is sometimes the best alternative for a family when the day-to-day management and administration of the private foundation has become more time-consuming than expected and is taking time and focus away from nonprofits, the community, and making grants. In addition, some families find that the tax rules related to investments, distributions, and “self-dealing” have become harder to navigate and are perhaps even preventing the family from maximizing tax benefits of charitable giving. Finally, the administrative load of managing a private foundation sometimes becomes overwhelming, especially if the family members who handled these functions initially have retired, passed away, or simply become busy with other projects.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Go further with your charitable giving

Go further with your charitable giving

Many donors are exploring how to help the victims of the earthquakes in Turkey and Syria. The team at The Community Foundation is happy to help you balance your desire to meet the most critical needs in our local community while also supporting international relief efforts. Please reach out anytime. Our team is also happy to share insights about what’s trending in philanthropy overall, including best practices in disaster giving. We are here to help you achieve your short-term and long-term charitable goals and work with you and your advisors to do so in the most tax-effective manner.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Hidden no more: Designated funds and field-of-interest funds

Hidden no more: Designated funds and field-of-interest funds

Most attorneys, accountants, and financial advisors are well-aware of donor-advised funds and the reasons behind their popularity. Especially when a donor-advised fund is established at The Community Foundation, this vehicle is an excellent way for your clients to organize their charitable giving and get even more connected to the causes they care about.

Enter the Qualified Charitable Distribution

Your clients can give nearly any type of asset to a donor-advised fund at The Community Foundation. A notable exception, though, is the Qualified Charitable Distribution (QCD). A QCD allows a taxpayer 70 ½ or older to make a direct transfer of up to $100,000 annually from an IRA to a qualifying charity. A donor-advised fund is not considered to be a qualifying charity.

Although donor-advised funds cannot accept QCDs, The Community Foundation offers other types of funds that can accept QCDs. For example, designated funds and field-of-interest funds held at The Community Foundation are ideal recipients of QCD transfers. These fund types are often overlooked, despite the high value they can deliver to your client and to the community.

What is a field-of-interest fund?

The Council on Foundations defines a “field of interest fund” as, “A fund held by a community foundation that is used for a specific charitable purpose such as education or health research.” Perhaps your client is passionate about rare-disease solutions, feeding the food insecure or preserving works of art, for example. Your client selects the name of the fund (family, cause-related or even nondescript) and then, the knowledgeable team at The Community Foundation distributes grants from the field-of-interest fund in a way that is aligned with your client’s values and charitable wishes outlined in the fund documentation.

What is a designated fund?

Designated funds are defined as, “A type of restricted fund in which the fund beneficiaries are specified by the grantors.” These are a good choice for a client who knows they want to support a particular charity or charities for multiple years. The client names the fund and The Community Foundation fulfills the distributions. Made over time, these funds can help the charity’s or charities’ cash flow planning. Distributions are aligned with your client’s wishes set forth in the original fund document.

QCD reminders

For the client aged 70 ½ through 72, a QCD removes funds from an IRA before the client reaches the age-73 threshold for Required Minimum Distributions (RMDs). This can lessen the eventual income tax hit that accompanies RMDs. And for RMD-applicable clients, the QCD counts toward their RMD. In both cases, the QCD transfers do not fall into the client’s taxable income.

QCDs are even more popular now that the $100,000 cap will be indexed for inflation under the new laws. Also, under the new laws, a one-time, $50,000 distribution to a charitable remainder trust or charitable gift annuity is now permitted.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Evaluating options for focusing your philanthropy

Evaluating options for focusing your philanthropy

If you’ve been giving to favorite charities for many years, it will not surprise you to learn that most donors are interested in deepening and focusing their impact as they maintain the frequent and total amount of giving.

Focusing on impact is hard, but it’s easier when you work with The Community Foundation and follow best practices for making grants to favorite causes. The Community Foundation’s expertise can be invaluable to you and your family as you pursue your charitable goals.

Here are three suggestions for refining your giving strategies to support your favorite causes.

Educate yourself. 

Learn about best practices that are emerging in the growing field of philanthropy. You can discover various philosophies that can drive charitable giving and gain insights from examples of what other philanthropists report has worked well and not so well. Working with The Community Foundation team is an excellent way to gain access to the most up-to-date research and resources on making an impact, including ways to make decisions with your partner or involve your family.

Follow your heart.

Your charitable giving is going to be most effective when you support the causes you truly care about. You’ll be more committed and better able to focus on impact if you experience the psychological rewards of providing financial support to organizations that align with your personal beliefs about how quality of life can improve for people in the community.

Seek information.

Information about nonprofit organizations is widely available to you through several online sources, including being able to access nonprofit organizations’ tax returns to see detailed financial data. As you do your online research, consult the team at The Community Foundation. We are happy to interpret the information available online and provide important context for the meaning of that information as it relates to the actual work of the nonprofit organization and the ways you are supporting it.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Disaster giving: Perspectives for your clients

Disaster giving: Perspectives for your clients

Both the recent one-year anniversary of the start of the Ukraine conflict and the earthquake that has devastated Turkey and Syria are causing more and more people to explore ways they can help. In an era of abundant giving methods and (sadly) potential fraud, The Community Foundation is a source of reliability and expediency to help your clients act on their charitable instincts.

Disaster giving frequently takes the form of a wide-ranging response, given that disasters can occur suddenly or over time, domestically and internationally. The damage can be heart-wrenching, such as loss of life and property destruction, or health-related, like Covid that has swept the globe. The urge to help is often immediate.

There are many viable options for your clients to activate their generosity toward relief efforts, but there are also caveats. While global disaster giving is important, it is also important for clients to stay tuned to the most critical needs right here in our community. Although these critical needs do not always take the form of a time-bound disaster, the impact of ongoing crises such as low access to health care and poverty can be quite damaging over the long term.

 

What is disaster giving?

Although challenging to pinpoint holistically, what’s typically referred to as “disaster giving” is perhaps best thought of as a subset of what has been a robust philanthropic climate in recent years. In 2021, Americans’ charitable giving reported by Giving USA was up 4% over 2020 to nearly $485 billion. Certainly the strong percentage increases in the categories of Human Service, Public-Society Benefit (up 23%, the second-highest percentage gain) and Health all likely involved Covid-related concerns and sentiments.

An emerging area of challenge may be annual giving to international affairs, which declined approximately 5% from 2019 to 2021, finishing at $27.4 billion. Of course, these figures could change for 2022 when accounting for aid to Ukraine (and in future reports, to Turkey and Syria). As context, through February 2023, U.S. government aid to Ukraine has exceeded $75 billion, including 40% for humanitarian and financial purposes and the remainder for the military. Philanthropy also contributed to humanitarian needs; the 10 largest private donations, led by Microsoft, totaled more than $1.2 billion.

 

How The Community Foundation can help

The Community Foundation can help your clients fulfill their giving instincts by acting as a secure, knowledgeable, and trustworthy facilitator. Our team personally knows–and regularly vets–hundreds of charities every year, and we can help you and your clients navigate the options for both local and international giving.

Frequently, a donor-advised fund at The Community Foundation will be a suitable giving vehicle for your clients. Our team can help connect your clients to the causes they care about by identifying the most effective organizations addressing the critical needs both locally and globally in your clients’ areas of interest. Working with The Community Foundation also helps your clients secure robust tax planning benefits that can be missed when a client gives to charity on an impulse.

Finally, The Community Foundation can help your clients steer clear of scams perpetrated via familiar-looking but sham websites and QR codes, both of which proliferate during highly emotional or threatening times surrounding a disaster. While your clients may be tempted to make a gift online or by phone out of compassion in response to a verbal solicitation or a news story, remind them that The Community Foundation has much to offer—safely, securely and advantageously—when it’s time to make impactful humanitarian gifts both here and abroad.

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

In the news: Billionaire givers, QCDs, and celebrity inspiration

In the news: Billionaire givers, QCDs, and celebrity inspiration

This month, we’re offering three suggestions for deeper reading on current topics in charitable giving.

Bring out your inner academic with this blog post published by the Lilly Family School of Philanthropy at Indiana University, especially if you’re interested in the latest chatter and variety of opinions on so-called “billionaire philanthropy.”

If you’re contemplating charitable giving in your retirement years, read this Kiplinger article to brush up on the Qualified Charitable Distribution (QCD), recently enhanced by late-2022 legislation. We totally understand that the first (and second, and third) time you read about QCDs, your eyes may glaze over, but the concept really is worth understanding. Contact the team at The Community Foundation. We are happy to break it down for you!

Finally, it can be reassuring to see high-profile individuals (Idris and Sabrina Dhowre Elba, for example) speaking up about their philanthropic values. In a world where so much needs to be done to improve lives and respect humanity, role models offer hope that philanthropy and community involvement can be important factors in progress.

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

In case you missed it: Three tax tips worth smiling about

In case you missed it: Three tax tips worth smiling about

Energy incentive extends to nonprofit organizations

Nonprofits and other exempt entities are often left out of discussions when new tax incentives are proposed in Congress, primarily (and logically) because these organizations don’t pay tax. Fortunately, nonprofits are not left out of a recently enhanced tax provision known as the 179D deduction, which is intended to encourage incorporating energy efficiency measures into new or renovated buildings. While a nonprofit itself can’t use the deduction, of course, because it does not pay taxes, this incentive is still valuable because the nonprofit can transfer the deduction to the architect or engineer on the project who then uses the deduction.

The takeaway here? If you represent nonprofit executives or board members at organizations that have undertaken capital projects (universities, for example), you’ll want to be aware of this potential benefit, in addition to keeping up in general on sometimes tricky tax rules related to exempt entities.

This again? More crypto crack down

The ups and downs (and downs) of cryptocurrency continue! If your clients are involved in the cryptocurrency market, and especially if they are contemplating giving these assets to support charitable endeavors, be aware that the IRS continues to formalize its guidance and requirements for a qualified appraisal. Recently, the IRS confirmed that an appraisal is required to claim a deduction of $5,000 or above for a gift of cryptocurrency.

A must-know: Reviewing the QCD

You’ll recall the buzz at the end of 2022 when Congress passed sweeping omnibus legislation that included a version of the long-awaited Legacy IRA provisions that expand a tool called the Qualified Charitable Distribution, or QCD. A QCD is a financially-savvy way for your clients to support the charities they care about.

As a reminder, if your client has reached the age of 70 ½, the client may be eligible to make annual distributions of up to $100,000 from IRAs directly to an unrestricted or field-of-interest fund at the community foundation or other qualifying public charity. QCD transfers count toward satisfying clients’ Required Minimum Distributions and therefore avoid the income tax on those funds. Plus, distributed assets are no longer part of a client’s estate at death, which avoids estate taxes, too. The new law expands the QCD rules to allow for a one-time, $50,000 QCD to a split-interest vehicle, such as a charitable gift annuity or charitable remainder trust, as well as indexing the QCD cap for inflation in future years.

Punchlist: What the IRS may be up to in 2023

Advisors of philanthropic clients are keeping an eye on the IRS’s list of priorities for the fiscal year, which includes a focus on several sections of the Internal Revenue Code that impact charitable giving. The team at The Community Foundation is also watching closely, and, as always, we’ll keep you posted as issues bubble up that may lead to potential charitable giving-related legislation.

 

The team at The Community Foundation is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as a secondary source as you manage the primary relationship with your clients. This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.  

It’s not too early for spring cleaning: Make this the year to help clients get organized

It’s not too early for spring cleaning: Make this the year to help clients get organized

If you’re already dreading asking your clients to pull together their receipts and other documents for 2022 tax filings, this may be a good time to take proactive steps to avoid being in this same spot next year.

When it comes to charitable giving, your clients may find that organizing their giving through one or more funds at The Community Foundation will make their lives easier. Establishing a fund at The Community Foundation is an easy way to organize and track charitable giving. A client can take advantage of this feature by making a single, tax-deductible contribution each year to The Community Foundation, to be added to their donor-advised, field of interest, or other type of fund.

An especially tax-savvy technique is for the client to make this contribution using highly-appreciated stock. After the stock has been transferred to The Community Foundation, the proceeds from The Foundation’s sale of the stock–free from capital gains tax–are then used for distributions to support your client’s favorite charities. No matter how many different charities receive support from the fund, the client still has just one receipt to keep track of charitable donations for income tax deduction purposes.

The subject of gathering up tax receipts for charitable donations is often a prompt for clients to get organized with the rest of their financial lives, too. At the very least, the subject of charitable giving can pave the way for a discussion about the basics of estate planning. Many clients are simply not aware of the meaning and importance of critical elements, such as:

–The difference between a will and a living trust and how charitable wishes fit in to these documents

–Why it’s critical to be intentional about how each and every asset is titled so that the assets actually pass as intended (which requires making a comprehensive list of assets in the first place)

–The dangers of hurriedly filling out life insurance and retirement plan beneficiary designations and why these documents are absolutely critical components of a financial, estate, and charitable plan

–Reasons for having both a “living will” and a durable power of attorney, both of which (or the lack thereof) have a major impact in the event of incapacity

–A reminder to make sure someone in the family knows where to find a list of logins and passwords

Charitable planning is one of many steps in your work with clients, but it can be an excellent catalyst for helping clients understand why they need that comprehensive estate and financial plan you’ve been encouraging them to complete. The team at The Community Foundation is happy to help with the charitable components of your service to clients. We look forward to making it easier for you to address all of your clients’ needs.

The team at The Community Foundation is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as a secondary source as you manage the primary relationship with your clients.

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.  

Community foundations: Unparalleled resources

Community foundations: Unparalleled resources for local giving with major impact 

As economic times get tough, more and more people are asking how they can make the biggest difference right in their own backyard. Indeed, local giving is a topic that has even made its way into the opinions of the mainstream media, causing many charitably-inclined people to pay more attention to the impact their dollars are having on the causes they love.

Sometimes the greatest needs really are right here at home. As donors explore charitable giving opportunities and receive requests for funding from charities near and far, it can be helpful to read first-hand accounts of why other philanthropists have been so inspired by uncovering local needs that they simply were not aware of.

Over the years, researchers have consistently validated the important emotional elements of giving to familiar and nearby organizations to foster the rewarding sense of connection that is such an important driver of repeat philanthropic behaviors. Today’s donors want to be able to actually see the results of charitable investments.

Here are three suggestions for anyone who wants to get started on a “give local” journey.

First, scan the local news. Many people are very accustomed to scrolling the news feeds on phones and catching the national and international headlines. Local news can be hard to find, but those outlets do still exist! In particular, many television stations’ websites include a local news tab. Spend five minutes scrolling through the local news for three days in a row, and you might be surprised at how much you learn about your own community. Make a mental note of issues that raise your eyebrows or make you ask yourself “I hope someone is doing something about that.”

Second, with this research in hand, run a few quick Google searches with the key words you’ve identified, along with the terms “nonprofit,” “charity,” and the name of your town or city. Sometimes these searches will illuminate organizations you might have heard of or even be involved with already. At the very least, you will begin to frame your own description of the local causes you care about.

Third, reach out to the team at The Community Foundation. The Community Foundation’s mission is to improve the quality of life in our region, and that is possible through the work of nonprofit organizations and people like you who support them. The Community Foundation team will know which nonprofits are addressing the issues you’d like to learn more about and can provide advice about how your charitable dollar can make the greatest possible difference.

The Community Foundation is unparalleled in its ability to be flexible and responsive, providing outstanding, personal service designed around your needs while at the same time working closely with legal, tax, and wealth advisors to ensure that you are maximizing the financial elements of your charitable giving plan.

We look forward to working with you to make as big a difference as possible in the causes you love and make our community an even better place for everyone.

Valuable conversations: Why it’s smart to talk with your clients about charitable giving

Valuable conversations: Why it’s smart to talk with your clients about charitable giving

January is a good time to start helping your clients plan for their annual giving. With the year-end flurry of donations still fresh in many clients’ minds, you may discover that clients will welcome your suggestion to make 2023 the year to get organized early, particularly as economic headwinds make planning especially important.

A conversation that benefits everyone

Among the many benefits of discussing charitable giving with your clients is that your clients will see you as an expert about local community needs and nonprofits, especially when you have a close working relationship with TCFHR team. Your philanthropic clients want to learn how they can make a difference through their charitable activities, and they are expecting their advisors to be ready to help them structure and plan their giving. Indeed, for years, research has shown that a proactive advisor who offers options for incorporating philanthropy into financial and estate plans inspires client loyalty, even across client generations.

The Community Foundation advantage

Advisors frequently comment that they’re surprised to discover the many ways The Community Foundation can help their clients, especially compared with national donor-advised fund programs affiliated with brokerage houses or financial services firms.

Sometimes the greatest needs really are right here at home, and working with TCFHR is often the very best option for ensuring that your clients are informed and impactful philanthropists. The team at TCFHR works with local nonprofits every single day and thoroughly understands how organizations are meeting community needs.

In addition, TCFHR is unparalleled in its ability to be flexible and responsive, providing outstanding, personal service designed around your clients’ needs while always respecting your role as your client’s primary advisor.

Options for every client’s unique situation

Our team welcomes the opportunity to work with you and your clients to implement their charitable giving goals. Here are just a few of the ways we can work with you as you plan for 2023:

Wills and trusts

A client can establish a bequest to a fund at TCFHR through a will or trust or through a beneficiary designation on a qualified retirement plan or life insurance policy. TCFHR will provide proper bequest language.

Retirement plan beneficiary designations

Bequests of qualified retirement plans can be extremely tax efficient. Funds flowing directly to a client’s fund at TCFHR from a retirement plan after the client’s death will not be subject to income tax or estate tax.

Family philanthropy

Consider encouraging clients to involve their children and grandchildren in philanthropy, especially when the clients are working with TCFHR through a family donor-advised fund or other collaborative vehicle.

Income tax planning

Remind clients that they are eligible for an income tax deduction for lifetime charitable gifts, and the gifted assets are no longer subject to future estate taxes.

Complex giving

Consider more complex giving vehicles, including charitable remainder trusts, charitable gift annuities, and gifts of closely-held stock. TCFHR can work with you to establish these structures to help facilitate your clients’ charitable giving goals and meet the clients’ financial and tax goals at the same time.

We look forward to working with you in 2023! 540-432-3863

The team at TCFHR is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as a secondary source as you manage the primary relationship with your clients. This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.