By: Mike Peterson
Charitable intentions? We often hear from clients thinking about setting up a private foundation to dedicate part of their estate to charitable intentions, while not earmarking it at this time to a particular charity or charitable activity. Sometimes it’s for a particular and timely need, like a friend’s child who needs a transplant or the families of shooting victims, still fresh in our minds from July 7.
Clients want to know their options and what issues they face with respect to those options. First of all, there are many charities out there doing good work and often you can find one that will understand your charitable goals and agree to use your funds to accomplish those goals. Scholarship funds at your alma mater are quick and easy and most educational organizations are willing and able to help you set those up. You don’t need anything more complicated if that is your goal. But what if your goal was more universal—you want to provide scholarships to students who are the first in their family to attend college, at whatever school they choose to attend. There may not be an existing charity set up to accomplish your goals. What are your options?
First, you could establish a charity to accomplish your goals. Second, you could establish a “donor-advised” fund at a local charity like the Communities Foundation or Dallas Foundation, or at a brokerage house like Fidelity Investments. You would then notify educational institutions of the availability of the funds for your stated purpose and direct funds to educational institutions that apply or otherwise advise you they are making scholarships available to first in family students. Third, you can just make gifts from time to time to individuals or educational institutions that further your charitable purpose. Each of those approaches has some benefit, but each carries some issues.
For instance, direct grants to individuals likely won’t get you a charitable contribution deduction and the grants will end at your death, unless you choose one of the other options at your death. If you establish a charity, but will not raise funds from others to accomplish your charitable goals, you may have to be a private foundation under Section 509 of the Internal Revenue Code. Due to perceived abuses, private foundations are subject to more restrictive rules than “public” charities and Code sections 4940-4948 apply. Those sections impose an excise tax on most private foundations, restrict dealings between the private foundations and donors and controlling persons of the private foundation, require minimum distributions of private foundation funds and limit the investment options of the private foundation, among other things. Private foundations also have lower contribution limits for income tax deductions. Private foundations are thus complicated and more difficult for a private individual to properly manage, so there are significant overhead costs that may take some of the funds you intend for a charitable purpose.
Establishing a “public” charity has similar problems even though it is not subject to many of the restrictions on private foundations. There is still overhead associated with the organization whether it is a non-profit corporation, trust or unincorporated entity. In addition to formation, the organization needs to raise funds for its charitable purpose and either staff or significant time commitments are needed to carry out the entity’s purpose. Unless you can find other like-minded individuals, it may simply not be feasible without a very large gift to continue the “public” charity into the future.
Donor-advised funds may solve some of the above problems, as your gift is to a “public” charity, managed by others, but gifts are subject to that organization’s approval. They are set up to help you meet your charitable goals, but occasionally they disagree with you regarding your specific request and are not obligated to make it in that event. Also, since they handle the overhead, there is a charge by that entity for providing the service. That charge varies depending on the charity involved. Some are able to be a big help in finding the right beneficiary of your gift, others leave that totally up to you. I suggest you talk to several of them regarding your intentions before deciding to go forward with a “public” charity or a “private foundation.”