Q. We don’t have tons of money, but we have enough to allow us to maintain a comfortable lifestyle in our retirement. Our children all seem to be doing fine financially, and we have funded 529 plans for all of our grandchildren. Now we are thinking about setting up a private charitable foundation as a way to give back to the community. It’s our understanding that this could also be a good way to involve our children in the gifting decisions and a way to leave, if you will, a legacy. Is there a certain amount of money where setting up a foundation does or doesn’t make sense?
A. There is not a rule of thumb regarding the amount of money to establish a private foundation. Some articles I’ve read regarding this question about private foundations have stated amounts, but the range is very broad. The minimum I’ve seen suggested is $250,000, but some suggest alternatives until the invested amount is greater than $10 million. You may want to familiarize yourselves with donor-advised funds (DAF) and compare the similarities and differences between them and private foundations (PF). The following comparisons should be helpful.
Startup and funding can be almost immediate with a DAF whereas a PF can take several weeks or months to get set up and funded. There are no start-up costs associated with a DAF. Startup costs for a PF can be rather high; expect to spend at least $4,500 to set up a PF. Ongoing administrative fees will be higher for a PF than a DAF. PFs offer more latitude to pursue almost any activity, as long as it is charitable. With a PF you can even run your own charitable event, such as a coat or food drive for the needy. You can’t do that with a DAF. Grants from DAFs are more limited and you can only recommend grant recipients. The DAF will verify that the charitable organization is eligible to receive the grant. But even if eligible, there is a possibility that the organization you recommend could be denied by the DAF.
With a PF you can use the assets for a wide range of administrative expenses. These could include reimbursement for travel, office space and payment to family members serving as directors or foundation staff. Covering these expenses is not available with a DAF.
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Tax deduction limits are higher for contributions to a DAF than to a PF because they are treated as donations to a public charity versus private. The tax deduction for contributions of cash to a DAF are limited to 50 percent of the donor’s adjusted gross income; for a PF the limit is 30 percent. For contributions of stocks or real property to a DAF the tax deduction is limited to 30 percent of adjusted gross income while the same type of contribution to a PF is limited to 20 percent.
A PF must distribute 5 percent of net assets annually, regardless of how much the assets earn. A DAF has no such requirement. PFs must file detailed tax returns on grants which will include investment fees, trustee names, staff salaries and other information – all of which will be available to the public. DAFs offer more privacy because there are no public filings. If desired, a grant from a DAF can even be made anonymously.
A discussion with your tax professional as to which gifting vehicle would be best for your personal situation is advised.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624