Consider all of your alternatives before starting a foundation - Rodgers & Associates
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Consider all of your alternatives before starting a foundation

The Clinton Foundation has been in the news lately. The former President of the United States, William J. Clinton, started the foundation in 1997. It is the nonprofit corpo­ration used by Bill and Hillary Clinton for most of their chari­table donations. Tax returns released by the Clintons recently show they donated $14.8 million to their foundation between 2007 and 2014.

Creating a foundation can be very rewarding but it requires much more than financial support. There is an important distinction between operating and non-operating founda­tions.

For example, the Clinton Foundation is an operating foundation. An operating foundation imple­ments programs rather than awarding funds exclu­sively through grant-making. Many founda­tions are non-operating and seek to make their intended social impact through awarding grants.

A foundation can be a powerful vehicle for driving social change. However, before you take on the huge respon­si­bility, you should consider alter­na­tives that could reach your goals without the formality and expense of estab­lishing a foundation.

What is a Donor Advised Fund (DAF)?

A DAF is a type of account that is set up to receive donated assets, such as cash, stocks, and real estate. The donor takes a tax deduction in the year the gift is made (up to certain IRS limits). Later, the donor can direct a grant from the DAF to a nonprofit.

Essen­tially, the donor can give multiple grants over time to different organi­za­tions. Contri­bu­tions to the DAF will grow tax-free until distributed. DAFs are a giving vehicle that offers many of the benefits of a foundation without some of the more compli­cated require­ments. These funds are often run through community founda­tions, financial insti­tu­tions, or independent nonprofits.

What is an Endowment?

An endowment fund is an investment fund estab­lished to make consistent withdrawals from invested capital. Endowment funds are often used by univer­sities, nonprofit organi­za­tions, churches, and hospitals to fund specific needs like schol­ar­ships for a university. Endowment funds are typically funded entirely by donations that are tax deductible for the donors.

What are Charitable Trusts?

A chari­table trust holds a donor’s gifted assets for a specified period of time. There are two basic types of chari­table trusts – remainder trusts (CRT) and lead trusts (CLT).

  • A CRT is an irrev­o­cable trust that provides for a specified amount of income, paid at least annually, to at least one person for a period specified in the trust, with the remaining balance paid to at least one chari­table benefi­ciary. CRTs are typically set up to pay over the life expectancy of the donor and can be desig­nated to pay over a joint life expectancy. The donor can fund the trust with highly appre­ciated assets and avoid paying capital gains tax on the sale. The donor receives a partial tax deduction for the value of the assets donated to the trust. The amount of the deduction is based on the value of the assets donated to the trust minus the estimated value of the income stream.
  • A CLT does basically the same thing as a CRT when you reverse the donor and the chari­table benefi­ciary. The CLT provides income payments to one or more chari­table benefi­ciaries for a period of time measured by a fixed term of years, the lives of one or more individuals, or joint life expectancy.  At the end of the term, the trust assets are paid to either the donor or to one or more of their heirs named in the trust.  Unlike a CRT, income earned in the trust is not neces­sarily tax exempt.  Chari­table deduc­tions are also complex and will depend on the terms of the trust.  An estate attorney should be consulted to determine if this type of trust is appro­priate.

Look for An Already Existing Nonprofit First

There may already be a nonprofit in existence that could accom­plish many of your chari­table goals. You could avoid the start-up costs and the admin­is­trative burdens of estab­lishing a foundation leaving more of your funds available to accom­plish your mission.

You may be able to collab­orate with an existing nonprofit that has a compa­rable mission even if it does not exactly address your area of concern. The nonprofit may be receptive to imple­menting and operating a new program.

What are Qualified Charitable Distributions (QCD)?

A QCD allows individuals over age 70½ to directly transfer up to $100,000 from their IRA account to one or more charities. This transfer counts toward the required minimum distri­b­ution rule for IRA accounts, but it doesn’t add to the taxpayer’s adjusted gross income. Anyone with an IRA meeting the age requirement can essen­tially use their IRA as a chari­table grant making fund. Donations can only be made to IRS recog­nized non-profits and the total annual grants cannot exceed $100,000.

A foundation can be a powerful entity to support chari­table activ­ities and provide a family legacy for years to come. They are more flexible than some of the alter­na­tives but that flexi­bility comes with added admin­is­trative burdens and costs. Before setting up a foundation, it is prudent to consider the alter­na­tives.

Rick’s Tips:

  • A foundation is an entity that supports chari­table activ­ities by making grants to unrelated organi­za­tions.
  • Most founda­tions are non-operating and primarily engage in grant making. Operating founda­tions engage in their own direct chari­table activ­ities or programs.
  • Collab­o­rating with an existing nonprofit may accom­plish many of your chari­table goals without incurring the burden and expense of estab­lishing your own foundation.