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.
- 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.