Estate Planning Strategies for Charitable Giving

When considering a large charitable gift, individual donors have many options at their disposal. Charitable trusts, donor‑advised funds, and private family foundations are three commonly used charitable giving options. Below is a summary of each option, as well as the advantages and disadvantages of each.

  1. Donor advised funds – A donor‑advised fund at a local community foundation manages assets much like a traditional investment account and distributes the assets to IRC501(c)(3) public charities as advised by the donor. The manager of the donor‑advised fund, like any financial manager, will charge a fee based on a percentage of the assets under the manager’s care (usually 2.5 to 4 percent), and will require a minimum initial contribution.

    There are several advantages to this type of charitable giving, including receiving a deduction on their income tax return. Donors can also advise the manager as to how the assets should be distributed in the future and will avoid administrative expenses.

    It is worth considering that the donor may only advise the manager as to which charities receive a distribution. The manager legally has the authority to ignore the donor’s advice entirely.

  2. Charitable trusts – Charitable trusts are used to manage charitable giving over a period of time. A charitable remainder trust (CRT) allows a donor to make a large one-time gift to charity, utilize the charitable deduction in the present and retain the income from the donative ("donated?) property for a period of years. A donor may either receive the income payments or designate someone else to receive them.

    The charity selected by the donor receives the balance of the trust assets at the end of the income period. The CRT is also an effective vehicle for donors who wish to make a charitable gift upon their death while at the same time providing an income stream for their heirs after they pass.

    CRTs do not give donors the ability to influence how trust assets are distributed after the trust is formed.

  3. Private family foundations – Finally, private family foundations give donors the ability to make a substantial gift and stay involved with how the gift is distributed. A private family foundation can operate as a trust or a corporation, with the donor and donor’s family members acting as the trustees or the board of directors in charge of making the charitable distributions.

    A private family foundation offers the donor the opportunity to leave behind a legacy that provides for the donor’s selected charities for generations to come, as well as the opportunity for the donor’s family to actively participate. Because the private family foundation is not under the umbrella of a bank or a community foundation, the donor is free to select the types of assets contributed and the organizations to which the assets are distributed.

    Private family foundations are subject to complex regulations and accounting requirements, so there may be substantial startup costs.