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Charitable Legacies

By Lisa Hooker
From the January 2014 issue of Columbus CEO

Families committed to charitable causes often do more than write a check. They find ways to leave a philanthropic legacy. When considering the options, private foundations and donor-advised funds held within a community foundation almost always are in the mix.

“The real buzz is about transitioning private foundations to donor-advised funds. In 2013, we’re seeing less tolerance for the complexity and compliance needed for private foundations. Even though they’re (foundations) still being set up, it’s rare today. The driving force is a move to simplicity,” says Christopher Fidler, partner at BakerHostetler.

“Because private foundations are so complicated, we always discuss donor-advised funds as an alternative. They’ve become much more prevalent in the last 15 years or so, because of the ease of set up and administration. The tax advantages are better, too,” says Victor Ferguson, partner at Vorys, Sater, Seymour and Pease.

Ohio’s 246 private foundations held assets of $11.6 billion in 2011, according to the latest available IRS data. That represents 90 percent of the state’s foundations and 64 percent of all Ohio charitable assets.

“The number of private foundations, or independent foundations as the IRS calls them, has slowed dramatically in the past few years. I think it’s partly because of the recession and changes to the federal estate tax,” says Claudia Herrold, vice president of communications and public policy for Philanthropy Ohio, which assists private foundations.

Legacy charitable giving and estate planning go hand-in-hand. Area experts explain the similarities and differences of private foundations and donor-advised funds. Knowing the ins and outs of each option maximizes your philanthropic contributions now and well into the future.

Set Up and Administration

Private foundations and donor-advised funds can be funded during your lifetime or at death. They also can be established in your lifetime and substantially added to at death. Money can be given once or on an ongoing basis.

“A minimum threshold of $5 (million) to $10 million for a private foundation is good place to start,” Fidler says. “They’re almost like running a family business. The family uses their foundation as a teaching tool about decision making, compliance and philanthropy for younger generations.”

Foundations allow families to actively manage the investments and grant making themselves Herrold says. “Families with their own foundation want it to last into perpetuity and involve multiple generations.”

That control is the real advantage. “As non-profit corporations, foundations have a board of directors that controls the investment strategy. Directors can be limited to family members or include outside advisors such as attorneys, accountants or investment advisors,” Ferguson says. The board also develops administrative policies and grant-making guidelines.

State and federal governments regulate private foundations. Once established, the foundation’s daily administration and ongoing reporting requirements are significant. “Unless you’re able to run the show on your own, the cost of legal, accounting and other fees is considerable. I call it the care and feeding of the foundation. Professional fees can diminish the deployment of funds for charity,” Fidler says.

It’s a different process for families choosing a donor-advised fund. A community foundation is the most common sponsoring charity of the fund, but some brokerage houses have entered the arena. “In this case, though, most clients have a strong preference for community foundations,” Fidler says.

A minimum of $10,000 establishes a donor-advised fund at The Columbus Foundation. “Each fund inside our legal umbrella has its own personality and charitable goals, but each one is not a new legal entity,” says Planned Giving Director and General Counsel Brad Britton.

“The process is faster, easier, cheaper and more effective than the hassle, expense and potential liability of operating a private foundation. All it takes is a simple one page agreement that can be executed in a day,” Britton says.

The community foundation charges an annual fee for the fund’s administration, including asset investment. “Families do give up that control. The sponsoring foundation controls the actual investments of each donor-advised fund,” Ferguson says.

Taxes and Reporting

Private foundations offer greater transparency than donor-advised funds. “They’re required to list all distributions and contributors who gave more than $5,000 with the amount they gave,” Ferguson says. “Donor-advised funds report the greater of contributions totaling $5,000 or 2 percent of donations to the public charity. Because they’re part of a larger entity, that’s a much bigger number than $5,000. It tends to keep identities confidential and that’s important to some people.”

Private foundations are subject to annual federal excise taxes on investment income. Donor-advised funds are not. Additionally, donor-advised funds offer greater tax deductions. “For a cash gift to a donor-advised fund, I can take up to 50 percent of adjusted gross income (AGI). Private foundations only let me deduct up to 30 percent of AGI,” Ferguson says.

Non-cash gifts, such as securities, can be deducted up to 30 percent of AGI compared to 20 percent for a private foundation.

Giving to Charity

Families are passionate about their pet causes, but over time those interests can change.

“When mom and dad are at the table, everyone gets along. When they die, you never know. As it goes down the generations, each child has their own interests. Sometimes causes diverge from the original intent,” Ferguson says.

Problems can occur if younger generations move away and discover causes they’d like to fund, Herrold says. “Some foundations address this by keeping a percentage of grants in the home area and another for charities in other geographic areas.”

Each year, private foundations must distribute an amount equivalent to five percent of its assets or 95 percent of its income. Individual relatives may be responsible for visiting and analyzing charities. “Assess if your family has the time and know-how to do that properly, ensuring the money is well spent,” Herrold says.

The Columbus Foundation does that research for its donor-advised funds. “Our grants officers are experts in non-profit groups in central Ohio and beyond,” Britton says.

At any time, families with donor-advised funds can request a grant of any amount to any public charity in the country. “Just because the fund is within the Columbus Foundation doesn’t mean the charity has to be in central Ohio. A large amount of our grant making is here, but that’s because of donor interest,” Britton says.

Private foundations don’t have grant restrictions, either, but Fidler says the rules strongly suggest contributing solely to public charities.

Ric Dillon, CEO of Diamond Hill Investment Group, Inc., is passionate about providing educational opportunities to others. He has the unique circumstance of having had both a private foundation and a donor-advised fund.

“I work in the investment industry and it’s very important to me to manage my assets,” Dillon says. It wasn’t until his firm was added to the Columbus Foundation’s list of approved investment managers that he made the change. “Once Diamond Hill made that list, it made sense to move my foundation to a donor-advised fund at the Columbus Foundation.”

He appreciates the ease of supporting his favorite charities through his donor-advised fund. “My advisors and I all breathed a sigh of relief. We didn’t have to do the regulatory and IRS filings anymore.”

Lisa Hooker is a freelance writer.