A true charitable legacy, a private foundation can transfer to future generations while also allowing control over how and where charitable gifts are made.
Mike Penfield, national director of the Charitable Services Group at U.S. Bank Private Wealth Management, shares what he’s learned in more than 20 years of developing charitable giving strategies.1
Many clients who start private foundations have had success with a private business and now want to run a philanthropic business. Additionally, family relationships are often incredibly important. They want to involve future generations and tie their family identity to charitable giving.
But perhaps the greatest benefit of private foundations is the enormous impact they can have on communities. We’ve seen private foundations receive letters that say, “You are the catalyst that changed my life. I used your scholarship to go to my local community college.”
There are two main reasons people opt against starting a private foundation: They require a mandatory minimum payout and they’re thought to be complicated to administer.
Meanwhile, donor-advised funds are seen as fairly flexible, simple and inexpensive to set up. Typically, they require less money to set up than private foundations — $25,000 versus $2 million or $3 million.
But donor-advised funds don’t deliver family legacies the way private foundations do.
For example, let’s say that you set up a donor-advised fund at a community foundation. That community foundation may continue your wishes during your lifetime and your children’s lifetime. Typically, though, after your children are deceased, your donated funds are then absorbed into the community foundation overall. In short, your family legacy ends.
Another reason many prefer setting up private foundations is around control. The donor can’t control investment decisions or payout decisions; they can only suggest them.
Some charities that administer donor-advised funds, such as community foundations, have internal policies that require an annual distribution, even though that’s not a statutory requirement.
Charitable remainder trusts are beneficial for people who need to retain the income from their charitable gift during their lifetime, with the remainder of their gift going to charity upon their death.
For example, an individual with a high concentration of stock in their estate could put some of that stock into a charitable remainder trust that pays out an annual income. Then, after a period of time, typically at death, those assets would be given to a nonprofit organization or even the individual’s private foundation.
If someone wants to support one organization, say a university or a hospital, then charitable trusts can be a wise choice.
A person might also choose a charitable lead trust as part of an estate-planning strategy that involves generation skipping; this can achieve tax benefits, while also moving assets to future generations.
Keep in mind, though, that charitable remainder trusts are irrevocable, so they can’t be canceled once they’re in place.
One-time donations are very simple. For people who know where they want to donate and how much they wish to donate, it doesn’t get any easier.
That said, easy isn’t always best. Private foundations can create discipline for nonprofits through the grant request process. People find reassurance in knowing why the nonprofit needs the funds, how the nonprofit will use them and what the nonprofit has achieved with past funds.
Although clients may be passionate about a certain nonprofit organization, they would rather have the organization work with their private foundation to seek grants each year.
Learn more about our charitable giving services.