Understanding Different Types of Charitable Giving
If you have significant funds available and want to give back to your community, there are many ways to make that happen. While every option has some tax advantages for the donor, each requires a different level of time commitment from the donor and offers a different level of control. So really, the first two questions to ask yourself are, “How active do I want to be in the organization?” and “How much control do I want to have?”
Here are a few of the most common ways to invest money in a charitable cause, along with a brief overview of the time investment and level of control.
Create a 501(c)(3) organization
This is often the first option people think of when they are passionate about a cause and have the funds to support that cause. But it’s also the most time-intensive option, as a 501(c)(3) organization requires recruiting a board and spending a fair amount of time to get the organization started.
They also generally do some sort of programming in the community, whether that’s housing homeless teens, feeding puppies, or providing some other type of hands-on support. If you’re not equipped to lead that programming, you’ll need to find someone qualified to handle that aspect.
With this approach, you also share control with the entire board. Once you create your board and obtain 501(c)(3) status, that entity belongs to the public. It’s not yours anymore, and there are limitations on how many family members can sit on the board. If three of the five board members decide to vote you off, you’re done.
One the plus side, it’s generally easier to fundraise with a 501(c)(3) structure. If you’re looking for ongoing funding for your cause, it’s a good option. But keep in mind that it must be funded by multiple people with no more than a third of the funding coming from any one donor.
In general, starting a 501(c)(3) is the most active option with the least control, but it also offers better tax benefits than a private foundation or donor advised fund.
Start a private foundation
A private foundation differs from a 501(c)(3) in regard to both funding and control of the foundation. It’s generally started through a sizeable donation of at least $1 million, and you exercise complete control over the foundation with as many family members on the board as you like. The only requirement is that the foundation must pay out 5% of the net assets to charity every year. That means if you start a private foundation with $2 million, you must make a $100,000 grant to charitable organizations.
There’s still some administrative work required of a private foundation, including monitoring net assets, filing a tax return, deciding what charities to support, etc. The foundation can only give funds to 501(c)(3) organizations or public entities, so there’s also work required to verify the organizations you support. All of that work has to either be done by the board or by someone the board hires to handle administrative work.
Donor advised fund
Donor advised funds are a great middle ground between creating a 501(c)(3) and starting a private foundation. With a donor advised fund, you’re typically putting money in a specific fund with a community foundation and thus offsetting your tax burden.
Unlike private foundations, there’s no mandatory payout for a donor advised fund. Those funds can hang out until you decide to do something with them, and the total amount can grow in that time. Funds can only be allocated to a 501(c)(3) or a public entity, but you control where the money goes and when. Some people choose to make donations only on the growth while others make contributions that deplete the principle.
The community foundation handles all of the accounting, investing the funds, monitoring the growth, etc., with the fund on their books as an asset. Since the community foundation is a 501(c)(3) and has the same fiduciary responsibilities as other such organizations, they maintain variance powers and the final say on whether receiving organizations qualify for the funds.
Choose an outlier option
There are some more obscure charitable vehicles, such as charitable remainder trusts and charitable lead trusts. A charitable remainder trust involves a bulk some of assets into the trust with a fixed percentage or amount paid every year to the donor as income. At end of donor’s life or the trust’s life, the remainder goes to the designated charity. For a charitable lead trust, you put a bulk sum into the trust that then pays out to a charity at a fixed percentage for the life of the trust or the donor.
Either of these options requires a lawyer who specializes in these particular trusts. It’s not something you want to attempt yourself, nor is it something even a CPA should handle. These types of trusts are complex and should be left to the professionals.
If you have funds that you want to contribute to a charitable cause, you have multiple options from which to choose, and it comes down to determining the level of control you want and level of time investment you can make. Talk with a qualified professional who can help you determine the best way to achieve your goals.