One of the most famous—and certainly most well-funded—private foundations in the world is the Bill & Melinda Gates Foundation. The private foundation was launched in 2000 and holds roughly $42 billion in assets. The foundation aims to improve healthcare and reduce global poverty, as well as to enhance education and access to information technology in the United States. The foundation is controlled by three trustees: Melinda and Bill Gates, and Warren Buffett. Some heavy hitters in the financial world to say the least.
I say all of this to lead into our discussion regarding the benefits of donating to a private foundation vs. a public charity. You see, Bill Gates and his family certainly could have donated directly to public charities of all kinds, but they chose to set up their own private foundation instead. My goal today is to show you the benefits of each charitable donation strategy as well as open your mind to the possibility of starting your own private fund regardless of your income level. Let’s begin by examining the differences between a private foundation vs. public charity.
Private Foundation vs. Public Charity: Key Differences
Most top-level executives have a basic understanding of how private foundations and public charities function. Public charities are much more prevalent, as you have likely been approached by numerous as a potential donor to their cause. There are certainly benefits to donating to both, but there are some basic differences to note for each of these charitable endeavors.
In general, public charities actively undertake charitable work and activities while private foundations financially support the activities of public charities. Both are known as 501(c)(3) entities in the eyes of the IRS, meaning that donations to both are tax deductible.
When it comes to the actual structure of the entity, however, a private foundation is allowed to have as little as one donor, and control of the foundation can be shared by family members or others appointed by the family. This is in contrast to a public charity, in which more than 50% of the board must not be related by blood, marriage or outside business co-ownership, and not be compensated as employees of the organization. Obviously, in our original example, the Gates Foundation would not meet these public charity criteria.
So, if you would like to heavily involve your family in your charitable endeavors, you might be more inclined to go the private foundation route. One of the other differences to consider when comparing private foundation vs. public charity is the amount you, as a donor, are able to deduct on your income taxes.
Deduction Limits for Gifts to Private Foundations and Public Charities
According to the IRS, in general, any contribution to charitable organizations can be deducted up to 50% of adjusted gross income computed without regard to net operating loss carrybacks. On the other hand, charitable contributions to most private foundations are limited to 30% percent of your adjusted gross income. While many top-level executives would not consider—or have the additional capital—to be donating more than 30% of their income to a private foundation, there are certainly those that donate 50% or more of their income every year to charitable endeavors.
While most executives are not basing their decision to engage in philanthropy on how much money they can save on their taxes, it certainly helps out in the long run. The benefit of a tax deduction is obviously greater when it comes to public charities, but you are also limited by the charity’s mission statement as well as that they are likely focused on one particular cause.
If you want to impact many causes, you might find yourself trying to identify numerous different charities to meet those needs. There is a more streamlined way to identify charitable capital and set it aside in a fund until you can identify where it should go.
Using a Donor-Advised Fund
An alternative to both donating to an individual public charity and setting up or donating to a private foundation is accomplished by setting up your own donor-advised fund. The thing that stands out to me the most when it comes to donor-advised funds is that many executives believe they need to have billions of dollars, like the Gates family, to set up their own charitable fund. That simply is not the case.
A donor-advised fund (DAF) is a fund in which you can place assets to be donated to charity and direct exactly where you would like them to go. One of the main selling points most executives love about a DAF is that you can take the charitable tax deduction when you place the cash or other assets in your DAF, even if the money doesn’t go to a charity in the same year. In fact, you can deduct up to 60% of your adjusted gross income for cash donations and up to 30% of your adjusted gross income for donations of assets such as real estate, mutual funds, and appreciated securities. You also have the ability to take the deduction up front and allow the funds to grow inside the DAF untouched for years until you designate the charity they are to be allocated to.
Whether you choose to donate to a public charity, private foundation, or even set up your own donor-advised fund, seeking the counsel of an expert can help you make the most of your charitable contribution strategies. An experienced executive financial advisor can help you make a bigger charitable impact as well as minimize your own personal taxation.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for estate planning and charitable gifts planning for executives. For more information on how Wade and the Carpenter Team can advise you on gifting to a private foundation vs. public charity or setting up a donor-advised fund, reach out today for a complimentary consultation.
SCHEDULE A CONVERSATION
Image courtesy of fizkes