Structures for giving
By Abby Rolland
In a previous blog post, we shared the variety of ways that funders can give back. From grantmaking to mission-aligned investing to providing support beyond the check, funders have different tools at their disposal to make a difference.
While they can use a number of tools, how can funders structure their giving? In other words, what vehicles are available for individuals or families to set up their giving?
Below, we share the structures that an individual or family can use for their philanthropy. While this post broadly outlines the different structures, for a more technical view, we encourage you to check out this article from Forbes.
1) Private Foundation
Private foundations may be the most well-known of a giving vehicle. The IRS has specific requirements for creating and maintaining a private foundation; learn more here.
Private foundations provide an immediate tax benefit to the donor when the funds are irrevocably given. By law, private foundations are required to pay out 5% of their assets per year. They must have a Board of Trustees/Directors that govern the organization; however, that Board can either be made of non-family members (an independent foundation), all family members (a family foundation), or a mix of family and non-family members (still considered a family foundation). If family members make up the members of the Board and/or staff (which is legally permissible), they maintain control over the foundation’s giving.
Both independent and family foundations are governed in the same way and have the same rules and requirements about giving.
Foundations are more structured than other charitable giving vehicles.
2) Donor-Advised Fund
While donor-advised funds (DAFs) have existed for a number of years, they have consistently grown in popularity. They are simpler to set up than private foundations – funds need to be given to a donor advised fund holder or sponsoring institution, of which there are several different types. Community foundations, national organizations such as Fidelity Charitable, Vanguard Charitable, or SEI Giving Fund, and single-issue nonprofits such as CAF America or Impact Assets, all host donor-advised funds and provide various levels of advice on giving. The donor’s wishes and the minimum contribution amount (some DAF fund holders have one; others do not) influences what kind of DAF account holder is chosen.
Like private foundations, DAFs also provide an immediate but better tax benefit. They have no legal payout requirement; however, many DAF sponsoring institutions do force a donor to give if they have not after a certain amount of time.
Contributions to DAFs are irrevocable and as such the donor is treated as an advisor with the ability to recommend grants to charities. These recommendations are then approved (or denied) by the sponsoring organization after a due diligence process.
In general, DAFs do not have as many legal requirements as foundations do, and their structure is more flexible, but donors lack the control and oversight that comes with a private foundation. No Board is required to govern giving from DAFs.
3) Individual Giving
And finally, there is individual giving or “checkbook philanthropy.” This is giving that is more unstructured than other forms in which an individual or family gives out of their personal funds. There are certain tax benefits for direct donations made to public charities if no benefit is received by the donor. The calculation of these tax benefits is complicated, and donors should be guided by their trusted accountants. Individual giving can be systematized, but since it is not in a formal charitable vehicle, the requirements are less stringent.
There is also the likelihood that unlike a foundation (more so) or DAF (less so), individual giving will not often lead to future generations giving from the same pot of money. With a foundation or DAF, it is easier to continue giving by subsequent generations of family members.
So, what’s the correct vehicle? It depends! It depends on…
1) If an individual or family wants subsequent generations to continue giving from the donated assets
2) How involved and how much control a family wants in their giving
3) The extent of legal requirements that a family or individual wants to govern their giving
4) The amount of funds set aside for philanthropic activities
5) How systematized a family or individual wants their giving to be
6) The extent of data analysis and evaluation that a family wishes to know/have about their giving
harp-weaver has clients who use one, two, or all of these giving mechanisms. We’re happy to have a conversation about which vehicle would work the best for you. Feel free to contact Abby at firstname.lastname@example.org.
Learn more the differences between DAFs and foundations from this article or chart from the National Center for Family Philanthropy.