Which Legal Structure or Structures Should I Use to Give My Money Away?
For much of the past century, when donors wanted to give away their money, establishing a private foundation was the go-to structure. Indeed, many of America’s earliest philanthropists—Carnegie, Ford, Rockefeller—achieved impact through self-named foundations that continue to operate. Increasingly, however, donors are turning to additional giving structures, with many philanthropists employing multiple structures to advance their giving. The right mix of philanthropic legal structures is different for everyone, so it’s no surprise that one of the most common questions philanthropists have when ramping up their giving is “what structure or combination of structures should I use?” The question is at its core a financial and technical one, but there are important strategic considerations to keep in mind. This guide is not intended to replace more specific tax, estate, or legal counsel, but instead offers a walk through a few of the options and some considerations when making this decision.
How to make your decision
So, how to go about choosing from among the growing number of options? Like so many choices in philanthropy, the decision of which structure to pursue (if any) is an intensely personal one. Your decision should be the right choice for you at this moment in time, and it might be subject to change. You can revisit your giving structure annually to determine whether your vehicle is achieving the goals you’ve identified. Given this, it may be better to start with unstructured giving and ramp up to more structure over time. It can be tedious to “undo” a giving structure; the opportunity cost and expense of a foundation, for example, is much more significant than a donor advised fund.
Also, consider that the right solution might be to operate through multiple structures. None of these structures are mutually exclusive. For example, you might wish to develop deep expertise and presence in one issue area through a foundation, while conducting discretionary giving informally, simply by writing checks. In this way, you enjoy the many advantages of a foundation in the issue that matters most to you, while limiting the administrative burden of your other philanthropy.
In addition, you may not want to choose a giving structure without consulting tax and/or legal professionals. It’s important to have your lawyer, financial advisor, family office, or other advisors weigh in on your options and help navigate this complex decision. However, keep in mind: No matter who is counseling you, they will likely bring their own perspective and preferences to the table. A financial services firm that operates a donor advised fund, for example, might have a bias toward that giving structure. Similarly, a law firm that structures foundations might have a bias towards foundations. In short, consult widely, and keep an open mind. Lastly, it is important to emphasize that there is no right answer. It’s important to consider all of the facts on balance, and select the giving structure (or combination of giving structures) that enables you to achieve your giving goals.
Types of philanthropic giving structures
Above and beyond writing checks, there exists a range of more formal giving structures. Based on differences in financial features, strategic control and a number of other factors, these giving structures can be thought of in two groups: non-foundation structures and private foundations.
Non-foundation structures
- Donor advised funds are charitable funds managed by a third-party organization. Commonly, these sponsoring organizations include mutual funds, investment advisors, or community foundations. An individual or family establishes a fund within the sponsoring organization and can then direct the sponsor to disburse the funds as they desire. Though the sponsoring organization ultimately controls where the money is distributed, it typically will honor the advice of the donor.
- Giving circles are vehicles that allow you to pool your charitable investments with other donors for the purpose of investing in an anchor of shared interest. By aggregating your money with other donors, it’s possible to achieve greater leverage in that field.
- Charitable remainder trusts are funds that allow the donor to convert assets into a stream of annuities for a period of time. After that time, whatever is remaining in the trust is donated to an identified charitable cause.
- Finally, some donors choose to establish an operating public charity with their investment, which is a 501(c)(3) nonprofit that receives contributions from many sources, like the public or government.
Private foundation
A private foundation is a 501(c)(3) nonprofit organized to make grants with a charitable purpose. Unlike charities, which get their money from public sources, a private foundation is organized with money from an individual, family, or corporation. In the United States, private foundations must pay out 5% of their assets annually or pay an excise tax. For more on private foundations, visit GrantSpace.
The table below describes some of the key differences between giving with no structure, giving through one type of non-foundation structure (donor advised funds), and giving through a private foundation. Donor advised funds are highlighted below as an example of non-foundation structures because they outnumber other non-foundation giving structures and are the fastest-growing non-foundation giving vehicle for living donors.
Note: Information provided in this table is for reference only and may vary depending on the specifics of the vehicle you choose. Laws and guidelines may change over time. You should consult an attorney or financial planning professional to verify how it applies to your chosen structure.
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No Structure
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Donor Advised Funds (DAFs)
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Private Foundation
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Financial considerations
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Financial reporting
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No institutional reporting required by law.
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No institutional reporting required by law (on the part of the donor).
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Require annual federal reporting, including the Form 990-PF.
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Deductibility
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Cash gifts deductible up to 50% of Adjusted Gross Income. Staff or management cannot be deducted.
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Cash gifts deductible up to 50% of Adjusted Gross Income. Staff or management cannot be deducted.
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Cash gifts deductible up to 30% of Adjusted Gross Income.
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Timing of tax benefit
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Tax deduction is received only when each individual gift is made.
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Tax deduction can be claimed up front, when assets are placed in the DAF.
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Tax deduction can be claimed up front, when assets are placed in the foundation.
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Required donations
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None.
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None required by law (though sponsoring organizations may establish one).
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Must spend 5% of its assets annually. Five percent includes any staff or management expenses.
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Asset funding
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Can be funded with multiple types of assets, depending on the organization.
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Can be funded with cash, appreciated securities and potentially other assets such as property or stock.
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Can be funded with cash and appreciated securities.
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Strategic control
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Donor control
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The donor retains total control of recipients of funds.
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Donors to DAFs may recommend the organizations that should receive donations, but the sponsoring organization retains ultimate control.
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Foundations enjoy total control over their giving, assuming recipients meet certain legal requirements. In the case of foundations in perpetuity, future trustees are bound to uphold the donor’s intent for the organization.
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Type of recipient
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Donors may give to any type of recipient they like, but only gifts to charities will enjoy a tax deduction.
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Generally, the sponsoring organization limits donor recipients to 501(c)(3)s.
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Foundations are allowed to make grants (from their payout) to both nonprofit and for-profit enterprises and individuals that meet certain criteria.
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Visibility and anonymity
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Visibility and risk
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Varies, but it can be difficult to establish a presence in the field without the visibility that an institution affords. There is also less concomitant risk in the absence of an institution associated with the donor.
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It may be more difficult to employ a platform in the absence of a personal institution like a foundation, but there may also be less risk to the donor’s reputation if a grant goes wrong or fails to create impact.
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Visibility of a self-named foundation can offer a platform to promote chosen causes. On the other hand, the prominence of a foundation associated with the donor’s name could create a reputational danger if things go wrong.
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Anonymity
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Generally difficult to give anonymously when giving directly.
For more information, see our Public vs. Anonymous Giving FAQ.
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The sponsoring DAF is not required to reveal the original source of a grant.
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If the donors are known, anonymity is impossible because the foundation must disclose its gifts on the Form-990. There are examples of foundations whose donors are anonymous (ex: anonymous donors gave $1.5M to Echoing Green in 2001).
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Staffing implications
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Staffing needs
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Vary, but administrative staffing needs may be lower.
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Tend to be lower as most back-office functions (investments, reporting, payments, etc.) are handled by the intermediary.
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Can often be higher, as administrative functions (investments, reporting, payments, etc.) must be performed by foundation staff or outsourced.
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Staffing costs
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Must be paid out of pocket.
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Must be paid out of pocket.
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Foundation proceeds–which count toward the foundation’s payout requirement–can be used to fund staff costs.
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Level of legal, financial, and other technical expertise required
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Start-up requirements
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None.
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Since the sponsoring organization is tax-exempt, no need to apply independently for status.
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Requires applying for federal tax-exempt status upon start-up.
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Administrative tasks
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Varies, but generally limited.
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Back-office functions, such as investing assets and financial reporting, are performed by the sponsoring organization for a management fee.
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Back-office functions, such as investing assets and financial reporting, must be performed either in-house or through hiring outside support.
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Flexibility of using your full balance sheet
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Balance sheet
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Similar to your other investments.
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Assets in a DAF must be invested in a limited set of investment options offered by the sponsoring organization.
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Total control over investment types, which allows foundations to invest assets (i.e. not just grants) in strategic causes (MRIs).
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Potential role in family for future generations
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Control over legacy
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Little opportunity to maintain legacy beyond donor’s lifetime.
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Most DAF’s limit the lifespan of a donor’s fund.
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A donor can decide whether to continue his or her foundation in perpetuity, potentially with their family, or to spend it down over a certain period of time. For more information about this topic, see our Spend Down vs. Perpetuity FAQ.
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See the Content Library for more FAQs.
Sources Used For This Article:
- Ron Barnett, Giving Circles Mix Fun, Fundraising, USA Today (2008)
- Council on Foundations, Definition of a Donor Advised Fund (2006)
- Foundation Center, Foundation Directory Online, Echoing Green Form 990-PF, 2002 (accessed March 2012)
- Foundation Center, Grant Space, What Is a Foundation? (accessed December 2011)
- Investopedia, Definition of Charitable Remainder Trust (accessed 2011)
- IRS, Tax Information for Private Foundations and other giving structures (accessed December 2011)
- Ruth Masterson, Association of Small Foundations, The Best of Both Worlds: Using Private Foundations and Donor Advised Funds (2010)
- The National Philanthropy Trust, Donor-Advised Funds vs. Private Foundations (accessed December 2011)
- Paul Sullivan, Weighing the Best Vehicles For Philanthropic Giving, New York Times (2011)