Guide to Charitable Giving

If you are charitably-minded, there are a variety of options you can use to give back to others. Get our free guide and learn which method of giving that is best for you

Guide to Charitable Giving photo of people on beach jumping up in front of sunset.

The natural inclination of people is to help others.  That’s because we all have an innate desire to create positive change.  Before you make a donation or gift, however, it is important to choose the right strategy for your circumstances, especially one which pays close attention to the potential tax and legal implications of giving. To help you understand your giving options, we’ve developed this guide to charitable giving so you can easily understand the different types of giving as well as ways you can leave a legacy.

Topics covered include:

  • Direct giving
  • Charitable trusts
  • Donor-advised funds
  • Private foundations

What is best for you and your family is a very personal decision. This guide endeavors to provide you with a variety of strategies, benefits, and implications of each type of giving. The four options covered include direct charitable giving, charitable trusts, donor-advised funds, and private foundations.

Direct Giving Options

Qualified Charitable Distribution – If you are charitably minded, you might wish to consider a qualified charitable distribution (QCD). While the distribution is not eligible as a charitable deduction whether you itemize income tax deductions or not, it may be counted as your annual IRA required minimum distribution. If you are 70½ or older and have a traditional IRA or inherited IRA, you may contribute up to $100,000 directly to a 501(c)(3) qualified charity without having to include that distribution as income. The QCD can go to a single charity, or you may make multiple QCDs to a variety of charities if the total of all your distributions stays within the $100,000 annual limit.

Donate Appreciated Assets Directly to Charities – If you have stock or another asset that has increased in value over the years, you can gift the appreciated asset directly to a charity. Gifting appreciated assets directly may avoid the inconvenience of selling the assets, as well as the realization of a taxable gain. In addition, the gifted assets may qualify for a charitable deduction if you itemize your income tax deductions. Charitable deductions are limited to 30 percent of AGI for long-term appreciated assets gifted to a public charity, such as stock. After the donor’s death, assets are kept by the organization.

Charitable Bequests

A charitable bequest is a beneficiary designation or a provision in a will or trust that allows estate assets to pass to a charitable organization. If you wish to give to charity posthumously, you may make bequests. This might occur by way of your will, trust provisions, or beneficiary designations. Thoughtful planning will help you provide for the right beneficiaries, in the right manner, and possibly help minimize taxes. When planning a charitable bequest, you may find it helpful to take the following steps:

  • Determine the bequest amount – Do you want to give a set dollar amount or a percentage of your assets? Some people prefer to cap the contribution at a specific amount. Others are more comfortable giving a percentage of their assets. With either approach, consider the possible consequences if your estate is much larger or smaller than expected.
  • Think about contingency provisions – Do you wish to make your bequest contingent upon other circumstances? For example, you may want to leave assets to charity only if other beneficiaries are no longer alive. You might instead decide to give the charity your residuary estate. The assets remaining after taxes and administration expenses are paid and other noncharitable bequests are distributed.
  • Specify future use of funds – Do you have a specific preference for how your donation will be used, or can the charity put the contribution in its general fund? If the charity has multiple purposes, you may be interested in supporting a specific charitable function. If you’re donating to a children’s organization, for example, do you wish to support academic programs, the purchase of supplies or equipment, or other activities? Any restriction on the use of your donation should be worded carefully, allowing the charity some flexibility to manage the funds accordingly in the event of unforeseen opportunities or challenges.
  • Discuss your plans – Run your ideas by the charitable organization’s staff members. They will be able to confirm that the charity can fulfill your future gift intentions. Alternatively, they can identify plans that cannot be accepted for legal or practical reasons. They can also discuss anonymous giving with you, if that’s a concern, and suggest creative ways to leave a legacy. Finally, sharing your plan with the charity’s staff will let them say “thank you.”
  • Designate a successor – Because the charity’s circumstances may change after your death, consider identifying a successor organization. Naming a successor will ensure that your charitable gift is put to good use in case of unforeseen events, such as a charity’s closure. Conversely, you may authorize your administrator or trustee to identify a new charity that supports your specific charitable goals.
  • Engage professional advisors – Work with your financial advisor and attorney to craft a bequest that meets your goals. Investing in good planning now may save your estate and family considerable legal, financial, and emotional grief in the future. Your advisors will work with you to determine whether to make a testamentary bequest through your will, or if advantages provided by trusts—such as probate avoidance, flexibility, and privacy—may better meet your needs.

Charitable Gift Annuities

A charitable gift annuity (CGA) is a split-interest gift made directly to a charity. In return, it provides you, your spouse, or a family member with fixed income payments for life. The charity typically ends up with about half of your donation, while you get an immediate tax deduction and some guaranteed income. Keep in mind that an annuity is a contract between you and the charity. Additionally, your return isn’t guaranteed by the government.

Getting Started

Many donors use CGAs as an inexpensive alternative to a charitable remainder trust when drafting and maintaining those trusts would be too expensive based on the size of the donation. CGAs can be funded with as little as $5,000, whereas a Charitable Remainder Trust (CRT) is generally appropriate for donations over $200,000 to $300,000.

CGAs are set up by an agreement between the charity and the individual annuitant or couple. Most gift annuity donors are:

  • Retired
  • Wish to increase their cash flow
  • Solicit the security of fixed payments
  • Would like to save taxes

CGAs concurrently provide a charitable donation, a partial income tax deduction for the donation, and a lifetime income stream to the annuitant(s). CGAs can begin paying income immediately, or payments can be deferred to a specific date in the future. An example might be the client’s expected retirement date or the date a client’s child reaches a certain age. When the payments stop in a CGA, the balance of the assets in the account is kept by the charitable organization as a gift.

How Do Charitable Gift Annuities Work?

Many large charitable organizations’ donor-advised fund providers offer CGAs as part of their planned giving programs. Once you find a suitable organization, you can fund your CGA with cash, securities, or a variety of other assets. If you are donating appreciated assets (e.g., securities), you may be able to spread the capital gains taxation over several years.

An individual can establish a gift annuity for themselves or on behalf of someone else, such as a spouse, though the total number of annuitants associated with any one gift cannot exceed two.

Payment amounts will depend on several factors, starting with the age of the annuitant. The younger the annuitant is, the smaller the monthly payments will be, as the total amount is spread over a lifetime.

CGA rates are lower than those offered through commercial annuities. If one wants to maximize the amount of income received over a lifetime, purchasing a commercial annuity—rather than entering into a gift annuity contract—would likely be the best course of action. Most charities use the rates provided by the American Council on Gift Annuities, which publishes current rates on its website.

Gift Annuity Tax Considerations

If donors itemize their deductions, they can claim a federal income tax charitable deduction for a portion of the amount transferred to the charity in exchange for a gift annuity. The deduction is equal to the amount of the contribution minus the present value of the payments that will be made to the annuitant(s).

The taxation of the income paid to an annuitant will vary based on how the CGA was funded. For CGAs funded with cash, part of the income payments will be taxed as ordinary income and part will be a tax-free return of principal. If the CGA is funded with appreciated assets, part of the income payments will be taxed as a capital gain, part will be taxed as ordinary income, and part will be a tax-free return of principal. In most cases, the entire income payment will eventually be taxed as ordinary income.

Gifting to Family

Giving back doesn’t always mean giving to charity. Gifting to family members can be just as rewarding, and it can be an effective way to transfer wealth while reducing or avoiding taxes. Here are several common strategies for gifting to family members:

  • Cash Gifts – For the tax year 2021, you may gift up to $15,000 to any individual without tax consequences. This amount increases to $30,000 for married couples. If you would like to gift more than this amount to one person, you’ll need to file a gift tax return using IRS Form 709.
  • Paying College Tuition or Medical Bills – If you wish to pay for a family member’s tuition or medical expenses directly to a school or health care provider, the $15,000 limit does not apply. Additionally, you are still free to give the individual a separate tax-free gift of up to $15,000.
  • Contributing to a 529 Plan – If you would like to help a family member save for college while paring down your estate, consider contributing to a 529 plan. Contributions grow tax-deferred, and withdrawals for qualified expenses used for the beneficiary’s education are tax-free at the federal level, and often at the state level, as well.

Additionally, 529 plans are eligible for a special exemption that allows you to gift up to five years’ worth of annual exclusion contributions. That means for the tax year 2021, you can give up to five times $15,000, or $75,000, per person per year without using any estate and gift tax exemption. You will, however, need to file IRS Form 709 to document the transaction.

Trust Options

Charitable Remainder Trusts

With the SECURE Act, IRA beneficiaries who are not the owner’s spouse must withdraw funds within 10 years. Using a Charitable Remainder Trust (CRT) can extend these distributions from traditional IRAs, which may offer some tax advantages.

With this type of trust, the donor receives income from the trust for his or her lifetime, the lifetime of another person, or a period of up to 20 years. At the end of the specified term, the remaining trust assets are distributed to a charitable beneficiary. The greatest benefit of a charitable remainder trust (CRT) is that you can take advantage of immediate tax benefits while continuing to utilize the assets, as you may deduct the present value of the charitable remainder interest. On the downside, charitable trusts tend to be complex to set up and usually require legal and administrative support.

How it Works

Generally, gifts to charity in which the donor retains a partial interest are not eligible for income tax, gift tax, or estate tax charitable deductions. One exception to that rule is CRT. These types of trusts allow the donor to receive income from the trust for his or her lifetime, the lifetime of another, or a period of up to 20 years. At the end of the specified lifetime or term, the remaining trust assets are distributed to a charitable remainder beneficiary. The greatest benefit of these trusts is that the donor can take advantage of the immediate tax benefits of making a charitable donation while continuing to utilize the assets, as the donor may deduct the present value of the charitable remainder interest.

Creation and Funding

CRTs can be created and funded during the grantor’s life as an inter-vivos trust or at death as a testamentary trust. Inter-Vivos CRTs are predominantly used to provide income security to the grantor and the grantor’s spouse, while testamentary CRTs are typically used to provide a benefit to heirs and to reduce the grantor’s taxable estate. Provided that the CRT complies with all IRS requirements, the trust will be tax-exempt, and the grantor is eligible for a charitable contribution deduction based on the present value of the remainder interest when the trust is funded.

Distributions from the trust to the income beneficiary are taxable using a four-tiered accounting system specific to CRTs. Though the trust is tax-exempt, it tracks all taxable activity and builds up four buckets of income: ordinary income (e.g., dividends and interest), capital gains, tax-free income (e.g., municipal bond income), and return of principal. Distributions will first pull from ordinary income until that bucket is exhausted, then will pull from capital gains, and so on.

There are a variety of forms of CRTs, each with its own requirements:

  • Charitable Remainder Annuity Trust (CRAT) – This is created by an irrevocable transfer of cash or property. The trust document specifies an annual annuity amount to be paid to the income beneficiary or beneficiaries over their lives or a specified period. The annuity amount must be between 5 percent and 50 percent of the value of the original trust principal each year and must be paid out even if there is no income, which means that the trustee may need to dip into principal at times. At the end of the specified annuity period, the remaining trust assets—which must be at least 10 percent of the initial fair market value of the trust principal—pass to a designated charitable institution. It’s important to note that additional contributions may not be made to a CRAT.
  • Charitable Remainder Unitrust (CRUT) – This is also created by an irrevocable transfer of cash or property. Unlike a CRAT, however, a unitrust amount is paid to the income beneficiary or beneficiaries each year based on a specific percentage of the trust assets, which are revalued annually. As a result, the income distributions from a CRUT may vary from year to year. The unitrust amount must be between 5 percent and 50 percent of the trust value, and additional contributions may be made over the lifetime of the trust. At the end of the trust term, the remaining trust assets are paid to a charitable remainder beneficiary. The value of the remaining trust assets must be at least 10 percent of the fair market value of all the property transferred to the trust, determined at the time the asset is contributed. There are several types of CRUTs which include:
  • Net-Income CRUT (NICRUT) – This enables the trustee to distribute an annual payment that is the lesser of the unitrust value in that year or the net income earned by the trust in that year. Net income can be defined in the trust document or by state law.
  • Net-Income Makeup CRUT (NIMCRUT) – This is a variation on the NICRUT. If the net income in a given year is less than the unitrust amount, this trust enables the difference to be made up in future years if income exceeds the unitrust amount.
  • Flip Charitable Remainder Unitrust (FLIP-CRUT) – This trust is a NICRUT or NIMCRUT that “flips” to a standard CRUT upon a triggering event. Triggering events include the donor reaching a certain age, getting married or divorced, or becoming able to sell a previously illiquid asset. This is often used by donors who won’t need trust income until some time in the future and want to maximize returns on trust assets.

A CRT may or may not be the best strategy for your situation. For this reason, it is highly recommended you seek the advice of your trusted professional advisors who can help you craft a strategy that meets you and your family’s needs.

Charitable Lead Trusts

Funding an Income Stream

A charitable lead trust (CLT) pays trust income to a charitable beneficiary for a specified term and then distributes the remaining assets to a noncharitable remainder beneficiary. The charitable distributions can be made based on a fixed annuity amount or a variable unitrust amount. CLTs can be created and funded in two ways: during the grantor’s life as an inter-vivos trust, or at death as a testamentary trust. There are two types of CLTs for income tax purposes:

  • A grantor lead trust, on the other hand, reverts to the grantor or his or her spouse as the remainder beneficiary. It does qualify for an immediate income tax deduction based on the present value of the annuity or unitrust payments to the charitable institution. This type of CLT can be a useful tool for individuals looking to shelter property from federal gift and estate taxes while taking an immediate income tax deduction.
  • Non-grantor lead trust. This is treated as a separate tax-paying entity subject to trust income taxation. The trust can deduct the payments made to the charitable beneficiary each year to reduce the tax implications. Someone other than the grantor is the remainder beneficiary. The grantor does not receive an income tax deduction when funding the trust but makes a completed gift to the remainder beneficiary and can deduct the present value of the income stream going to the charity from the value of the gift. Any appreciation of the assets passing to the remainder beneficiary occurs outside of the grantor’s estate.

The Details 

Once you’ve decided between a grantor lead trust and a non-grantor lead trust, the CLT can then be established as a charitable lead annuity trust (CLAT), which pays a fixed dollar amount based on a percentage of the initial funding amount to a charity for a specified length of time, or a charitable lead unitrust (CLUT), which pays a percentage of the trust’s value, as calculated each year, to the charitable income beneficiary.

  • A CLAT is more suitable if the grantor wants to maximize the benefit to the noncharitable beneficiary and expects the assets in the trust to appreciate over time.
  • A CLUT is more suitable if the grantor expects the trust assets to decline over the term of the trust, such that revaluing the income payment year to year may result in more assets left for the remainder beneficiary.

The Benefits

CLTs offer several benefits. The grantor can donate to a charity while keeping trust assets within the family. The grantor can also control the payment method, term of the trust, and beneficiaries, as well as postpone the non-charitable beneficiary’s receipt of the trust assets.

Using a non-grantor CLT helps substantially lessen the value of a taxable gift to the remainder beneficiary by locking in the value of the gift at funding and deducting the value of the charitable income interest from the value of the gift. This is known as an estate tax freeze technique.

Proceed With Caution

CLTs can play a valuable role in a financial plan, particularly when it comes to estate tax planning. They are complex vehicles and require careful drafting to achieve your goals, so it is imperative to work with an attorney.

Creating a Donor Advised Fund

A donor-advised fund, or DAF, is an account held through a sponsoring public charity for accepting charitable gifts. Once a gift has been made, the donor becomes a grant advisor to the DAF. As a grant advisor, you can make nonbinding recommendations that the sponsoring charity direct grants from the DAF to other public charities.

A donor-advised fund is a charitable giving vehicle managed by a public charity to distribute funds to other charities. When you contribute to a donor-advised fund, you can advise the charity on the grants it makes, as well as take advantage of possible tax deductions. Be aware, however, that there may be a minimum donation amount, and administrative fees may cut into the funds available for grants.

How it Works

If you are interested in grouping charitable deductions together but prefer spreading the distributions to charities over years, a DAF may be an option. It is a charitable giving vehicle that allows you to contribute as frequently as you desire and to recommend grants to your favorite charities. It can also be used to create a pool of money that will encourage giving by your family for generations to come.

A DAF is established through a public charity, so you can receive an immediate charitable tax deduction when you exceed the standard deduction threshold and itemize taxes. In 2021, charitable deductions are limited to 60 percent of adjusted gross income (AGI) for cash gifts to the DAF, though a special rule allows deductions of cash donations of up to 100%. The deduction for long-term appreciated assets (e.g., stock) to the DAF is 30 percent of AGI. Please note: You can also avoid capital gain taxes on gifts of appreciated assets to the DAF.

If you can itemize deductions, gifts to a DAF may qualify for a charitable income tax deduction. The deduction equals the fair market value of the gifted cash or property in the year the gift is made. The total deductibility of gifts in any given year is subject to the same limitations as gifts made outright to a public charity. Currently, limitations are60 percent of the donor’s adjusted gross income (AGI) for cash gifts and 30 percent of AGI for long-term capital gain property. If the full deduction cannot be taken in the year of the gift because of AGI limitations, the donor may carry forward the unused deduction for five years.

Benefits of Funding a DAF With Concentrated Stock

Funding a DAF with appreciated concentrated stock can provide the following benefits:

  • On the date of the contribution, the donor receives an income tax deduction equal to the shares’ fair market value.
  • Once contributed, the shares can be sold without incurring capital gains tax.
  • The donor has a pool of charitable funds that can be directed to support various charitable organizations.
  • DAFs are typically easier and less expensive to establish and maintain than other concentrated stock strategies.
  • The donor may have the funds professionally managed by his or her financial advisor.
  • The donor can designate successor grant advisors who can continue recommending grants to the DAF after his or her passing.

For owners of concentrated positions who have charitable intent, a DAF can be an excellent way to sell appreciated shares and help fund a charitable legacy in a more tax-efficient manner.

Charitable Giving Comparison Chart

View the Charitable Giving Comparison Chart 

Leaving a Legacy

Private Foundations

Private foundations are no longer tools used solely by the affluent and corporate philanthropists. Many moderate-income families are now taking part in charitable giving. They are using private foundations as a tool for leaving a family legacy.

Quick Overview

A private foundation is a charity established by an individual, family, or, in some cases, by a corporation. It provides a vehicle for charitable giving through grantmaking and disciplined investment decisions.

A foundation operates as a service fund managed by its donors or as a separate legal entity that carries out the donor family’s charitable wishes. Donors must also adhere to a strict set of rules designed to ensure that the foundation carries out its charitable purpose. If the foundation fails to adhere to these guidelines, it risks being subject to various excise taxes.

Types of Private Foundations

Two types of private foundations can be formed:

  • Operating foundations – An operating foundation is directly involved in sponsoring and operating a charitable project or enterprise. It does not use assets to make grants to other charitable organizations.
  • Nonoperating foundations A nonoperating foundation does not provide services or conduct charitable activities. Instead, it makes grants to public charities that operate charitable programs. Nonoperating foundations must distribute 5 percent of their net investment assets each year in the form of qualifying distributions, such as grants.

How They Differ From Public Charities

The key difference between a private foundation and a public charity is the funding source.

Private foundations receive most of their support from a small number of contributors. They are generally controlled by their founders or substantial donors. They frequently use charitable contributions to make grants to individuals or to other charities rather than directly fund their programs. Public charities tend to use charitable contributions to directly fund programs.

Private foundations operate independently and therefore have the freedom to ignore public opinion regarding the use of their charitable assets. In contrast, public charities must solicit donations from the community and must appeal to public sentiment. This can influence how the charity chooses to use its funds to carry out certain programs.

Flexibility & Control

Donors of private foundations can take on the role of trustee, control the timing of donated funds, and disposition of gifts. For instance, donors can monitor public charities and support them during selective causes rather than offering them gifts over which they have no control. Assets eligible for donation to private foundations include:

  • Artwork
  • Jewelry
  • Cash
  • Closely-held business stock
  • Non-publicly traded stock
  • Publicly traded securities
  • Mutual funds
  • LLC or LP interest
  • Real estate
  • Life insurance policies
  • Other unique assets

The IRS has rules against excessive business holdings, so it’s important to seek the advice of your trusted advisor.

Benefits of a Private Foundation

There are several benefits associated with starting a private foundation. Clients often appreciate the ability to establish a legacy while involving family members. They like the flexibility of making family members employees or members of the board. This enables the benefit of multiple generations working side-by-side on a shared vision. It also means values are passed down to younger members. They are often taught about charitable giving and engagement with the community.

As a founder, you have full control over the creation of grants used to support organizations you care about. Once the private foundation has been funded, the donor can control where charitable grants are made and how assets are invested.

Tax Benefits

Additionally, private foundations can accept many types of assets as contributions. With gifts of long-term appreciated securities, the donor may potentially eliminate capital gains tax. When the shares are donated, the donor receives an immediate charitable income tax deduction. This deduction is equal to the fair market value of the stock. Deductions are based upon the donor’s adjusted gross income. They are limited to 30 percent for cash contributions and 20 percent for capital gain property. Contributions over those limits can be carried forward up to five years to help offset future taxable income.

An additional tax benefit is that the donated shares are removed from the shareholder’s taxable estate.

Since private foundations fall under charitable, section 501(c)(3) organizations, they are exempt from federal income tax. This offers a one-two punch for donors. Donors can deduct their contribution to the foundation. This further reduces their taxable income by donating appreciated property at fair market value because no capital gain is realized. Property must have been held more than one year before the contribution or be subject to the donor’s cost basis. To qualify for tax exemption, a foundation’s purpose must serve one of the following:

  • Charitable
  • Religious
  • Educational
  • Scientific
  • Literary
  • Testing for public safety
  • Assisting national or international amateur sports
  • Preventing cruelty to children or animals

Private foundations also offer the ability for donors to gain a tax timing advantage. Donors can:

  • Lock in their deduction in the current year
  • Donate during a year in which they have sizable personal income
  • Direct how the foundation invests the donation
  • Time the execution of disbursement to charities across multiple years

Finally, holders of concentrated stock positions typically understand the complexities and risks associated with owning these shares; however, they sometimes struggle to determine the best course of action for reducing those risks. For those with a philanthropic intent, funding a private foundation with their concentrated stock positions may be worth considering. This can provide benefits both to the shareholder and to charitable organizations.

How it Works

If you’re seriously considering starting a private foundation, we recommend you adhere to the following steps:

  1. Prepare a written plan that includes the foundation’s mission, the programs it will fund or operate, and the staff needed.  You should create a clear mission statement that outlines the specific vision and guiding principles for donors, board members, trustees, staff, and the public. This statement should establish the goals and values and suggest what can be expected of the foundation.
  2. Set up a corporation or trust whose assets will be exclusively dedicated to charitable purposes. Determine how you wish to set up your foundation, either as a corporation or a trust. A corporation offers more flexibility with the ability to amend its articles, bylaws, and governance. They can also change the charitable purpose. Organizing as an irrevocable trust offers less flexibility. That said, it can help ensure that a specific charitable purpose is not changed by future generations. Consider the lifespan of the foundation. Will it exist in perpetuity, requiring a succession plan? Or will it have a sunset clause, designating a specific end date? You should discuss the multiple reasons behind these strategies with your trusted financial advisor.
  3. Organize the Board of Directors or Trustees. Only include those trusted and qualified to oversee activities and carry out the mission. Choices can consist of donors, their family members, or other qualified independent parties depending upon the scope of the foundation. A foundation that provides grants for medical research needs members with a different skill set than one that provides educational scholarships. You’ll also want to establish a variety of controlling roles. They should cover purpose, financial and legal aspects as well as investments, grants, and transactions.
  4. Apply for an Employment Identification Number (EIN). The IRS requires you to apply for an EIN, even if you do not anticipate hiring people. This number serves as your tax identification number for the foundation, much like a social security number for individuals.
  5. Select the professional advisors you’ll work with including attorneys, tax advisors, and financial advisors. Your financial advisor can assist with planning and executing the foundation. They can also coordinate with legal and tax advisors and help with the foundation’s charitable assets and investment strategy.
  6. Prepare financial projections, including the cash or assets that you will give to the foundation and any other revenue that you expect to receive.
  7. Request tax-exempt status from the IRS by completing IRS Form 1023 (i.e., the Application for Recognition of Exemption).
  8. Fund the entity and set up financial recordkeeping systems, such as adequate accounting and internal controls.

Private foundations require legal expertise to establish and administer, which can lead to a significant expense. They also require strict adherence to complex reporting requirements and IRS compliance. While they can be excellent charitable planning tools, private foundations are most appropriate for those who intend to make very large donations.

Additional Requirements

Depending upon the value of a private foundation’s assets and amounts distributed to charities annually, they must pay a 1-2 percent excise tax on net investment income. Additionally, the IRS considers certain types of assets as excess business holdings. They may have limitations on how long the foundation can hold that asset without incurring an excise tax.

Private foundations must file Form 990-PF (i.e., the Return of Private Foundation) annually with the IRS. They must also file in the state where their main office is maintained to avoid losing tax-exempt status. This report supplies details of the foundation’s operations, contributions, disbursements, expenses, sales of assets, and capital gains. If there is greater than $1,000 in unrelated business income during the year, the IRS requires the foundation to file a Form 990-T. Each state has its own rules, and some states require private foundations to register and file annual reports with the state’s attorney general. Your professional advisors can assist you with the required forms.

Private foundations must meet certain compliance criteria. They must make an annual qualifying distribution of five percent of the fair market value of non-charitable use assets. The use of foundation assets may cover charitable grants and administration. Examples include administrative expenses, equipment that assists in achieving the foundation’s charitable purpose, directly related charitable activities, and program-related expenses.  Some funds used for administration, however, do not count toward the IRS’s minimum required annual distribution. Examples include investment management, salaries, custodial fees, or a board member’s expenses involved in overseeing investments.

You’ll need to establish grant-making guidelines along with administrative support for charitable inquiries. A grant officer must manage grantmaking by reviewing applications, handling correspondence, suggesting grants, and conducting site visits. They must ensure funds have been used appropriately. Grant recipients might include:

  • Churches
  • Colleges and universities
  • Hospitals
  • Medical research organizations
  • Museums
  • Schools
  • Social service organizations

Though foundations often make grants to nonprofits, they can create their program. Such a program must meet the IRS’s charity definition for tax purposes. Grants made to individuals for scholarships, hardship, emergency assistance, and medical assistance must also meet certain IRS criteria.

Additionally, grants made to non-charities, such as a non-profit organization that employs people experiencing homelessness, must be used solely for charitable purposes. They must also meet IRS criteria. Your financial advisor can help you sort through these grant-making options.

Proceed With Caution

While private foundations can offer advantages that charitable contributions do not, there are strict IRS rules. Violations can result in severe penalties for tax code violations if abused. Penalties can also be levied on both the board members and the foundation. They are meant to thwart the risk of abuse when interested parties control the foundation instead of an independent board. Not to mention, public scrutiny and online commentary that could also damage a foundation’s reputation.

Private foundations are prohibited from self-dealing transactions like lending or borrowing money from the foundation. Disqualified persons may not transact with the foundation other than making donations. Disqualified persons include foundation officers, directors, trustees, and substantial contributors. Also disqualified are those who own a substantial stake in a company that is a substantial contributor. Family members, spouses, and descendants of these are also disqualified along with businesses partially or wholly owned by them. Specific examples of prohibited self-dealing include:

  • Providing goods and services to or from the foundation
  • Borrowing funds from the foundation
  • Personal use of foundation assets or income
  • Leasing space to or from the foundation
  • Retaining foundation assets on private property, such as artwork

Private foundations must:

  • Avoid making grants to individuals and organizations that are not public charities unless they follow strict guidelines
  • Avoid making expenditures to influence elections or legislation
  • Avoid making grants to private operating foundations and certain foreign organizations

Here to Help You

Many of the tactics mentioned here are complex and require careful administration to achieve your charitable giving goals. It is imperative to work with a trusted financial advisor.

We all know there is a lot of misinformation on the web.  That’s why, as part of our GWA Gives© program, we are dedicated to helping others find sound advice. We believe in sharing free material so people have a trusted source to rely upon. We are always happy to answer any questions on charitable giving that you might have.  You can reach us at one of our convenient offices listed on the Contact Us page or by filling out the chat form below.

The material in this booklet is provided for general informational purposes only and does not constitute either tax or legal advice. We go to great lengths to make sure our information is accurate and useful. We recommend you consult a tax preparer, professional tax advisor, or lawyer.

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