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Join the wealth strategists of CIBC Private Wealth as they shine light on the topic of wealth planning by sharing their insights and ideas on how to use wealth in ways that are important to you—whether for your own needs, the people you hold dear or the causes that you care about.
CIBC US Podcast
Wealth Planning Illuminated
Episode: Private foundations v. donor-advised funds
Theresa Marx:
Hello, and welcome to another episode of Wealth Planning Illuminated. I am your host, Theresa Marx, a senior wealth strategist at CIBC Private Wealth in the US. I am joined today by my colleague, Leslie Kehoe, also a senior wealth strategist at CIBC Private Wealth. In today's episode we will discuss 2 types of personal charitable vehicles, a private foundation and a donor advised fund. We will explore what these vehicles are as well as how they compare to each other.
Alright. Let's get started. Much has been written about the wealth transfer that is likely to take place in the coming years. And for many, that means earmarking some of that wealth for philanthropy. As people think about philanthropy, they often want to create their own personal charitable vehicles, which typically comes in the form of a private foundation or a donor advised fund, often called a DAF.
As a result, I think it's important to understand those 2 vehicles, both what they are and how they might compare to each other as somebody might try be trying to decide how to choose one vehicle over the other. So, Leslie, can you help us get started by explaining what is a private foundation?
Leslie Kehoe:
Yes. It's a great question, Theresa, because I think a lot of people throw that term around and they don't actually really know what a private foundation is. So, a private foundation actually requires the creation of a new legal entity. And that usually takes the form of a corporation or a trust depending on what state you're in, and other factors may weigh into that decision.
Theresa Marx:
So, what do you typically see when somebody's forming a foundation? Do you often see a corporate form or a trust form, or does it kind of depend on the family situation?
Leslie Kehoe:
It depends on the family situation and really state law. I'm in the state of Georgia, and we have very well-developed nonprofit corporation laws. So, we typically see the nonprofit corporation format, but I know, for instance, in South Carolina, a trust is used quite a bit. So, it's good to, connect with your legal counsel to see which format would be the best for you and your situation.
Theresa Marx:
Okay. That makes sense. So then what about a donor advised fund or a DAF? What is that?
Leslie Kehoe:
So that's a completely different animal. A donor advised fund is basically an account that you set up within a charitable organization, and that charitable organization might be a community foundation or it might be a charitable arm set up by a financial institution, but you're basically creating an account. And that's where you put in your contribution, and that's where contributions come out.
Theresa Marx:
Okay. So, it's worth thinking about, you know, that private foundation versus the donor advised fund, and maybe somebody's trying to choose which option is best for them. What are some of the factors or the considerations we should be thinking about as we compare the 2?
Leslie Kehoe:
So, Theresa, there's a lot of differences between the 2, and a lot of them are very intricate differences. But from a practical perspective, I like to break it down to the 3 c's, something I call the 3 c's, control, convenience, and contribution size.
Theresa Marx:
Okay. So, let's start then with control. What do you mean by control, and then and what should we think about when it comes to both the private foundation and the DAF when it comes to control?
Leslie Kehoe:
So, this is a big one for some people. So, basically, with a private foundation, you or your family are in control of everything. The 2 big ones here are the investments and the grants that come out. And, basically, with a private foundation, you know, within the letter of the law, you have complete control over the investments and the grants. And this also create some really nice family legacy options when you're thinking about a private foundation.
Because your family's in control. There's lots of different aspects of a private foundation that you can bring in your family.
Theresa Marx:
And how would you bring in your family with a private foundation, like on the board or to run the organization? What do you mean by, you know, kind of bringing in the family?
Leslie Kehoe:
Yeah. So, they can have an actual role in the administration of the private foundation, whether it's a nonprofit corporation, they could be on the board like you mentioned, or they could be an officer. Or if it's a trust, they could be a trustee, or they could be on the grant committee. And then you can form committees that are in charge of certain aspects of the private foundation to participate in, you can sort of create with a private foundation.
Theresa Marx:
A lot of the clients I've worked with also like the ability to maybe compensate their family members, you know, from the private foundation for the actual work that they're doing. So, can you maybe touch on that a little bit?
Leslie Kehoe:
Yes. That's another great family legacy option with a private foundation. So, if your family member does take a formal role, and like you said, they actually must be completing that role, then they can be paid for it. The one caveat is you cannot just pay them whatever you want to pay them. It has to be commiserate with the actual role that they're fulfilling, the number of hours that they're working.
And there's actually a lot of resources online where you can look up, you know, what would be a good salary for somebody who's the, you know, treasurer of a private foundation that is this size. So that's just something to keep in mind, which is a nice thing about being in control.
Theresa Marx:
Yep. Absolutely. Okay. So, taking that to the DAF, what should we think about when it comes to control and the DAF and also kind of that family member involved that you were just talking about?
Leslie Kehoe:
So, with the DAF, the sponsoring organization, that charitable organization that you set up the account with, that sponsoring organization is actually who owns the DAF after you transfer the funds in, and you're what's called an advisor. So, they really ultimately, that charitable organization, has control over the investments and the grants. Now whoever the designated advisor is can give advice about, you know, how they think the asset should be invested or where the asset should be contributed to. And, you know, frankly, most of these charitable organizations are going to listen to your advice as long as you're full you know, following their rules and regulations, especially once it comes to grants.
But you ultimately do not have control. You know, if you recommend a grant and it's, a charitable organization that violates the terms or policies of your sponsoring organization, they may say, no. We're not going to make that grant. So, you do cede some control with the creation of a DAF.
Theresa Marx:
So, what about that family member piece? Can family members be involved in the same way that we were talking about with the private foundation or how is it different?
Leslie Kehoe:
So, they can't be quite involved in the same way. You know, organizations that sponsor these staffs are trying to create roles for family members because they know that this is a big deal for some families. So, you know, you could have a family member be an adviser. Sometimes you could have the option to give a little bit of your DAF and put it in a separate account that your family member could manage. You know, they could be the adviser, but it's not quite the same role and responsibilities that somebody can have as they can with a private foundation.
Theresa Marx:
I've often seen it kind of work with the donor advised fund more on a, I don't want to say casual way, but, you know, with that less structure than with the private foundation. Right? Maybe it's a family meeting where they're all talking about, okay, how do we want to use our donor advised fund this year? And there's kind of conversation around how they want to use it. It's not a specific role.
It's not defined in the documentation, but there still can be some family involvement and family conversation around philanthropy.
Leslie Kehoe:
That's right. And, you know, for a lot of families, that works well. Now, you know, they got to remember to have those conversations.
Theresa Marx:
Right.
Leslie Kehoe:
You know, with the private foundation, you're going to have to have those conversations because if your family member has a formal role, then you have to get together and make those decisions. So, the private foundation more, you know, forces you into having those conversations. With the DAF, you got to make more of an effort.
Theresa Marx:
Yeah. Good point. Okay. So, moving on to your second c, convenience.
Let's get into that, you know, for both the private foundation and the DAF.
Leslie Kehoe:
So, as we talked about with the private foundation, it's a separate legal entity. So, there's a lot of administration that goes with that. You know, everything from a tax return that has to be filed to, you know, you've got to approve grants every year. If you have a board, you have to have board minutes. You might need directors and officers liability insurance.
There's just a lot that goes into the administration of it. So, I wouldn't say convenience is, a great, aspect of a private foundation. Now that being said, you know, a lot of those administrative responsibilities can be outsourced if the family doesn't want to deal with it. You know, you have the accountant take care of the tax return. Now you might be managing some people, whoever you outsource all these responsibilities to, but you don't have to take that whole burden yourself if you don't want to.
But there's just a lot more involved with administering private foundation.
Theresa Marx:
So, it's control with that administration, but you also or with the private foundation, but you also get a lot more hassle or less convenience, if you will.
Leslie Kehoe:
That's right. That's right. You get, you know, a benefit on one side, but that creates a downside on the other. Exactly. Although some people like the administration of it.
You know? They'll welcome that opportunity.
Theresa Marx:
Absolutely. Okay. So, is the same true then for a donor advised fund? Do you get less control on a donor advised fund and therefore more convenience with a donor advised fund?
Leslie Kehoe:
Absolutely. And it's about as convenient as it could be because that sponsoring organization that we talked about; they basically take care of everything. So, you're at the very beginning going to sign an agreement. And then once you've done that and transferred your funds in, there's not much more else for you to do. I mean, you're going to recommend grants each year, and that's about all you have to do if that's all you want to do.
And an extra benefit that comes with this is for people who want to keep their charitable giving more on the down low, it's a little bit easier to remain anonymous with the DAF, because you don't have to file a tax return. You don't have to disclose your donors. So, if you name your DAF something that no one's going to recognize the name, you know, I'm not going to name it the Leslie Kehoe DAF if I'm worried about keeping my name under wraps. I'm going to name it the sunshine DAF or something like that. You know, that's another benefit for the donor advised fund for people who really are seeking some privacy.
Theresa Marx:
Mhmm. That's a great point. So then your last c, contributions. You know, what do we need to know about contributions for both of these types of entities?
Leslie Kehoe:
Well, as you might have guessed, with a private foundation, because there's significant administration, which really does create a few more costs when you're setting up a private foundation, if you're, you know, just going to give away a regular amount. So, if you're, you know, just going to give away a regular amount. So if you're thinking about a private foundation, I think you really need to be making a contribution side of size of about $1,000,000, maybe more. You know, somewhat of a personal preference, but there's just a lot of cost and administrative hassle. So you want to make sure it's worth it.
Theresa Marx:
And what about, you know, kind of, you know, kind of ongoing contributions depending on, you know, maybe what type of asset you're putting into the trust or the things or trust or nonprofit corporation. With a private foundation, are there things we should be thinking about there on the contribution side?
Leslie Kehoe:
So the other thing is if you're making a very significant contribution to our, private foundation, it's important to keep in mind that there are minimum distribution requirements each year with a private foundation. And I do know that some private foundations have a hard time meeting those minimum distribution requirements each year. If they, you know, dumped a whole lot of assets, which is great, they just might not be ready, because it's about 5% of the total value of the private foundation needs to be distributed yet, that may be an issue. So that's something to keep in mind.
Theresa Marx:
Great point. So then on the donor advised fund, what should we be thinking about, you know, both the contributions and then as you just mentioned, the distributions, you know, based on those contributions?
Leslie Kehoe:
So the good thing about DAPs is they're very accessible to almost every donor size. A sponsoring organization might have a minimum, but it's usually very minimal to set up an account. And so for most people, you know, it's going to be a great option if you're not sure you want to dump or you don't have a lot to dump in. So, yes, it's much more accessible, and so the contribution size is definitely a benefit when you're looking at the donor advised fund.
Theresa Marx:
So maybe if you're early on in your philanthropy, not ready to hit that $1,000,000 minimum, you said that, you know, this might be a good place to start because you can put in a, you know, less than $1,000,000, whatever that might be, probably from like $1,000 on up and to kind of get used to having your own charitable vehicle with it with a donor advised fund.
Leslie Kehoe:
Yeah. And it's a great point, Theresa, because we've seen a lot of clients who will do both of these. Yep. So, you know, it's not just either or. You can really have both of these depending on what your charitable, your charitable goals are.
The other thing, is we talked about the minimum distributions with a private foundation. Well, sometimes with that 5% amount, if you're not quite sure where you want it to go yet, if you have a donor advised fund, you could go ahead and put that minimum distribution, into the donor advised fund, and that buys you some time to then figure out, okay, now what charities do I actually want this to go to? The other thing is if your kids aren't ready yet quite to have a formal role with your private foundation, maybe you set up a little donor advised fund and let them be the of that. And that's sort of like a test case to see how they handle it. And then maybe it transitions into okay.
Now they're ready for a formal role in the private foundation. So, they can really work well together, both the private foundation and the donor advised fund.
Theresa Marx:
So, for the donor advised fund, do we have that same 5% requirement each year, or is it a little more flexible?
Leslie Kehoe:
Not now. We don't. So right now, it's very flexible. Sometimes you hear of congress thinking about, passing legislation to require some sort of minimum distribution out of the donor advised fund, but that has not happened yet. I do think donor advised sponsoring organizations are really good about advertising, how much they have come out each year.
Just sort of say, hey. We're really spending money. You don't need to give us some sort of minimum that we have to comply with. But nobody knows what will happen in the future. But right now, there is no minimum distribution requirement.
Theresa Marx:
So, if I put a $1,000,000 into a DAF, I can keep it in there and sometimes distribute out 20%, in other years, maybe 5%. I kind of have flexibility as the adviser to choose when that's coming out rather than that prescribed 5%.
Leslie Kehoe:
Yes. Now sponsoring organizations sometimes will say, okay. You can't just sit on this for, you know, unlimited years. So, they'll sometimes maybe have some policies and procedures that say, okay. You know, you can't just be inactive for a couple years. But from federal government legislation, there's no requirement.
And so, right, you can do as you see fit.
Theresa Marx:
Okay. So I want to just circle back real quick to something you mentioned about, you know, somebody can make a distribution from their private foundation to their donor advised fund because I think that that's helpful for a lot of families and a lot of people thinking about especially if they have both of these types. But am I correct in remembering that you cannot go from a donor advised fund to a private foundation so we can go one way but not the other?
Leslie Kehoe:
That's exactly right. And so, when people are setting up private foundations, you know, they might be really excited about it at the time. But, you know, 10 years down the road, they might be getting tired of having to administer the private foundation or their family circumstances might have changed. So, it's pretty easy to unwind the private foundation. You can just transfer it all into a donor advised fund.
But as you mentioned, you can't go the other way. So, if you've put funds into a donor advised fund, it has to come out to what we call public charities. It cannot go out to a private foundation. So, you'll just want to keep that in mind when you're putting assets into a donor advised fund.
Theresa Marx:
So it sounds like from this conversation, Leslie, that we really have, you know, pluses and minuses to both types of vehicles and really ultimately choosing one over the other or to maybe use both together really depends on each individual specific circumstances and what really might work for them and what their philanthropic goals are moving forward.
Leslie Kehoe:
That's right. And I think these 3 c's, the control, the convenience, and the contribution size really encompass most of the, you know, distinctions between the 2. But there's a lot of complicated issues when you're deciding. So, you want to make a good decision, and I would get your attorney and your accountant involved, to make sure you're making the decision that's best for you.
Theresa Marx:
Great point. Thank you so much, Leslie.
Leslie Kehoe:
Thanks, Theresa.
Theresa Marx:
Thank you for joining us for this episode of Wealth Planning Illuminated. We hope you found this topic interesting and that you will continue to explore the variety of wealth planning topics available to you on this channel. Thank you, and have a great day.
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