Not all giving is created equal. Many charitably minded individuals, couples and families who want to make a bigger impact with their donations—while availing themselves of tax breaks and other benefits—create vehicles for their contributions called donor-advised funds and family foundations.
Donor-advised funds are ideal for individuals and allow for private contributions of smaller sums, while family foundations are good for managing a lot of money and creating scholarships or grants. Here’s what you need to know before starting either to ensure your goodwill goes the greatest distance.
Donor advised funds
Bill Pugh, 64, a retired computer science professor at the University of Maryland who lives in Bethesda, faced a conundrum more than a decade ago. He owned some securities that had increased in value over the years and wanted to donate some of the money the assets had earned.
He could have simply sold the securities, paid the taxes, and then contributed the remaining funds to charity. After learning about a donor-advised fund (DAF), a type of private account created to manage and distribute charitable donations, he realized he could give the whole value of his extra assets to charity while also lowering his taxes: a smarter way to donate money, he says.
The account is called a donor-advised fund because the donor picks where the money is donated and sends the money from the fund to those charities. A DAF can be started quickly with minimal paperwork through most investment and wealth management firms. Some institutions do not require a minimum initial contribution, but most require a preliminary investment of $5,000-$25,000.
“DAFs typically have portfolios that you can invest in, like within a 401(k),” says Keith Barberis, partner and managing director of Barberis Wealth Management of Steward Partners in Bethesda. “They typically have conservative and aggressive options.”
One big benefit: Any investments in the DAF grow tax-free, so there’s no additional financial burden to the account holder. And a stock contributed to a DAF can lose value, but the account holder isn’t losing money, they simply would have less money to give away. The charity is receiving a monetary contribution from the account, so they wouldn’t lose money either.
Pugh, who already had an account with Fidelity Investments, chose to use its sister operation, Fidelity Charitable, keeping the startup and management simple. When Pugh wants to contribute to a charity, he searches an online portal to ensure it’s an IRS-qualified 501(c)(3) public charity in the U.S. and then determines how much to send. “It’s easier than sending a check, and there’s no credit card fee, so the charity isn’t losing any of your donation,” he says.
Another advantage Pugh appreciates is the ability to make contributions anonymously, ensuring that his name isn’t publicly available and isn’t added to any outreach lists for other charitable organizations hoping to tap new donors.
Pugh mostly contributes to his DAF annually, but there are years when he won’t. “Generally, I’m only donating appreciated securities, so if the stock market is down that year, and I don’t think there’s a particularly good time to sell stock, then maybe I won’t give that year,” he says.
Barberis says, “Currently, you can deduct up to 60% of your adjusted gross income [for] cash contributions and up to 30% of your adjusted gross income for appreciated asset contributions.” Barberis, who only shares tax information—not advice—with his clients, recommends that anyone with a DAF or foundation should always talk to a professional tax adviser before making decisions related to charitable giving.
“We recommend bunching the charitable contributions, so someone might make the equivalent of five years’ worth of charitable contributions to the DAF in one year so they can itemize and get a great deduction,” Barberis says, “because itemizing only reduces a tax bill if the potential amount of taxes you owe is more than the set amount of the standard deduction.”
Barberis believes that one of the most overlooked potential benefits of a DAF is using it to dissolve the cost of any taxes on a portfolio with a lot of stocks that started out cheap and then appreciated.
There are some disadvantages to a DAF according to Barberis. If you make a series of charitable contributions throughout the year that don’t eclipse the standard deduction, you won’t reap the tax benefits. You cannot accept anything in return for the charitable contributions, such as free tickets to a local theater you support. And once funds are placed in a DAF, they cannot be withdrawn.
Family foundations
Karen Leder, 59, and her husband, Ethan, 61, who live in Bethesda’s Edgemoor neighborhood, formed a family foundation several years ago after Ethan’s company, Precision Medicine Group based in Bethesda, completed a major investment and recapitalization, leaving the family with some new assets they wanted to give to charity. The Leder Family Foundation focuses on contributing to education, health care, economic justice and Jewish-related causes in the D.C. area. One scholarship initiative helps cover tuition costs for local student-athletes, others go to students at Johns Hopkins University, Ethan Leder’s alma mater. “The hardest part is deciding where you want to put your resources,” Karen Leder says. “In my opinion, almost every organization is worthy.”
Unlike a DAF, a family foundation is not a plug-and-play solution, instead requiring much more money and oversight, while offering more flexibility and independence in return. Barberis sees them as a way for couples and families to work together on identifying meaningful charitable organizations and initiatives. “That way, everyone is involved and understands what’s important to everyone else,” he says.
Barberis estimates the opening investment should be at least $1 million. A foundation can be funded with a variety of contributions, including cash, stocks, real estate, and interests in family-owned companies. There are significant tax deductions for these contributions, though not as generous as a DAF. Donors can deduct up to 30% of their adjusted gross income (AGI) for cash contributions, up to 20% of their AGI for the fair market value of publicly traded securities, and up to 20% of their AGI for the cost basis of real estate and interests in family-owned companies, according to Barberis. There is an annual 1%-2% excise tax on the foundation’s resulting investment income, Barberis says.
One consideration: There are operational requirements for a family foundation. The foundation must form a board that meets annually, it has to file a tax return, and at least 5% of a foundation’s funds need to be distributed every year. Whether the family oversees the foundation itself or hires a third party to manage it, they will need to pay the requisite administration, accounting and attorney fees, according to Barberis.
On the other hand, there’s much more latitude on who or what a foundation can support. “Foundations do have more flexibility in the grants they give out,” Barberis says. “They can even make grants to individuals if the proper documentation is used and it meets the standards required.”
If someone is facing an emergency or expensive medical crisis, a foundation may be able to help that person directly. Foundations can also create a specific scholarship and then determine who wins it, says Barberis.
One drawback: Nothing is anonymous. The tax filings of foundations are public, so anyone can look up its size and where its donated money has gone.
To make the maintenance of the Leder Family Foundation easier, the Leders use the Foundation Source in Fairfield, Connecticut, which provides support services. It issues grants, handles tax filings, and otherwise ensures the foundation is compliant with the law. “That way we don’t have to deal with compliance, do tax prep, and that sort of thing,” Karen Leder says.
An advantage of a foundation is the ability to hire staff—which can include family members—to oversee grants, administration and investment strategy. The foundation can give reimbursements for reasonable expenses, such as travel to assess a charitable organization that may be the recipient of a future contribution. Finally, if the foundation becomes too cumbersome to manage, or its assets are depleted, Barberis says any remaining funds can be transferred into a DAF, ensuring its charitable mission continues even after it’s dissolved.
Nevin Martell is a Silver Spring-based freelance writer and photographer who regularly contributes to The Washington Post, Washingtonian, USA Today and National Geographic. Find him online at nevinmartell.com and on Instagram @nevinmartell.
This story appears in the November/December 2024 issue of Bethesda Magazine.
