Paying It Forward

August 5, 2011

John Levesque


Filmore RoseYou are a philanthropist if you consistently donate
charitable gifts to make the world a better place. You probably give considerable
thought to your annual charitable giving, and you know how much the weak
economy has affected charitable organizations.

What better time than now to organize your philanthropy
through a private foundation or a donor-advised fund? The choice will depend on
the funds you can dedicate to charitable causes and whether you want to be a
hands-on donor.

A private foundation is a charitable organization funded
primarily by an individual, a family or a corporation. It may be organized as a
nonprofit corporation or a trust. Its principal purpose is usually making
grants to organizations for scientific, educational, religious or other
charitable purposes. Many private foundations focus their grant-making on one
or more areas of interest, such as health care or the arts.

Private foundations are subject to a number of reporting and
operational rules, including restrictions on self-dealing and annual
distribution requirements. As a practical matter, the costs of administration and
compliance make a private foundation suitable only for donors who plan to give
substantial contributions and create a permanent fund.

A donor-advised fund (DAF) is a relatively simple, low-cost
and flexible alternative to a private foundation. A DAF is created by
contributing to a public charity that sponsors and administers DAFs. The donor
is entitled to an immediate income tax deduction upon making the contribution.
The donor recommends which charitable organizations will receive grants, and
the amount and timing of such grants. The sponsoring organization takes care of
all the administrative work, may provide support in the grant-making process
and furnishes the donor with periodic reports. This approach enables the donor
to concentrate on grant-making.

The sponsoring charity has final approval on the grants
(ensuring grants go to qualified charitable organizations) because that is one
of the guidelines governing the operation of DAFs.

DAFs are available through local community foundations and
many other charitable organizations. A number of mutual fund companies,
brokerage firms and trust companies have DAFs as well. There are differences
among DAFs with respect to the types of assets accepted, the level of
administrative fees charged, the minimum amounts required to establish a fund,
and restrictions on the types of grants that may be made. For example, if you
plan to establish a DAF, you might want to ask whether grants may go outside
your community or whether there is a minimum grant amount.

If you are committed to annual charitable giving but also
want to provide for your family, you can combine philanthropy with advantageous
estate planning through a charitable lead trust (CLT). Current low interest
rates and low asset values make this a particularly opportune time to consider
a CLT.

A CLT functions somewhat like a temporary private
foundation. To create a CLT, you transfer assets to a trust. The trustee
distributes income, typically in the form of a fixed annual payment, to one or
more charities for a term of years. At the end of the selected term, the assets
in the trust, which ideally have appreciated, are transferred to the donors
designated family members. Because the value of the charitable lead interest
reduces the amount of the taxable gift to family members, it is possible to
greatly reduce or even eliminate gift or estate taxes that would otherwise be
due when the assets are distributed to family members. The rules governing CLTs
are complex and you need the help of a competent professional to establish one,
but the benefits can be compelling.

This is a sponsored legal report. Filmore Rose, an attorney
at Lane Powell, focuses his practice in the areas of tax, estate planning and
tax-exempt organizations. He is experienced in legal issues involving federal
estate, gift and generation-skipping tax, including both planning and
compliance. He also represents individuals and charities in charitable gift
planning. He can be reached at or (206) 223-7747.