Leaving a Lasting Legacy

Leaving a Lasting Legacy

May 05, 2022
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How to Pay it Forward with a Charitable Foundation

When you think about the kind of legacy you want to leave, what comes to mind? For some, it’s making sure assets are successfully transferred after they’re gone. Others might want to make sure that higher education is provided for their grandchildren. Still others want to continue a financial contribution to an organization that meant a lot to them during their lifetime.

But maybe you want to do more than have your estate make a one-time donation to your favorite charity or organization. Some individuals choose to make a difference for their community or school by setting up a charitable foundation. You don’t have to wait until you’re retired; you can start this process at any time. In fact, the earlier you get started, the more people can be helped by your generosity.

Keep in mind, this article is for informational purposes only and is not a replacement for real-life advice. Make sure to consult your tax, legal, and financial professionals before modifying your estate strategy if you want to update or expand your charitable giving.

Starting a Charitable Foundation

While creating a charitable foundation stems from a desire to do good, it’s important to consider just how your charitable foundation will be set up. The Internal Revenue Service (IRS) has a number of guidelines to get you started. You may need to create an organizational structure, a charter, and bylaws to establish your charitable foundation.1

Once your foundation is established, there are a number of ways to fund the operation. One choice is funding the foundation with appreciated assets, which may help you manage your overall tax obligation. Determine whether or not there’s a minimum funding requirement for your charitable foundation, and once it’s established, how any fees are handled. Administrative costs and investment fees may be anything from a predetermined amount to a percentage of the balance of the fund and deducted directly from the account.2

There is no time limit for when grants are given out from your foundation, so you can take your time to ensure that you’re supporting causes that are meaningful to you.2

Private Foundations vs. Donor-Advised Funds

For most people, the purpose of any type of charitable foundation is to donate money now and have it be disbursed over time. But how do you know what type of charitable foundation is the right one for you? This depends on a number of factors, including tax considerations, how involved you’d like to be in the foundation, and whether or not you’d like flexibility in determining where the funding goes.2

Two of the most common setups for charitable foundations are private foundations and donor-advised funds. Donor-advised funds are the simpler of the two, which may be appealing if you’d prefer a more active approach to your foundation. Once your donor-advised account is set up, you can decide over time which charities and causes you’d like the funding to go toward. Donor-advised funds may also provide tax considerations that you can manage. Your tax deduction may be based on contributed amounts worth up to 60 percent of your adjusted gross income. For appreciated assets, the deduction cap is 30 percent, and you’re able to carry over excess deductions for up to 5 more years if you exceed the limits.2

Some donor-advised funds are considered mutual funds and are sold only by prospectus. The prospectus will provide information on charges, risks, expenses, and investment objectives and should be reviewed carefully before investing. Investment companies can provide a prospectus, or you may prefer to ask your financial professional. Read it carefully before you invest or send money.

“You may need to create an organizational structure, a charter, and bylaws to establish your charitable foundation.”

However, donor-advised funds can be restrictive. Because these funds are often sponsored by a community foundation or non-profit (like a hospital or religious organization), there may be restrictions on where and how your grants are used. Further restrictions can be applied by the financial institution they’re affiliated with.2

Establishing a private foundation is more complicated at the outset and typically costs more to set up. Private foundations are best for high-net-worth individuals who have at least $2–3 million ready to establish their foundation; otherwise, you could spend more on startup costs than you will helping others. While private foundations give you the flexibility to give money to whomever you choose—from scholarships to public charities to international grants—there are also more tax filing and paperwork requirements. Whereas donor-advised funds are not required to distribute money annually, private foundations may be required to distribute 5 percent of their assets annually and may be subject to an excise tax on the net income.2

Other Types of Charitable Funds

While donor-advised funds and private foundations are the most common, there are a few specific types of funds that may work well for you.

Designated funds allow you to support your favorite non-profit organization with an annual donation.3

  • Discretionary funds are established to allow for grants to adapt to changing circumstances and the needs of the organization.3
  • Field-of-interest funds allow you to support a specific cause, like education or the environment. Depending on how your foundation is set up, you may or may not have a say in specifically who receives this funding, and the foundation may make an independent decision.3
  • Future funds are typically established from a donor’s estate and allow a fund to be created as part of your legacy after you’re gone.3

1. USNews.com, March 11, 2020

2. CNBC.com, August 23, 2021

3. FoundationHoc.org, 2021

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk, and the return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Past performance does not guarantee future results.The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

Photo by Nina Strehl on Unsplash