Irving Kempner, the son of Holocaust survivors liberated by the U.S. Army, shows gratitude for his good fortune by giving to the American Jewish Committee, the U.S. Holocaust Memorial Museum and other charitable causes. When Kempner, a 59-year-old retired corporate executive (he was a vice-president of Gillette and chief executive of LoJack, the car-security company), makes grants, he does so through the Kempner Family Foundation.
Kempner's "foundation" is actually a donor-advised fund, an account designed for philanthropic giving that is administered by a charity. Donor-advised funds provide more-attractive tax advantages than private foundations and are usually cheaper to operate. If you want to set up a family charitable fund, a donor-advised fund will likely meet your needs. But for some people, a family foundation may be a better way to go.
One critical factor is how much and how often you give. For instance, you should expect to set aside at least $5,000 to start a donor-advised fund sponsored by a financial firm. Many community foundations can set up a fund for $1,000 or less if you give regularly. But it usually takes at least $250,000 in assets to make a private foundation worth the cost.
If your giving patterns are the same year after year, "go with a donor-advised fund," says Chuck McLean, vice-president for research at GuideStar, which tracks charities. "Go with a family foundation if you want maximum control and maximum investment options."
Advantages of a fund
Kempner is eligible for an immediate tax deduction -- up to certain limits -- for cash, stocks, bonds and other assets he puts into the fund, which is sponsored by Combined Jewish Philanthropies of Greater Boston. The market value of his gifts goes into diversified investment pools offered by the fund. He can then select the charities that receive grants, but his requests must be approved by CJP, which legally controls the assets. "When I make a grant, it is not automatically rubber-stamped," says Kempner. "CJP makes sure it is a legitimate agency." Funds usually approve a donor's grant -- Kempner has never been turned down -- as long as a charity has 501(c)(3) tax-exempt status.
Many types of charities, including more than 700 community foundations, sponsor donor-advised funds. With $3.7 billion in assets, the Tulsa Community Foundation is the largest such organization in the country. A fund may be affiliated with a religious organization, such as the Catholic Community Foundation, or an educational institution, such as the University of Florida. Some of the largest donor-advised funds are administered by charities set up by financial-services firms, such as the Fidelity Charitable Gift Fund, the Schwab Charitable Fund and the Vanguard Charitable Endowment Program.
Donor-advised funds give you more-generous tax breaks than family foundations. For example, you can deduct the value of cash gifts to charities up to half of your adjusted gross income, compared with a deduction of up to 30% for cash gifts to charities from a private foundation. Gifts of stock and property also receive favorable tax treatment: With a donor-advised fund, you can deduct the value of such gifts up to 30% of your AGI, compared with up to 20% with a private foundation. Plus, if you go with a donor-advised fund, you avoid an excise tax of 1% to 2% on net investment income levied annually on foundations.
Managers of donor-advised funds point out that the funds are also less expensive to run than small family foundations. "With administrative expenses that are 20% lower than private foundations, the Gift Fund allows more dollars to go to the charities themselves," says Sarah Libbey, president of Fidelity's donor-advised fund.
In addition, donor-advised funds offer more leeway in setting your giving timetable because you're not required to make grants every year. That said, the largest donor-advised funds typically grant 20% of their assets annually; funds sponsored by community foundations give about 15% of their assets each year.
Because donor-advised funds have so many advantages, Libbey expects a 40% increase in the number of foundations that Fidelity will convert to funds in 2009 compared with last year. Such conversions are irreversible, and the rules for closing foundations vary from state to state, so it's important to consult an attorney. Many funds will help you with a conversion, which should cost about $5,000 for a small foundation.