Charitable Giving Vehicles: Exploring Options and Considerations

When thinking about charitable giving, the main thought on donors’ minds is most likely where to give back: either to the cause they care about, a certain population that they want to support, or a region of interest.  In addition to whereto give, donors can also consider how to give. Donors have many different methods or charitable giving vehicles that they can utilize for their giving.  Most used, and also the simplest approach is direct giving, which is often a response in the moment to various unfortunate natural disasters or crowd-funding requests using credit card, cash or checks. In addition to this, however, there are a variety of other methods that are worth considering when utilizing charitable giving dollars depending on the donor’s preference and desire for a more formalized giving approach.

Choosing the right charitable giving vehicle, or a combination of a few, can be complex but it’s important to start with your own preferences and personal financial situation, such as impact goals, time horizon, desire for anonymity, family legacy, estate planning or tax considerations. We’ve outlined a few of the popular charitable giving vehicles, each with its own benefits and other considerations, to serve as a resource as you explore what might be best for your own financial situation and charitable goals.

1. Direct Donations
   Direct donations are the most common way to give to charitable organizations through cash, checks or by credit card.
   
   Benefits: Direct donations are straightforward and provide immediate support to nonprofits. They are easy to make, provide flexibility of timing your donations, and offer potential tax deductions if you itemize. Many employers also offer matching gift programs which can help to increase the impact of your donation.
   
   Considerations: Cash donations may not be the most tax-efficient strategy for high-net-worth individuals. Deductions are subject to limitations, and there may be alternative approaches with greater impact. For example, donating stock that has appreciated for more than a year would be more tax-efficient and often results in a larger donation to the charity.
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2. Donor-Advised Funds (DAFs)
   ‍A Donor Advised Fund (DAF) is a type of charitable account, hosted by a public charity, designed to facilitate and optimize charitable donations.  
   
   ‍Benefits:  DAFs offer flexibility by allowing donors to contribute to the fund and recommend grants to preferred nonprofits over time. They provide an immediate tax deduction upon contribution which can be particularly helpful during high-income years. The charitable assets within a DAF can be invested, allowing for tax-free growth and potentially increased philanthropic funds. Grants from a DAF can be made anonymously (if that’s the donor’s preference) and can be established simply and quickly with no initial set-up costs.
   
   ‍Considerations Some DAFs have administrative fees (although much less than private foundations, which are described in more detail below), and donors relinquish direct control over the funds once granted to the DAF. Research is essential to choose a reputable DAF provider. When recommending grants to nonprofits from your DAF account, they must be a registered 501c3 public charity. DAFs do not have an annual payout rule like private foundations (which has drawn criticisms from the philanthropic sector), but DAF grant payout rates tend to exceed those of private foundations by three to six times.
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3. Private Foundations:
   Private foundations are independent legal entities established to support charitable causes. They can be family-operated and funded by a single source or multiple donors. They can be chartered through a trust agreement or through incorporation.
      
   Benefits: Private foundations offer full control over charitable giving activities and investment decisions. They can be a family legacy vehicle, allowing involvement across generations. There are many tax advantages such as an immediate income tax deduction and the assets you contribute to a private foundation will be able to grow in a tax-advantaged environment.  Some of the largest private foundations include The Bill & Melinda Gates Foundation, The Ford Foundation, and the W.K. Kellogg Foundation.
      
   Considerations: Private foundations require significant administrative responsibilities, including legal compliance, reporting, and operational costs. They also lack the anonymity of other vehicles. They have an annual payout requirement of 5% of their net assets for charitable purposes. Private foundations take more time and money to establish than DAFs and require the approval of the Internal Revenue Service (IRS).
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4. Charitable Remainder Trusts (CRTs):
   CRTs are irrevocable trusts that allow donors to provide an income stream to beneficiaries for a set period (receiving a current-year personal income tax deduction), after which any remaining assets will pass to one or more charities, chosen by the donor.
   
   Benefits: CRTs allow donors to provide an income stream to themselves or beneficiaries for a specified period while the remainder goes to charity. They offer potential income tax deductions. CRTs can be funded during an individual’s lifetime or by will. Donors are able to support charities anonymously through this method.
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   Considerations: CRTs are more complex to set up as they require the services of an attorney to establish the trust and may not be suitable for all donors. The income stream to beneficiaries is subject to taxation.
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5. Charitable Lead Trusts (CLTs):
   CLTs are irrevocable trusts that provide income to one or more charities, selected by the donor, for a predetermined period, after which any remaining assets will pass to the stated beneficiaries.
   
   Benefits: CLTs provide income to charities for a specific period, after which the remaining assets are passed on to beneficiaries, such as family members. They can reduce estate and gift taxes. CLTs can be funded during an individual’s lifetime or by will and donors are able to support charities anonymously through this method as well.
   
   ‍Considerations: CLTs are complex and involve legal and administrative intricacies. Beneficiaries must wait for the trust term to expire before receiving assets and the trust income is not tax-exempt.
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6. For-Profit Limited-Liability Company (LLC):
   A LLCs is a for-profit business structure that some donors choose to use for their philanthropy. Philanthropic for-profit LLCs are becoming more common among ultra-high-net-worth individuals.
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   Benefits: The donor has the most flexibility, control, and privacy to make grants or investments in charities or companies that align in their cause areas, regardless of the charitable status of the organization. For example, this allows donors to make political donations or lobby which is not possible through private foundations or DAFs. Often donors who utilize this vehicle do so in combination with a private foundation or DAF.  Some well-known philanthropic LLCs include The Chan Zuckerberg Initiative, The Omidyar Network and The Emerson Collective.
   
   Considerations: Donors do not receive tax deductions for funds donated to the LLC and any income generated by the LLC will not be tax-exempt. LLCs also do not provide any tax benefits when considering passing this vehicle to family members.  Any deductions would only apply when the entity itself distributes funds to a 501c3 organization. There are some criticisms of for-profit LLCs used as charitable vehicles because of the lack of required payout or transparency.

Choosing the right charitable giving vehicle involves thoughtful consideration of your financial situation, philanthropic goals, and personal preferences. Each option offers distinct benefits and considerations, and the choice may depend on factors such as tax strategies, family involvement, and long-term impact. Often, donors decide that more than one giving vehicle is appropriate for their goals and situation.

Once you decide on your charitable giving vehicle(s), you can consider developing more of a strategy behind your annual giving. If you care deeply about a cause but are not sure what specific organizations are making an impact, collaborating with other donors around that specific cause area though giving circles or collaboratives can also be an effective approach to support large systemic changes to move the needle on important issues. In addition to your philanthropic giving, there are other ways to make an impact with your dollars, such as through impact investing.

If you’re interested in getting support on what charitable vehicles might be the best fit for you and creating a giving strategy that aligns with your values and maximizes your impact, our Fire Capital team would be happy to support you in your journey.