The mechanics of charitable giving

Private foundations vs. Community Foundations vs. Supporting Organizations

If you are serious about sustained giving to charitable causes, this page is for you.

Disclaimer: I'm not an expert on this stuff, so here's what I know from experience and talking with others. I'm still learning, even after 5 years of philanthropy.

One basic tip: Purchase your stock early on if you possibly can. That way, when you donate the appreciated stock, you don't have to recognize the capital gain, and you get a deduction on the full amount. You never want to sell the stock yourself; let the charity do this.

Here are your four principal options for where to park your hard earned monetary assets:

Giving directly to the charity
Some top philanthropists do this. Total control. No hassles other than record keeping and writing the check and remembering to take the tax deduction. Best part is you can invest the money wherever YOU want including hedge funds, etc. Bad part is that very cumbersome to give appreciated stock (you have to do it each time). Using Network for Good can help you simplify your giving when you give directly. Makes it very easy.

Set up a donation page on Bring Light
Bring Light was created by former executives at Adobe Systems (ironically, by people who worked on FrameMaker, a product I helped create).You can create a page at BringLight and then tell your friends and family about it. They can then donate to your fund. You can then tell BringLight what 501(c)(3) is to receive the funds. You can specify more than one. This is absolutely ideal if you are diagnosed with cancer. People say: "How can I help?" You say, "give to my page." Then, you can later determine which charities are the most effective for your disease and disburse the funds at any time. You can give directly to hospitals, etc. Any 501(c)(3) non profit. This way, you don't have to decide at the time of diagnosis where the money would be best spent. A total win if you are in a similar situation I have been with my cancer. I have top scientists tell me which researchers to get the grants. The money is spent as responsibly as possibly with little overhead. This is better the Network for Good which is similar in concept; you can't set up a fund there to receive funds unless you are an IRS registered 501(c)(3) charity. Bring Light also helps charities raise money for specific projects.

Donor-advised fund at a community foundation or public charity (such as AEF)
 In this option, you sign a contract with your local community foundation to establish a "donor advised fund." You make one giant gift usually, but you can add to your fund at anytime. Then you call or email to tell them where to disburse the funds. They verify that you are giving to 501(c)(3) charities. Unless you are doing something illegal, they always follow your "advice" because otherwise people wouldn't use them and they would die.

Advantages

• You get to specify where and when the money goes
• You are not required by the IRS to donate a specific amount each year
• No paperwork; just fax the form or email the community foundation the amount, date, and recipient. I do all my grants by email now. It's really simple; much easier than doing it myself
• You never have to track receipts since all your donations come out of the community foundation
• No work at tax time; since all your donations are made to the community foundation, you've probably made just one big grant years ago
• Your endowment compounds tax free
• You can donate to the fund when your stock is at its peak; then later determine who gets the money (instead of having them tied which can limit your flexibilty in getting the most out of your donation)
• You can donate even if you are locked up for any reason (e.g., during an IPO, after a merger, etc.). This is because the charity can short the stock for you and you can later cover the short. This is really important since your stock always seems to peak when you can't sell it. So you can maximize the charity benefit and maximize your tax deduction. In the largest grants we've used to fund the foundation, we've always ended up using this technique (because the stock price was maximized during a lockup period).
• It's hassle free. Stock transfers are always a pain with all the paperwork, doubly so for the shorting technique.  This allows you to do it just once. When we created our endowment fund, it was with $6M worth of stock. We only had to worry about one sale and had one item on our tax return.
• The recipient charities like it too since it less work for them (they get cash)
• Same deductibility as if you gave directly to a charity
• No excise taxes (as in private foundation)
• Minimum investement is pretty low (around $25K)
• Simple to get started
• Can get started in a day
• You can call it anything you want, e.g., the" John and Mary Doe Foundation"
• Anyone can donate money into your fund
• You can move funds between a donor advised fund and a supporting organization
• It's easy to give anonymously to a charity without anyone in the charity knowing who you are

Disadvantages

• You can't usually control how the endowment funds are invested, but like a 401K, you can choose between high yield and low yield investment options (at least at the Community Foundation of Silicon Valley (CFSV), thanks to my suggestion). However, if you have a $1M fund at Fidelity Charitable Gift fund or you open a $10,000 fund at AEF Donor Advised Funds, then you can direct how the funds are invested so long as they are invested transparently so the charity can verify there is no self dealing, e.g., no hedge funds
• You can't employ family members
• You can't pay for "expenses" like office supplies or other costs
• The fund only survives a generation unless they add significantly to the endowment
• You can't hire a staff to help you sort through all the grant proposals

Supporting organization to a community foundation
This is like a donor advised fund, but you get a lot more control of the investments and you can hire a staff to help you and you can engage in public lobbying. In this option, you set up a board of directors controlled by a community foundation. In essence, they are there to keep you honest, so you can do all the things that a private foundation can do that a donor advised fund cannot. So for example, you can invest portions of the endowment in startup companies, or put it all into Microsoft stock or US Savings BondsSee details below. So long as the investment is "reasonable" (i.e., putting 100% of the endowment into equity of a startup company is not reasonable since it would be extremely risky) and not "self-dealing," you should be OK.

Advantages

• All of the advantage of a donor advised fund plus eliminates all the disadvantages
• Can hire staff, incurr expenses, invest the money as the BOARD approves

Disadvantages

• Takes about a month to set up (government approvals)
• You don't control the board (although for anything reasonable they should approve it, but they do not have to and there are cases where this can be a real problem and very frustrating). Boards are typically more conservative than you are, e.g., investing the endowment. So this can be a good thing, or very frustrating. And if you are diagnosed with cancer, you will not be allowed to vote on grants related to cancer or even participate in the discussions. I know...this happened to me.
• $1,000,000 minimum size (at least at the CFSV)

Private foundation
This give YOU more control than a supporting organization, esp. in times of greatest need, e.g., you are diagnosed with cancer. You call the shots.

Advantages

• You can dictate where the money goes
• You can hire staff
• You can decide where to invest the endowment

Disadvantages

• No lobbying
• 2% excise taxes on investment income (that's not too bad since it is on the income, not the principal)
• Restrictions on investments
• More severe limitations on tax deductibility of contributions into the foundation
• More expensive startup costs (but under $10K)
• Unlike a supporting organization, people can't contribute money into your foundation easily (but it can be done)
• Burdensome and expensive IRS administration requirements
• If you don't give to a 501(c)(3) charity, you must fill out lots of paperwork
• Can't give to disqualified people (such as family members working for the foundation like you could with a supporting organization)
• Operating private foundations (as opposed to non-operating private foundations) are subject to additional rules (beyond the normal private foundation rules). An operating private foundation means the foundation does work of its own or supervises it's own activities or donations to non 501c3s), rather than just passing through funds to other 501c3s (non-operating).

The CFSV has some more info on charitable giving options (along with another picture of us).

Also check out Foundation Definitions.

Back to our charity page or our charitable guidelines page.