Ways to Give

Selecting Your Philanthropic Vehicles

Individuals are increasingly looking to be more strategic and impactful in their philanthropy. They’re adopting thoughtful and well-crafted approaches to their charitable giving that integrate with their overall wealth plan, maximize their contributions, and make a measurable and lasting impact on the causes that matter to them.

If you’re hoping to make the shift from traditional direct giving to a more strategic approach, one of the crucial decisions is determining which charitable vehicles best fit your goals — your philanthropic impact and overall wealth planning goals.

Since everyone’s situation and goals are different, there is no one-size- fits-all approach. At Bessemer, we can collaborate with you to develop a custom framework, often employing a combination of vehicles to establish a “charitable toolkit” that prioritizes your ultimate goals and desired impacts on society, family, and legacy.

This primer provides an overview of the most common and effective vehicles and shares insights drawn from our experience working with clients and their families.

For ease of reference, we have organized the information into three sections:

1. Traditional Grantmaking
2. Planned Giving and Estate Planning
3. Philanthropic Initiatives

Your Bessemer team can facilitate a seamless and transparent decision-making process — equipping you with the most current and comprehensive information to make the most effective choices. We are here to work closely with you every step of the way.

Traditional Grantmaking

The simplest and most direct way of giving to a qualified charity is by contributing cash, securities, or other assets. This enables the donor to have a personal relationship with a nonprofit and allows a high level of flexibility in responding to immediate needs.

A direct gift is typically tax deductible in the year in which it is given, subject to percentage-of-income limitations (currently up to 60% of adjusted gross income for cash and 30% for appreciated property, such as securities).

While direct giving has limitations when it comes to ongoing family engagement, it can be a useful part of any donor’s plan — either as a simple one-time grant, with or without a gift agreement, or as part of a larger plan of complex giving.

Direct giving is the most streamlined giving approach, and it can be an ideal way to begin philanthropic giving; it can also be a useful tool within more complex strategies. We have seen client couples or smaller nuclear families work thoughtfully and effectively using this method.

In general, donors typically move from direct giving to using one or more of the charitable vehicles discussed below as their giving matures — for example, the volume of their grantmaking is increasing, the grants they want to make are becoming more complex, or they want to formalize a family giving platform where multiple (often younger) generations are empowered to engage in the process.

A donor-advised fund, or DAF, is a giving account that is created and administered by a sponsoring institution, such as the Bessemer Giving Fund or a community foundation, that qualifies as an independent 501(c)(3) charity. Once the donor makes an irrevocable contribution of personal assets to their DAF account, they can make recommendations to the sponsoring organization as to how those funds are granted to operating charities. The sponsoring institution almost always respects the recommendation if it names a qualifying public charity to receive the grant.

DAFs allow donors to make anonymous contributions, receive an immediate tax benefit for their charitable giving, and recommend grants for the fund over time. Compared to other charitable vehicles, they offer an avenue for giving with lower costs, less oversight and effort for the donor, and more efficiency overall. The sponsoring institution is responsible for all administration and compliance of the DAF. In some cases, it may be possible to incur operating expenses that further the donor’s goals (e.g., consulting services) through the DAF.

As with direct gifts, DAF donations are usually tax deductible during the year in which they are made to the DAF, up to 60% of adjusted gross income for cash contributions.

Presently, DAF accounts are not subject to a minimum annual distribution requirement. Donors experiencing sudden liquidity events often establish DAFs to offset capital gains and give them time to consider how to construct a grantmaking portfolio that will be most meaningful to them and impactful in the communities they care about. DAFs provide those donors with more time to build their charitable giving plans. They can also be established quickly and easily, which works well for donors working on a tight timeline for tax efficiencies.

One feature that may make DAFs less attractive to philanthropic families is the inability to officially structure a complex governing framework. DAF-holding families can assign to specific individuals the right to request grants as a donor advisor, which simplifies succession planning. However, when a family has more than one donor advisor, there is no mechanism to require all advisors to agree to a distribution recommendation.

Our team can work with your family to help facilitate consensus and create a governance framework and structure that will provide the opportunity for family engagement and continuity in giving through future generations.

A private non-operating foundation is a nonprofit grantmaking organization that is created and funded by an individual, family, or corporation. Assets are irrevocably transferred to the foundation, which can have tax and estate planning advantages. Donations to private foundations are generally tax deductible for the year in which they are made, typically up to 30% of adjusted gross income for cash contributions.

To avoid penalties, private foundations are required to distribute a minimum percentage of their assets annually for charitable purposes, typically 5%. Under current law, a portion of the annual distributions can be made into a DAF account.

Private foundations have the advantage of being able to leverage staff salaries and other operational expenses (such as rent for offices, tax and legal advisory services, a portion of investment management fees, meeting expenses, related travel, etc.) as part of the 5% required distribution.

Unlike DAFs, the net investment income of a private foundation is subject to tax of 1.39%.

While private foundations are generally more complicated to establish, from a family engagement and governance perspective, they tend to remain a “go-to” vehicle for larger-scale endeavors. They are particularly appropriate for families with more assets to devote to philanthropy.

Private foundations can be structured as a charitable trust or a nonprofit corporation. Donors should consider the following elements when determining which structure will work best for their philanthropic goals:

Charitable LLCs are playing a growing role for philanthropists who prioritize flexibility, minimal compliance requirements, and privacy, and when immediate tax efficiencies are not the main goal. This vehicle combines the profit-driven nature of traditional business entities with a philanthropic mission. These entities can generate revenue and allocate a portion of their profits to charitable causes — which, when given to a public charity, enables the associated tax efficiencies to flow back to the LLC’s members.

LLCs are not required to disburse any of their assets, and when dissolved, all assets held revert to the members.

It is important to note that no tax deductions are available when funding an LLC. Tax deductions come into play when gifts are made to public charities, and then those tax deductions are available to the owners of the LLC.

Furthermore, all income earned on the assets within the LLC is taxable to the owners of the LLC. By blending the flexibility of a business vehicle with social responsibility, charitable LLCs are reimagining the way we think about traditional grantmaking.

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Planned Giving and Estate Planning

In addition to the charitable vehicles previously discussed, several planned giving strategies may offer individuals a range of options to leave a philanthropic legacy and receive a gift or estate tax benefit.

The most common philanthropic estate planning vehicles are charitable remainder trusts and charitable lead trusts. Variations of these vehicles provide individuals with the ability to support charitable causes while also enjoying certain financial benefits. Planned giving vehicles can be utilized to minimize tax liabilities, transfer wealth, and ensure that one’s assets are distributed according to their wishes.

Charitable remainder trusts are created when donors want to create an income stream for themselves or others but also have charitable intent. The income stream can be in the form of an annuity (the recurring dollar amount is determined at the creation of the trust) or a unitrust (an annual percentage of the trust assets). The annual payments can be structured for a term of up to 20 years or for the lifetime of the individual(s). The remainder interest at the end of the chosen period is left to charity. It is possible to name the donor’s DAF or private foundation as the charity (with certain tax considerations). These structures often result in a current income tax deduction for the donor and remove the assets from the donor’s taxable estate.

Charitable lead trusts, on the other hand, are set up to create an income stream for a charity (which may be a DAF or private foundation), with the remainder interest after the chosen period going to family members. Again, the income stream can be in the form of an annuity or a unitrust. We often see charitable lead trusts as an estate tax savings vehicle. A client may reduce or eliminate their estate tax liability by leaving to a charitable lead trust the amount of their estate that would otherwise be taxable. This would provide a gift to charity and leave any remainder amount after the term of the charitable lead trust to the client’s heirs.

Individual retirement accounts (IRAs) and life insurance policies can also be used as planned giving vehicles, allowing individuals to make annual distributions or designate beneficiaries to receive the funds upon their death. That said, the use of life insurance policies is less common as it is not the most tax-efficient method for leaving a planned gift. For IRAs, each spouse can give up to $100,000 from their own account annually as a qualified charitable distribution. In addition, IRAs are often excellent choices to leave to charities upon death because their assets would otherwise be subject to both estate and income tax.

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Philanthropic Initiatives

A public charity is a tax-exempt nonprofit organization that receives most of its funding from the public, government agencies, corporations, private foundations, and other sources.

Public charities are dedicated to serving the public good by carrying out charitable, educational, religious, scientific, or other philanthropic activities.

Donors might consider starting a nonprofit organization if they are deeply passionate about a specific cause and want to have a direct and sustained impact on addressing that issue. We often caution clients considering establishing a public charity, however, that such an endeavor requires full-time dedication and constant fundraising to meet the IRS “public support” test, all of which requires considerable human resources, whether paid or volunteer, beyond the founder to support the organization.

Private operating foundations can be thought of as hybrids of traditional private foundations and public charities in that they have limited funding sources but still carry out defined programmatic activities (e.g., museums, zoos, training programs, animal rescue farms). Private operating foundations give donors significant control over program activities if distribution requirements are met.²

Private operating foundations are advantageous for donors who prefer a hands-on approach to their philanthropy. They are well suited to donors interested in funding, staffing, and operating their own charitable initiative(s). Private operating foundations are not subject to any benchmarks for fundraising. While they can accept donations from various sources, they may also be funded in full by a single family.

However, sustainability can be a challenge for some private operating foundations as donors frequently underestimate the time and resources it takes to operate these entities. Some donors who might otherwise be inclined to operate their own charitable vehicle decide against private operating foundations and choose, instead, to make a complex grant to an existing organization to launch the initiative, start up a new nonprofit public charity, or launch a charitable project through a fiscal sponsor.

A fiscal sponsorship is a charitable vehicle in which one nonprofit organization, known as the fiscal sponsor, provides support to a project, individual, or another nonprofit organization that does not have its own 501(c)(3) tax exempt status.

The fiscal sponsor takes on the responsibility for managing the finances, receiving donations, and providing other services on behalf of the sponsored entity. This allows the sponsored project to receive tax-deductible contributions, utilize the fiscal sponsor’s established infrastructure and expertise, and focus on its mission without the burden of maintaining its own nonprofit status.

Donors typically consider fiscal sponsorship if they plan to work on a limited-time project or prefer to initially test a program idea. Projects can start quickly without the lengthy process of establishing a new nonprofit organization and have the flexibility to scale up or wind down operations, as needed, without the legal implications of dissolving a separate entity.

To leverage this route most effectively, we often recommend identifying a fiscal sponsor that is already working within the issue area that is aligned with the donor’s mission. This is typically the best option for incubation of a philanthropic initiative.

Charitable LLCs can also be used as flexible vehicles for operating charitable programs. Donors often select this vehicle for a new philanthropic initiative because funds given are fully revocable and additional for-profit enterprises could be run alongside the charitable work that would, in turn, fund the organization’s ongoing mission.

With the ability to bring together the best elements of for-profit and nonprofit vehicles, charitable LLCs have been reshaping how donors conceptualize and execute contemporary philanthropic strategies.

Craft a Strategy That Works — and Works for You

When choosing a giving vehicle that makes the most sense for you, you’ll need to consider much more than potential tax efficiencies — such as the desired impact of your gift as well as any circumstances and preferences that may affect your charitable giving decisions.

And selecting a charitable vehicle is often just the first step toward a more formal and strategic approach to philanthropy. When providing support to the causes that are most important to you, you’ll need to consider many other factors ranging from which organizations to support, who to involve in the decision-making process, the timing of and the way you make your gift, and more.

As your trusted advisor, Bessemer is here to help guide you to the vehicle or combination of vehicles and the many other steps necessary to achieve your goals.

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