Philanthropic Vehicles – As in Most Things, Form Follows Function

Strategic Philanthropy
Monday, February 14, 2011

Last week’s New York Times carried an article by Paul Sullivan under the headline  “Weighing the Best Vehicles for Charitable Giving.”  It raises good questions and makes good points.  But like most discussions of philanthropic vehicles, the forest here is somewhat obscured by the trees.  (In Mr. Sullivan’s defense, he made a good faith attempt to address a highly complex issue in a very few column inches.) 

For my money, a few of the questions I’d want to put to Mr. Nopar and others considering the choice of giving mechanism include:

 What do you want to achieve with your philanthropy?  What are your goals?  Is this in part about legacy?  How much of this is about you?  Your parents?  Your children?  What’s your tolerance for tax?  For admin?  Are you a control freak?  Does paying taxes drive you nuts? 

Once these cosmic questions are wrestled to the ground the philanthropically inclined individual or family has at least a working framework from which to address more pedestrian issues such as “How much?” and “What’s the appropriate vehicle?”

But, getting back to the article, a few additional thoughts …

Control – For the control freak – the individual determined to manage every aspect of his/her philanthropy – private foundations do offer the certainty that one’s wishes with respect to charitable beneficiary will be executed.  But in 99 out of a 100 cases (probably more), a public charity that manages donor advised funds (DAFs) is likely to follow the donor’s wishes.  An important exception can be gifts to non-US charities; after exercising appropriate due diligence private foundations can make such gifts, while many public charities that manage DAFs will not. 

For the donor who seeks the control offered by the private foundation but the benefits of a public charity (e.g., lower taxes, reduced admin responsibilities, higher ceilings for tax-advantaged gifts), there is a hybrid animal that Mr. Sullivan fails to mention:  the “Supporting Organization” or “Supporting Foundation.”  S.O.’s are like private foundations attached to a public charity, e.g., a community foundation or a university.   S.O.’s are especially attractive to the donor who (1) wishes to involve her family in grantmaking decisions, (2) seeks grantmaking assistance from the host organization’s staff, and (3) wants the more liberal tax contribution allowances afforded to donors for gifts to public charities.  In exchange for these benefits the donor sacrifices some control over the composition of the board.  But definitely worth considering.

Size and Costs – TPI is often asked how much one should plan to give to justify the creation of a private foundation.  My answer is always the same:  There is no absolute and there is no right or wrong; it depends entirely on your goals.  For the donor interested in using a private foundation as a teaching tool for family governance and/or capital management a $500,000 private foundation may be plenty big enough. (The great majority of US private foundations are capitalized at less than $1M.) Conversely, for the donor with zero tolerance for administrative detail, $100M may be too small.

As for cost, we’ve found the widely-held perception that DAFs and Supporting Organizations are cheaper than private foundations in many instances to be just plain wrong.  Community foundations typically charge the donor advisor between 1.5 and 2% of capital annually to cover their investment management and administrative costs.  Many private foundations incur annual costs s less than that, and that’s including excise tax and money management and accounting fees.

Privacy – While Mr. Sullivan is correct that it is somewhat easier to shelter one’s giving from public scrutiny in a DAF than in a private foundation, it is possible for the latter to use a public charity as a conduit for gifts to other charities.  TPI, a public charity, has played that very role for private foundation clients seeking to make anonymous gifts to other charities without revealing their identities.  

These points – while seemingly granular – are in reality important components of the philanthropic decision-making process that don’t necessarily lend themselves to reader-friendly news articles.  So, while I am truly grateful to folks like Mr. Sullivan who are willing and able to take a stab at distilling an arcane topic into plain English, it is also true that the details – wherein the Devil lies – are pesky and susceptible of overgeneralization.  But kudos for the willingness to wade into the murk!