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Oxford Financial Group, LTD


Oxford Financial Group, LTD


Expert Perspective

News, research and market insights from our team of experts.


Current Issue | December 20, 2018

The Symbiotic Use of Private Foundations and Donor Advised Funds

By: Julia Weaver, J.D., Director, Family Office Services and The Trust Company of Oxford and
Stephanie Allsopp Van Vlerah, CFP®, MBA, Managing Director

Enhancing the Philanthropic Engagement of Future Generations
A both challenging and rewarding objective for many philanthropic families is to create a charitable mission that will be embraced for multiple generations. In the ideal case, a private foundation can support a family's charitable vision in perpetuity. The challenge for many families, however, is that unforeseen factors can affect the future relevance of philanthropic desires. As environmental, socioeconomic and cultural trends evolve with time, so too can the philanthropic passions of future generations. A flexible philanthropic strategy enables future generations to feel they are making an impact on the issues of their day.

Families are typically presented with two distinct options to create a sustainable philanthropic entity: a private family foundation or a donor advised fund (DAF). Fortunately, these structures are not mutually exclusive. To the contrary, these vehicles can be used symbiotically to provide flexibility and to enhance the engagement of future generations in the family's philanthropic mission.

Private Family Foundation
Many families choose to create private foundations that are funded with family wealth to meet the philanthropic and estate planning objectives of the family. This type of vehicle provides many freedoms and greater control by the original donor, as well as potentially onerous responsibilities. One of these responsibilities is the requirement that the foundation distribute at least 5% of the value of the preceding year's investment assets, or fall subject to certain punitive excise taxes.

Private foundations can be very appealing for families because the donor names the board to operate the foundation and usually sits on the board along with other family members, provided the hiring is done diligently within strict rules against self-dealing. Private foundations are also generally created to continue in perpetuity and can encourage multi-generational philanthropic goals.

Donor Advised Fund (DAF)
By contrast, DAFs may not hire or pay staff and may be limited in the number of successor advisers. While the donor may act in an advisory role, a public charity retains ultimate control over the fund, and the assets in some DAFs may eventually be transferred back to a sponsoring organization.

Enhancing the Flexibility of a Philanthropic Strategy
A family for whom a private foundation is appropriate typically seeks the involvement of future generations in the selection of the charitable grantees. The heirs' engagement can be enhanced by allowing future generations to select and even create various DAFs to receive such distributions. The recipient DAF can be created to maintain relevance and a sense of empowerment for heirs.

Foundation board members may feel detached from the original causes that the foundation historically supported for several reasons. Along with those mentioned above, disengagement can be precipitated by geographical moves. As children, grandchildren and even great grandchildren move away from home to new areas, they may feel more geographically connected by creating a DAF that still honors the families philanthropic mission but that serves the causes they know and love in their local area. The desire for flexibility may even be fostered by the desire to honor the legacy of a family member by creating a DAF in the name of the loved one. A private foundation might also create a DAF to receive certain discretionary grants that are of more isolated interest to particular board members or that are more specifically relevant to younger family members. This can assist with grooming a junior board in the art of generosity and benevolence.

Case Study
Oxford Financial Group, Ltd. Managing Director, Stephanie Allsopp Van Vlerah, recalls working with a family that was struggling with a unique but similar situation. In the case of Stephanie's client, the family had recently formed a foundation and was still developing its goals and objectives. Stephanie explains that, "the foundation was facing a mandatory payout without having yet finalized its grant making criteria or philanthropic focus."

The family reached out to Stephanie for direction on their options to address the upcoming distribution deadline while still allowing the appropriate time to create the foundation's mission and strategy in order to maximize the impact of their giving. With the deadline for the mandatory distribution looming, Stephanie counseled the family's foundation to create a DAF in the name of the foundation and to make the grant to the DAF to meet the required distribution. Thereafter, the foundation can recommend grants from the DAF when the goals and objectives are better defined and the foundation has identified the desired grantee. Stephanie recalls that, "[t]he foundation's board, which consisted of two generations of family members, had a shared desire to help people with disabilities. The family was still in the process of defining how the foundation could best provide for education, training and programming to help disabled persons assimilate into their desired career paths and other independent living situations." In addition to providing the family with a strategy to have more time for these critical decisions, Stephanie and the team are helping the family to clearly define and articulate the foundation's mission and are assisting in finding charities that satisfy that mission. Stephanie and team also facilitate the foundation's annual meetings and maintain the foundation's records.

Maximizing Tax Efficiency
It is also notable that for ongoing contributions, a family may maximize the deductibility of their giving by contributing a portion of their charitable donation directly to the DAF in order to partake of the higher deduction limit as a percent of adjusted gross income (AGI). For a DAF, gifts of cash are deductible up to 50% of AGI and gifts of appreciated property are deductible up to 30% of AGI. These percentages are reduced to 30% and 20%, respectively, for private foundations.

The Importance of Flexibility
As with any estate or philanthropic plan, success will be enhanced by maximizing the flexibility of the various techniques and strategies. Flexibility promotes the ongoing relevance of the plan while still honoring the legacy of the original donors. The entire team of Oxford advisors seek to design philanthropic solutions that will provide families with this flexibility to safeguard their legacy for generations to come.

This information is not intended to serve as tax or legal advice. As always, tax and legal counsel should be engaged before taking any action.