Speaker 1 – 00:00
It’s usually these big life triggering events that are causing people to say, like, I’m not living my life the way that I
really want to. I want to give back.
Speaker 2 – 00:08
There’s a tax benefit to do some of this charitable planning, but you can’t do this for a tax decision. There’s a large
variety of options out there for your philanthropic planning, some charitable planning, charitable vehicles, and
specifically what a private foundation is and how that differs from what’s a little bit more common is a donor
advised fund. It’s essentially a charity account. It’s irrevocable, it has to go to charity.
Speaker 1 – 00:32
Private foundations are really controlled by a family, by an individual. You’re retaining the control over where the
money’s going and where you’re going to be funding the grants.
Speaker 2 – 00:43
There is a process to convert the foundation into a donor advised fund. They both have pros and cons with
different use cases and they can be used together. Foundation has a little bit more upfront heavy lifting and
ongoing heavy lifting administrative work.
Speaker 1 – 00:55
Like with the heavy lifting and the administrative costs, that is something we are able to help with at all times.
Speaker 2 – 01:04
Ultra high net worth families often want to get involved in some sort of charity or philanthropic cause to make sure
that their wealth serves a purpose of meaning and contribution to the community and also getting future
generations involved. So there’s a lot of options out there, but we’re going to really focus on the difference between
a donor advised fund and a private foundation and when one may make sense over the other and what all of the
pros and cons are. Welcome, Carrie. This is your first podcast. She just joined our team as she has an extensive
background in estate planning, also as an attorney. A jd. Yeah. I don’t know. What’s the difference?
Speaker 1 – 01:41
If you pass the bar, you’re an attorney.
Speaker 2 – 01:43
Okay. So a JD means you have a degree in legal law.
Speaker 1 – 01:46
Yeah. You went to law school.
Speaker 2 – 01:46
Oh, cool.
Speaker 1 – 01:47
Yeah. All right, so I did pass the bar. So I am an attorney. But.
Speaker 2 – 01:53
Well, Carrie came from a large firm. National firm, you know, did trust tax, trust estate, everything in those lines.
Speaker 1 – 02:05
Yeah. Lots of private client service work, private foundations, estates, trust support, 1040 support, gift tax return
support and gift tax planning support. That’s the majority of my background. Yes.
Speaker 2 – 02:18
Cool. We’re excited to have you. We’re going to talk today about some charitable planning, charitable vehicles, and
specifically what a private foundation is and how that differs from what’s a little bit more common as a donor
advice fund.
Speaker 1 – 02:33
Yep.
Speaker 2 – 02:35
So let’s just talk like General Overview 30,000 Foot View and the families that you’ve worked with and
implemented, whether it’s private foundation, donor advice fund, let’s just talk like charitable intent. What sparks
these conversations? What’s the desire to implement these vehicles from your experience?
Speaker 1 – 02:55
Yeah. So really anything can spark this. I’ve had people who have had kids with disabilities and started thinking,
okay, this is something I want to be a part of. I want to be funding not just for my own child, but you’re seeing it
firsthand becomes a lot more real when that happens, which can incite people to really want to take a step back.
How can I get involved? What can I do? So that I would say is like the most common thing that I’ve personally seen.
Another big one I’ve seen is when these families, their parents pass, that creates people to kind of like want to step
back and think, how can I make their legacy better? I worked with a group of brothers, there were three brothers.
That was so important to them.
Speaker 1 – 03:40
Their parents always talked to them about giving and it’s important to give back. And we’ve been so fortunate to
have all of these things and live such a great life. And so that really sparked something in them to say, hey, I want
to make sure my kids are also recognizing this and we are creating this as a family. We’re doing this to remember
them. It’s something they would love to have seen. So that’s another big way. It’s usually these big life triggering
events for the most part that are causing people to say, like, hey, I’m not living my life the way that I really want to. I
want to give back. I want to be using these funds that I’m so fortunate to have to provide accessibility to things
and overall information to others. So that’s.
Speaker 1 – 04:30
It’s usually a big life event which makes people think, hey, how can I help? What can I do?
Speaker 2 – 04:36
Cool. I always explain to clients, yes, there’s a tax benefit to do some of this charitable planning, but you can’t do
this for a tax decision.
Speaker 1 – 04:45
Like, yes, it is. Especially in the private foundation space. It is a huge undertaking to create a private foundation. So
you really have to be committed. You have to want this to be a generational thing. You don’t want to take all this
work to set it up and really get it going for just the next 10 years. That’s not really going to be where you’re
maximizing the benefit to the community or to yourself in a tech situation either. If that is going to come into Play
for you.
Speaker 2 – 05:13
Cool. So generally has to be, you know, there has to be some sort of like mission passion cause that you care
about, that you want to give back to. And one example I have second generation wealth. We’re talking ultra high net
worth space. And both parents had died, two siblings inherited a large sum of money. Luckily there’s a lot of really
good estate planning done in trust, different structures to help save on taxes, get some creditor protection. And so
one of their big things that we’ve had in depth conversations about is, you know, when I started working with them,
the big question I asked was like what do you want to do with your life now? Like your life just flipped in a matter of
2 years and both parents passed like net worth basically 5x. What do you want to do?
Speaker 2 – 06:03
Like and that’s what they’re really focusing on. And it’s, we started having these charitable, these charity
conversations about, you know, they told me I want to, we want to be, we don’t want to work just to earn a
paycheck. They don’t have to anymore. So it’s like we want some cause something that we’re really passionate
about, put.
Speaker 1 – 06:19
Their attention to something too.
Speaker 2 – 06:21
And that’s when we kind of started down the route of well foundation might make a ton of sense. So let’s table
foundation for a second. Let’s start with the simpler one, the donor advice fund. High level review of a donor
advice fund is, it’s essentially a charity account is the simplest example. So you can put assets in there. The best
option generally from a tax standpoint is appreciated stock. So if you have, you know, some stocks that have a
pretty high unrealized capital gain, you could push those over to the debtor advised fund. You’re going to take a
deduction on that. The appreciated stocks, 30% of your adjusted gross income that year gets the deduction.
Everything in the account doesn’t pay. You don’t pay any taxes on the investment growth. This is much simpler. It
doesn’t have a lot of strings attached.
Speaker 2 – 07:09
The money just, it’s irrevocable. It has to go to charity. But that could be one time. You can make one big grant. You
can make grants throughout your lifetime. It can pass the next generation. It’s very flexible and there’s different,
you know, avenues that you can give to. So that’s essentially think of that as just like it’s a charity account. It can be
anonymous. Nobody has to know where the money’s coming from. You can name it whatever you want. You don’t
have to have your name on the grants. It’s the much simpler vehicle. Is there anything to add on donor advised
funds?
Speaker 1 – 07:37
No, I think you hit the nail on the head.
Speaker 2 – 07:39
Okay, so the next. And there’s a lot of different charitable options on the table we’re not going to dive into. You
know, there’s different charitable trusts that you can do. But the question and conversations that I have a lot with,
you know, all tried worth families is what about a private foundation? So let’s start 30,000 foot view of what a
private foundation is, right?
Speaker 1 – 08:02
Yeah. So your private foundation is going to be a charitable entity. It’s typically a single sourced entity. So that
could be an individual, a family unit, a business entity. But it’s typically not going to be soliciting donations broadly.
Maybe you’ll have an event or something. You’ll have to worry about self dealing rules in that case. But you can
have an event to kind of generate some income. But year over year you are going to be the one funding this for the
most part. So that’s where differences, the difference lies between a private foundation and a public foundation.
Public foundations are largely getting community support. They’re requesting donations all the time. They’re out in
the community trying to build like a presence and get their name out there and that’s how they’re funding things.
Private foundations are really controlled by a family, by an individual.
Speaker 1 – 08:54
That’s their bread and butter. So you’re establishing the foundation you’re using it to formalize a purpose or a
mission that you feel passionate about. You’re wanting to get future generations involved, maybe your kids, your
grandkids. That’s what your hope is in philanthropy. You’re retaining the control over where the money’s going and
where you’re going to be funding the grants. And then you’ll get some tax benefits obviously.
Speaker 2 – 09:22
So you essentially stand up your own 501 C3. So the family has its own entity.
Speaker 1 – 09:29
Yep.
Speaker 2 – 09:30
Has its own ein number. Yep. There’s a tax return with it, right?
Speaker 1 – 09:33
Yes. There has to be annual filings involved with a private foundation.
Speaker 2 – 09:37
We’ll get into that. There’s an investment policy, it has a board, there’s bylaws. So it is literally you’re forming your
own legal entity to then give the money to some cause. So what’s exactly give us an example of, I don’t know what
some that you’ve seen set up of like what’s usually what’s like a common process overarching cause that because
you said you have to, you know, say this is for some reason. Right, right.
Speaker 1 – 10:06
So when you’re thinking about your private foundation, the beginning step, before you even start with any of your
articles, incorporation, any of your bylaws, you’re going to sit back and you’re going to say, what is the charitable
purpose? What is the goal that this private foundation will pursue? You want to think, you want to clarify what the
impact you want to make is and for whom. So just to do that, you’ll draft a mission statement which is just going to
be a brief one sentence, two sentence statement, focus description on the intent. And that intent is going to guide
your grant making purpose.
Speaker 2 – 10:43
Can you give us an example of what’s a common or what have you seen?
Speaker 1 – 10:47
So it’s kind of funny, they say you need these intents, but they can be a little broader than you’d expect. So you
could say something like, the intent of this private foundation is to help my local community with support in
scholastics and sports. So then you’re thinking, okay, I’m gonna fund all these children’s little leagues, I’m gonna
fund children’s reading communities and libraries. Like you can get all of that within that one statement. So they
are a little broader than maybe it initially seems, but that is the overall support. Another one you may see is
something that private foundations can do that dafs can’t is give to individuals.
Speaker 2 – 11:30
Okay.
Speaker 1 – 11:31
So something you may want to do, you do have to get an IRS approval if you want to give to individuals. But that is
something that you get have. You can get the ability to do.
Speaker 2 – 11:40
Any individual or what.
Speaker 1 – 11:42
So that’s part of the IRS process. When you’re applying for this, you have to say what specifically you want to get
for. So scholarships is a big one. A lot of people will set these up and try and get that support from the IRS to give
out individual scholarships. That has to. There’s a lot of. Not a lot, but there is some red tape with that. So it can’t
be like, I’ve set up this private foundation for scholarships and then you’re just gifting scholarships to your friend’s
kids. There has to be a step back from how you’re deciding. There has to be a process, an application process.
Speaker 2 – 12:18
Like under, like families, you could say, like families that don’t have the means to correct income.
Speaker 1 – 12:25
Yes, an income based. And then you’ll solicit applications, there’ll be a specific process for how those applications
are reviewed and then the grants can be awarded so that’s another one you see. You’ll see some from time to time
is we want to provide scholarships for families who are below the means. Exactly what you just said. Another one
you can do is for disaster relief. That can also be specific to individuals. So Hurricane Katrina, that became like a
big thing. A lot of people were trying to figure out how we can help these people who have lost everything. And
insurance companies are taking their time to pay out. What can we do right now to get people back on their feet?
So some of the private foundations that had already had this implemented, we’re able to step in and provide
support there.
Speaker 2 – 13:14
Okay, so let’s. We’ll go from the setup process and then we’ll talk about, once it’s set up, what needs to be done.
Speaker 1 – 13:22
Sure.
Speaker 2 – 13:22
I want to start a private foundation.
Speaker 1 – 13:24
Sure.
Speaker 2 – 13:25
What. Talk me through from A to B, step zero to I have a foundation set up now. What needs to happen?
Speaker 1 – 13:31
So as we talked about, first thing you want to do, figure out your mission. Why are you creating this private
foundation? That’s step one. That’s your bread and butter. Next, after you’ve discussed, after you’ve determined
your purpose, you’re going to draft and file your articles of incorporation. When you do that, you also need to check
for what your state’s nonprofit requirements are, and you’re going to have to do those in tandem. Once you do that,
you’ll be doing your bylaws, where you’re going to appoint your directors, your board members, your officers. And if
you want to have any or have any need for trustees, after you’ve got your bylaws and you’ve had your board set up,
you’re going to get your ein, you’re going to open your bank account, and you’re going to start the funding.
Speaker 1 – 14:15
You’ll also need to have regular board meetings while you’re doing this. So year after year, we recommend you
meet at least once, if not quarterly or more. At the very least, you’re going to want to have a yearly board meeting.
So it is. There is a bit of a heavy lifting process to this. Right. Like a daft.
Speaker 2 – 14:38
You just so open an account on your custodian, put the money in, put.
Speaker 1 – 14:42
The money in, and you’re good to go. Yeah. So that’s very different.
Speaker 2 – 14:46
What, who, what’s common? Is there a number of board seats you need and who are people that generally you
families put on their board?
Speaker 1 – 14:55
That’s very, I would say, dependent on how much money is in the foundation, what the rules are going to be, how
much you’re really putting into it. Right. So some people who maybe have a smaller foundation, maybe they’ll have
one or two and that’s really all they need. And those, they can have someone who’s the president and someone
who’s also the secretary and treasurer, and they can also work in tandem as officers. So you don’t necessarily need
a group officers, a separate group for the board and a separate group for directors. You can kind of combine the
roles. People can work more than one role. So you can just kind of do with that based on your needs.
Speaker 2 – 15:38
Okay, so I have this entity formed. I have a mission statement. Now let’s talk about funding. I have the bank
account open. What assets can I put in? What make the most sense? What’s the tax benefit?
Speaker 1 – 15:52
Yeah, so you can do cash, you can do securities, you can do real estate and some tangible personal property if it
makes sense. It really depends on again, your goals, what you’re trying to accomplish. Securities are obviously a
great thing to transfer in because they can, they’re taking it out from the gains on your side. And then a lot of
foundations will accept securities too. So you can kind of just flow it the whole way through.
Speaker 2 – 16:17
The money stays invested.
Speaker 1 – 16:19
Yes, exactly. So that’s a great option. Cash obviously is still great. That’s a little bit higher of an AGI deduction,
which is nice too.
Speaker 2 – 16:29
Is it 60 or is that.
Speaker 1 – 16:32
That’s for individual or for a daft. For public foundation? For a private foundation. Excuse me, it’s 30. 30% For cash.
Yes.
Speaker 2 – 16:40
20% For stock versus a donor advised funds. 30% For stock, 60% for cash.
Speaker 1 – 16:45
Correct. And 20% for any real property. If you’re going to. I’ve seen people donate land that then gets sold, things
like that.
Speaker 2 – 16:53
What about, what about like business, like private business interest or stock in A S Corp, C Corp. That’s, that can
get muddy, but it could be. You can do it.
Speaker 1 – 17:05
So there are some roles when it comes to self dealing, excess business holdings, things like that. You really want
to be careful with that. Now if it’s a, an entity that’s just producing passive income. So if it’s like an FLP that just
has passive income in it, that is generally more okay. But if it’s an active business, you’re going to want to be really
careful with that.
Speaker 2 – 17:26
We have the entity formed, it’s funded now. What, what on an on year to year ongoing basis. So let’s talk about
what percent has to go Out. You said there has to be board meetings. Minute meetings. Like, minutes of the
meeting. So we talked about that. What has to go out each year? And let’s talk about, like, tax to the private
foundation. Yes, that’s important.
Speaker 1 – 17:49
Yes. So each year you have a required minimum distribution of 5% of the Fair market value of your net investment.
So what does that mean? That means the fair market value of your cash, your securities, you do get to back out
some expenses from that. So let’s say you have a million dollars in net investment income right off the bat. You get
to take a 1.5% cut from that, which the IRS considers to be cash. You need to continue the private foundation. So
for a million dollars, 1.5%. That’s 15,000. Yeah, right, 15,000. Okay. So now your 5% is based off of your $985,000 in
fair market value. So you’ll take the 5% off of that, which I think is around 50 grand. And then that’s what you need
to give in that year. Right. To stay compliant.
Speaker 2 – 18:47
You also take out, like, expenses as far as pay officers.
Speaker 1 – 18:52
Yes. So that’s where that comes into play. Yes. So expenses that are in furtherance of a charitable purpose can
come out. So if you advised, if you hired an advisor for something and you paid him 10 grand, you have your 50
grand, you can take the 10 off of that. So now you need to distribute 40,000. Another thing that comes into play is,
let’s say you got really excited for your first year and you donated 100,000, but you really only needed to donate 50.
You can carry that 50,000 over to the next year, and then you can use that for the next following five years. So
that’s another benefit.
Speaker 2 – 19:30
So I think one of the big benefits of this is, like, you talked about wanting it to continue generations. You know, I
think it can be a healthy way to get, you know, generation two, generation three involved in something that has a
large amount of money into it, but they don’t just. They don’t just have access to, like, pull that money out. So let’s
talk about. Let’s say you want to establish this board. Maybe you want your children to serve on it.
Speaker 1 – 19:59
Yep.
Speaker 2 – 19:59
What’s. How do you dictate the payment? What do they have to do? What’s their involvement?
Speaker 1 – 20:04
Yeah, so you don’t have to pay them, but you can. If you are going to pay someone in this involvement, then it’s
going to have to be reasonable. It has to be a reasonable value. You can’t just hire your child to work for the
foundation and pay them a ton of money. Right. That’s not going to fly with the irs. So what’s reasonable? That
becomes the question. Right? The IRS tends to look at similar foundations. What are they paying? What is the
service? What are the hours? Every time you file this return, you have to say the hours that people are working in
the foundation. So does that equate to what the income is? You know, if you’re saying you’re working one hour a
week, does that make sense? And again, you’re not going to give 500,000 for someone working one hour a week.
Speaker 1 – 20:50
That’s just, that’s never going to match up. So you do have to take all that into consideration. There’s no hard and
fast rule on what you can pay, so it can get a little bit hairy. But generally speaking, as long as you do your due
diligence and your research, you should be fine paying some reasonable costs to get people involved.
Speaker 2 – 21:07
So let’s say you employ your kids, you have a reasonable salary. What, what do they actually have to do?
Speaker 1 – 21:13
What do they have to do? Yeah. So tons of this is, you know, preparing for the board meeting, due diligence on
other 501Cs that you want to give to. That’s a huge piece of this, right? You’re researching, you’re meeting with
those entities who are requesting money. You’re coming up with your grant making process, you’re adjusting your
grant making process. You’re looking at your bylaws every year. You’re making sure everything makes sen.
Speaker 2 – 21:41
You’re.
Speaker 1 – 21:41
Spot checking that no one’s doing anything that they shouldn’t because or by accident. I had a client once who was
putting a new roof on his house. He has a private foundation. Nicest guy ever. Absolutely. Don’t ever think this was
done purposefully in any way. Accidentally grabbed the checkbook for the private foundation, not his personal
checkbook, to pay for his new roof. I didn’t get caught. We weren’t involved in helping him with his private
foundation, which I think is something really great. That here we can be helping you. We can be helping you run
your board meetings, helping you. We know when we see the money. You know, I think that’s really great where I
was involved. We were just doing the tax return for him. So this didn’t get caught until I went to finalize the tax
return.
Speaker 1 – 22:29
I saw this random $20,000 going out of the account and I thought, hey, this isn’t going to A grant. You don’t have
this listed anywhere. What is this? And he was like, oh, gosh. I think he went back, checked the check registry, saw
that was for the roof by accident. Well, now he’s getting hit with a 10% tax on that. So I think it’s really just one of
those things where these people who are working at the foundation are just due diligence. That is your biggest
factor. You’re going to want to be checking things at all time, making sure you’re following all compliance rules.
Speaker 2 – 23:03
Okay. And then there is an excise tax on income. Investment income.
Speaker 1 – 23:09
Yes. Investment income does get hit with a 1.39%. How would you say? 1.39% Flat rate. So what is that? That is on
any interest, any dividends, any capital gains, anything like that is going to be hit with this 1.3 million in there.
Speaker 2 – 23:27
It goes up to 11 million. And calendar year, that million dollars of growth, for the sake of a simple example, is hit
with a.
Speaker 1 – 23:36
Well, assuming you cashed out, right. It’s not going to be on just like unrealized. Yeah.
Speaker 2 – 23:41
So capital gains, realized interest and dividends.
Speaker 1 – 23:44
Yes, correct. But you can also back out some fees for that too. So let’s say you had a million or your number 10
million investment. Oh, I guess that’s your invested assets. Let’s say you had 1 million investment income, but you
paid your investment team 100 grand. Well, you can take that out too. So now you’re looking at 900,000 accounting
fees. You could take that out too.
Speaker 2 – 24:10
So let’s talk about our setup as we incorporate all of this stuff into our services. The tax work, some of the
structuring advice, ours will be a little bit different. But if you were outside of working with us, what’s the general
like ongoing formation cost and then ongoing cost.
Speaker 1 – 24:30
Ongoing cost. So that’s going to be. Again, we talked about board meetings, getting those running if you want to,
just getting the materials up. If you want to have someone come in and help you record keeping asset
management, that’s you’re going to be doing your grant due diligence, your annual tax filing, that’s a cost usually
every year, any state filings. You, if you’re in Pennsylvania, maybe you have to file your BCO10 or your BC23. Those
are things that you need to think about. And that can require costs, legal fees, accounting fees, admin fees,
investment costs. Those are your big four.
Speaker 2 – 25:04
Okay, so there’s going to be ongoing, I don’t know, it could be anywhere from 5 to 20,000 a year maybe.
Speaker 1 – 25:11
I would say that’s a good ballpark.
Speaker 2 – 25:12
Yeah.
Speaker 1 – 25:12
It depends on the size of the foundation, but I think that’s fair.
Speaker 2 – 25:16
As we said this, obviously you. The goal generally is for this to last multiple generations. But there is a workaround.
If at some point like kids don’t want to be involved or there’s nobody left to run the foundation, you can, there is a
process to convert the foundation into a donor advised fund. Right. We don’t need to get all into the nuanced
mechanics of it, but you essentially could take the foundation, swap it into a donor advised fund and then it just
acts like a normal donor advice when you would have if you didn’t have a foundation.
Speaker 1 – 25:48
Yeah. And I think your bylaws should generally say what happens when this occurs. Maybe not specifically it going
into a daft, but when there’s no one left to run this or it’s kind of got to its end of life. It’s just there’s. It’s not going
to continue.
Speaker 2 – 26:08
Okay. So I think that’s a good overview. Just common differences. Prison. Just looking at the two DAFs much
simpler. It can be anonymous.
Speaker 1 – 26:22
Yeah. Oh, that’s a big factor we didn’t talk about too with the private foundation filing these annual returns, those
are public documents and listed on these documents are your expenses, what you’ve spent, who you’ve grant, who
you’ve given grants to and how much. So all of that is going to be public information.
Speaker 2 – 26:43
Is there any way, is there any way to not like would if families names be on there. Is just the name of the
foundation like is it tied to an individual?
Speaker 1 – 26:52
The name of the foundation is on there, but you do. It wouldn’t say who it’s technically tied to, but it does list out
your officers, your directors. So in a way, yes, I gotcha.
Speaker 2 – 27:04
So yeah, that’s a big differentiator is that some of it’s public information. Daft can be.
Speaker 1 – 27:09
Some people love that though. To some people that’s a perk. It’s getting out in the community that what they’re
doing. Yeah.
Speaker 2 – 27:19
So Denver Advisory Fund’s simpler. It doesn’t have the annual distribution requirement. You kind of have flexibility
on giving it out whenever you want. Foundation has a little bit more upfront heavy lifting and ongoing heavy lifting.
Really Administrative work. Yep. But I think they’re both. They both have pros and cons or the different use cases
and they can be used together.
Speaker 1 – 27:39
Yeah, you can have both definitely for sure. And I think, too, just to back up a little bit on something, you said that
with the heavy lifting and the administrative costs, I don’t want that to necessarily come across as. That would be
a burden. That is something we are able to help with at all times.
Speaker 2 – 27:55
We basically take all that heavy lifting.
Speaker 1 – 27:56
Yeah, exactly. And it is rewarding. It’s rewarding. Excuse me. To do that type of work. So a lot of people find a lot of
value in that.
Speaker 2 – 28:08
I think that’s a pretty good overview of the difference between a donor advised fund and foundation. Again, like we
explained at the beginning, there are other vehicles that can be used, different. Charitable trusts. Yes, but there’s a
large variety of options out there for your philanthropic planning. And so. So make sure you do your homework.
Figure out the pros and cons, and if there’s any further questions about your situation, feel free to reach out. We’re
happy to help.
Speaker 1 – 28:33
Absolutely. Yeah. And I think maybe in the future we’ll dive down into those charitable trusts too, for sure.
Meeting created at: 11th Sep, 2026 – 12:30 PM
Transcribed by https://fireflies.ai/ 18 / 18
