Highlighting the Philanthropy Trifecta

Philanthropy Trifecta: A private foundation, charitable remainder trust, and donor advised fund can work together

Advisors who work with high-net-worth families are increasingly encountering a planning scenario involving private foundations, charitable remainder trusts (CRTs), and donor advised funds (DAFs).

What’s the background?

A charitable remainder trust (CRT) is an irrevocable trust that allows your client or the client’s beneficiaries to receive income for life or for a term of years, after which the remaining trust assets pass to a charity, such as a fund at the community foundation. CRTs are frequently funded with highly appreciated assets because the trust structure may allow the sale of those assets without immediate recognition of capital gains tax within the trust.

What’s the fact pattern?

The situation often unfolds like this: Your client established a private foundation years ago and remains deeply committed to charitable giving. You’re now working with the client to set up a CRT as part of a broader tax, estate, and income planning strategy, using highly appreciated asset from your client’s portfolio to fund the trust.

What’s the problem?

As you prepare the CRT documentation and run the numbers, you realize that the client’s private foundation may not be the ideal remainder beneficiary for the CRT. Here’s why:

• When a private foundation is named as the remainder beneficiary of a CRT, the charitable deduction for your client’s gift of appreciated publicly-traded securities is generally limited to cost basis rather than fair market value, unless an exception applies.
• In addition, the deduction limitations are less favorable. Gifts to a CRT with a private foundation remainder beneficiary are typically subject to a 20% of AGI limit, compared to 30% for CRTs with a public charity remainder beneficiary. Any unused deduction may generally be carried forward for up to five additional years.

What’s the solution?

A donor advised fund can be an attractive option for the CRT’s remainder beneficiary because the donor advised fund is a public charity. This means:

• Because the DAF is sponsored by a public charity (the Arizona Community Foundation), it is generally treated as a public charity for income tax purposes. As a result, your client is typically eligible for a charitable income tax deduction based on the fair market value of the contributed securities. For gifts of appreciated publicly traded securities, the deduction is generally subject to the 30% of AGI limitation, with any unused deduction available to carry forward for up to five additional years.

Are there other benefits of this technique?

Yes! Many clients discover that a DAF can complement – and sometimes even eventually replace – a private foundation. This is the case whether or not a CRT is involved.

For example, by setting up a DAF with ACF during their lifetime, they can leverage our local expertise on community issues and non-profit organizations, while also using their it for flexibility in grantmaking and, in some cases, to help satisfy annual distribution requirement of their private foundation. Clients may also contribute appreciated assets to the donor-advised fund to take advantage of more favorable income tax deductibility.

As clients look ahead to retirement, reduced involvement, or legacy planning, many consider gradually winding down the private foundation in favor of a DAF. This approach can be particularly effective when:

• Next-generation family members are unlikely to take on foundation governance and administration
• Administrative and compliance costs have become burdensome relative to the foundation’s asset size
• Successor trustees or directors are difficult to identify
• The client wants to simplify future charitable administration and compliance
• The family wants flexibility without ongoing private foundation regulatory obligations

Similar to a private foundation, a DFA can preserve philanthropic continuity across generations. Family members can continue recommending grants to favored charities while avoiding the administrative, legal, and fiduciary burdens associated with private foundation governance.

What is the first step?

If you think a combination of a private foundation, CRT, and a DAF might work for one or more of your clients, please reach out! Our team is happy to explore if these three tools can work together strategically for your client to achieve both immediate planning objectives and long-term charitable legacy goals.