Philanthropic giving is a common goal for many individuals. The choice to give is often fueled by the desire to unite the family and establish a legacy with their favorite charitable causes. Other times, a significant shift in wealth (due to retirement or selling a business, for example) can influence the decision to create a charitable trust.
Regardless of the reason for pursuing philanthropic giving, several options of charitable trusts, foundations, and funds are available to meet the needs of individuals and families. Each charitable giving structure has advantages and disadvantages, so it’s important to understand which vehicle will allow your client to find the best solution for their philanthropic goals.
Family Foundations (Private Foundations)
Family foundations are private charitable organizations typically funded by an individual, a family, or a family-owned business – allowing founder(s) to support causes aligned with their values over generations. These foundations offer a structured way to manage philanthropic efforts, often providing tax benefits and long-term impact through strategic grantmaking to causes like education, science, the arts, or religion.
Why Choose a Family Foundation
While the core benefit is to make a lasting charitable impact, family foundations also offer compelling strategic advantages.
Family Involvement and Education
A private foundation is an excellent way to involve family members in philanthropic decision-making. Children or grandchildren can serve on the board, grant committees, or even act as trustees or co-trustees. By involving younger generations, clients can foster financial literacy and instill core values around giving, stewardship, and legacy. For many families, it’s an intentional way to pass down more than wealth—it’s about passing down purpose.
Some Cumberland Trust clients involve the whole family in the family foundation. Often, a board consisting of members of elder generations oversees the entire foundation, while members of younger generations serve on subcommittees, which are placed in charge of various aspects of the foundation, from researching charitable organizations to visiting grant recipients. Each family member has a role and is invested in the legacy of the family wealth.
Control and Flexibility
Founders can enjoy a high degree of control over how a family foundation operates, including:
- Determining which charitable organizations receive grants
- Serving as trustee or co-trustee, or maintaining veto power over board decisions
- Appointing family members, friends, or trusted advisors to the board
This freedom of direction allows the foundation to reflect personal values and long-term goals with precision.
Tax Advantages
Gifts made to a family foundation can reduce the size of a client’s taxable estate, helping mitigate estate tax exposure.
Considerations: Family Foundations
Running and administering a foundation is significant work.
To realize a family foundation’s full potential, the grantor must ensure family members are willing to engage and participate in the organization. This requires open and honest communication among family members as well as a commitment to fulfilling their responsibilities to the foundation.
Not all families have a member who is willing or able to serve as a trustee. This responsibility can be overwhelming, but it is important to keep the trust compliant. Other options, such as a corporate trustee, co-trustee, or agent, can be an alternative solution.
Family foundations must give away at least five percent of their assets each year.
This requirement, which can be satisfied by making grants and paying certain qualifying expenses, ensures that foundations actively support charitable causes rather than simply accumulating wealth. If a foundation distributes more than the required amount in a given year, the excess can be carried forward for up to five years to offset future distribution requirements. While their purpose is philanthropic giving, many family foundations desire to grow assets initially before making larger contributions to charitable organizations.
Charitable Lead Trusts & Charitable Remainder Trusts
Another philanthropic opportunity is charitable trusts. Charitable trusts are irrevocable trusts that allow grantors to benefit themselves, beneficiaries, and a charity. The trust can be funded with cash and assets such as marketable securities, real estate or private business interests. Clients often choose this type of philanthropic trust when they sell a business or have a liquidity event that will impact their personal income taxes.
Charitable Lead Trusts (CLTs) provide funds to a charity or charities of the grantor’s choice for a set time. At the end of the designated time, the remaining assets are distributed to the grantor or beneficiaries.
Charitable Remainder Trusts (CRTs) provide funds to the grantor or beneficiaries for a set time. The remaining assets are distributed to the selected charity or charities at the end of the set time.
Benefits of CLTs and CRTs
Each client has different needs, and CLTs and CRTs offer plenty of advantages for clients who want to explore philanthropic giving.
- Support a charity and family. CLTs and CRTs allow the client to financially support loved ones and pursue charitable donations.
- Fund with cash, assets, or both. Charitable trusts allow for flexibility in how they are funded.
- Utilize tax breaks. Income and capital gains taxes can be reduced or avoided when forming a charitable trust. Plus, assets can be sold tax-free inside the trust without triggering gains.
Considerations: CLTs and CRTs
- Limited flexibility to make changes. Since it is an irrevocable trust, changes cannot be made to the assets or terms of the trust once executed. However, grantors may reserve the right to change charitable remainder beneficiaries.
- Managing & administering the trust. Ongoing management, reporting, and legal compliance are complicated. The trustee is responsible for this crucial part of the trust, which can create an overwhelming situation for individual or inexperienced trustees.
Community Foundations
The IRS classifies community foundations as publicly supported charitable organizations. Community foundations support a wide range of programs, including scholarships for students, affordable housing initiatives, mental health services, food security efforts, environmental conservation, and arts and cultural projects. They also fund workforce development, support for small businesses, and disaster relief in response to local needs.
Benefits of a Community Foundation
- Serve your community. Many individuals are attracted to community foundations because they want to serve the people and needs in the place where they live. Community foundations are an easy way to ensure financial gifts serve their community.
- Needs are already identified. Community foundations have already completed the legwork to identify areas of need and the best ways to address them.
- No extra work for the donors. Donors will not need to worry about tax laws, governing funds, or administering gifts when they donate via a community foundation.
Considerations: Community Foundations
There are two reasons a community foundation might not be the right fit for your client.
- Lack of control. With a private foundation or a charitable trust, a grantor decides who gets the funds. A community foundation allows donors to specify the programs to which they wish to contribute and where donations should be sent. But ultimately, the foundation and its board make the final decision about where funds are needed.
- Little engagement required. If your client hopes to engage their family through charitable acts, donating via a community foundation doesn’t provide the opportunity for a family to invest in a cause together. This can be great for some clients, but less than ideal for those looking to create a legacy together.
Donor-Advised Funds
A donor-advised fund (DAF) is a flexible, tax-efficient charitable giving account that allows an individual to set aside assets for charitable giving while retaining the ability to recommend grants to preferred nonprofits. Individuals can contribute cash, marketable securities, or other assets to a donor-advised fund, where they can grow tax-free.
Benefits of Donor-Advised Funds
- Receive immediate tax benefits. Even when a donor doesn’t immediately make grants to charities, they receive a tax deduction upon opening the fund.
- Simple process for giving. Donor-advised funds create a simple process for giving, relieving individuals of administrative burdens.
- Accepts all appreciated assets. Donors can fund the account with appreciated assets as well as cash.
Considerations: Donor-Advised Funds
- Contributions are irrevocable. Once you contribute to a donor-advised fund, the assets no longer belong to you—they must be used for charitable purposes and cannot be reclaimed for personal use.
- Limited control over investments. While some donor-advised funds offer a variety of investment options, you typically won’t have complete control over how the assets are managed. This can be a downside for donors who prefer a more hands-on approach.
How Cumberland Trust Can Help with Your Clients’ Charitable Trusts
Cumberland Trust works with clients and their professional advisors to carry out the client’s philanthropic intentions through the administration of charitable trusts and family foundations.
At Cumberland Trust, we provide:
A breadth of trust services
We offer a range of services and work with many types of personal trusts, which can be hard to find at other corporate trustees.
Professional governance and accountability
Unlike friends or family members serving as individual trustees, Cumberland Trust is regulated and held to a high fiduciary standard. This accountability assures neutrality, transparency, and professional governance.
Centralized expertise and experience
Our team comprises legal, tax, and high-net-worth wealth transfer professionals to provide experienced, knowledgeable guidance.
Contact Cumberland Trust to learn how we can support your client with charitable trust administration and their greater philanthropic endeavors.