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McKenzie Robinson | SBJ

Family wealth meets opportunity

Foundations and donor-advised funds are tools to meet charitable goals

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“No man becomes rich unless he enriches others,” said U.S. Steel founder Andrew Carnegie, whose enduring legacy is the 2,509 Carnegie libraries built through his grant program.

The Midtown Carnegie Branch Library, opened in 1905 at 397 E. Central St., is one of these. Carnegie gave Springfield a $50,000 grant to build the library, on the condition the city provide $5,000 annually for book purchases and building maintenance, according to the Springfield-Greene County Library District website.

Carnegie libraries are an example of accumulated family wealth given away for the public good with the name of the donor literally etched in stone on buildings that still stand today – 800 still in use as libraries and 350 given new life as office buildings and cultural centers, according to Theodore Jones, author of “Carnegie Libraries Across America.” Jones reports Carnegie spent the equivalent of $1.3 billion on libraries in the U.S., 70% of them in small towns like Marshfield, where the former Carnegie library now houses the Webster County Historical Museum.

According to Shari Hoffman, managing director of BKD LLP, wealth is a responsibility, and one that many families take seriously.

“I’ve seen a lot of families who have used those dollars to bring families together,” she said.

Hoffman said charitable donations give families an opportunity to have conversations about how they might want to allocate the money.

Two popular mechanisms a family might use to facilitate charitable giving are the family foundation and the donor-advised fund. According to Hoffman, either can help families accomplish their goals.

“They’re also used to educate and encourage younger family members,” she said. “They’re a springboard to help teach younger generations about charities and charitable giving.”

There are advantages and disadvantages to either instrument, according to Hoffman, though both can be named to honor a family.

Selecting a giving vehicle
According to 2021 figures from the National Philanthropic Trust, foundation giving increased 19% in 2020, to a level of $89 billion. Some 86% of affluent households maintained or increased their giving, despite uncertainty about COVID-19.

Adults are more likely to give to charity if their parents did so, according to NPT.

NPT reported there were 1 million donor-advised fund accounts in 2020, with $160 billion in assets. The average donor-advised fund account size was $159,000.

A family foundation is more heavily regulated than a donor-advised fund or a public charity, according to Hoffman.

“I think some people don’t always realize that,” Hoffman said. “These family foundations are required to make gifts to charities each year, 5% a year, and they are required to file a tax return.”

The tax return includes information about the assets in the foundation, the people contributing and the charities the foundation supports.

“Anonymous donation is a little bit difficult to do in a family foundation,” Hoffman said.

In a recent interview with Springfield Business Journal, Heather Zoromoski, executive director of the Darr Family Foundation, pointed to an effort to change the mindset from family foundations giving the 5% minimum to giving the maximum they can, for some up to 10%, while still having sufficient funds to operate into perpetuity.

“We’re seeing as baby boomers age, there’s going to be this massive generational transfer of wealth,” she said. “This is going to, in turn, likely lead to growth in the size of existing family foundations, and also opportunity for families to either start their own foundation or invest some of that money in a donor-advised fund.”

A family foundation also incurs administrative costs that a donor-advised fund does not.

Hoffman said a donor-advised fund has some similarities to family foundations, but they generally require less money, time and legal assistance to set up, as well as less day-to-day administration.

The family also has less control over a donor-advised fund.

“Like the name suggests, the donor has the right to advise on how they want their contributions to be distributed, but ultimately it’s up to the supporting organization to decide,” Hoffman said.

She noted, though, that supporting organizations have a strong desire to follow the donor family’s wishes if possible.

A donor-advised fund has fewer reporting and filing requirements than a family foundation, and it does not have a minimum annual distribution requirement. Costs are generally lower, too, Hoffman said. Both instruments allow tax deductions at the time a gift is given to them.

“As a general rule of thumb, if you want to start a family foundation, you need probably $5 million or more to justify the cost of that gift,” she said, but added there is no minimum size requirement to set up a family foundation.

“I have certainly worked with families who have done it with lesser amounts than that, but the reality is that there’s a cost to set them up and administer and keep them going.”

The Council of Foundations reports that half of all private foundations in the U.S. are family foundations.

Local expertise
Locally, one common option for managing donor-advised funds is the Community Foundation of the Ozarks Inc., Hoffman said.

“I really feel like they have their finger on the pulse of the needs in our area,” she said, adding CFO does  a good job of bringing charitable families and organizations together in the community.

Brian Fogle, CFO president, said there is both an art and a science to philanthropy.

“The most common ways that families meet their charitable goals is through a donor-advised fund,” he said. “That is like a checking account under a community foundation. … You set up a fund and then you donate money into it.”

Donor-advised funds also can be set up through a private portfolio management firm, Fogle said. He noted the donor has advisement privileges to distribute money.

Record-keeping is much easier with a donor-advised fund, according to Fogle. “If you’re giving 40 charitable gifts per year, rather than having to figure out who you gave it to, you can go through your donor-advised fund. That’s a benefit,” he says.

An adviser who manages a fund also checks to make sure a charity is legitimate, Fogle said, thus eliminating a lot of legwork for the giver.

“The advantage of a community foundation is we work in the community, so we know the charities,” Fogle said.

CFO manages almost 500 donor-advised funds and works with most local charities, he said. They have a total value of $90 million, according to Fogle. The administration fee is 1.15% of the average balance.

“We do a lot of donor education, too,” Fogle said “We’ll do a webinar on who’s working on a cause or what the needs are in the community.”

Fogle said a private charitable family foundation may be the right option for larger charitable goals. Like Hoffman, he said the cost can be steep.

“I heard a planner say you either want $5 million or to employ a family member,” he said.

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