Over the years at FCS Private Wealth Management we’ve found that charitable giving can be an excellent tool for helping our clients achieve their financial goals, provide wealth education to their heirs, as well as fulfill their desires to give back to the community. Whether it’s through donor advised funds or charitable trust, we work with our clients to determine the best strategy for fulfilling their wealth’s purpose. 

Charitable giving is a foundational part of our company culture and who we are at FCS. Giving back to the community is important to us and we know it’s important to our clients. That’s why we always take the time to discuss the methods available for charitable giving as part of building your private wealth management plan. 

Every client is different; they have their own goals and resources. The charitable giving strategies you use might be dependent on whether you live in Napa Valley, CA or Naples, FL or if the organization you want to support is in a different state from where you are. You can trust our team knows how to navigate all the requirements and ensure that you can be generous to the charities you hold close to your heart.

Donor advised funds, charitable trusts, and private foundations

There are multiple methods that we use to facilitate charitable giving for high-net worth individuals and families looking to make an impact on their community. Some of the most common ones include donor advised funds, charitable trusts, and private foundations.

Donor Advised Funds

Donor advised funds are a particularly popular strategy for charitable giving in the last few decades, though they’ve been around since the 1930s! They’re a great way to maximize your giving to the charities you value most because they are easy to set up and manage, especially when you’re working with a personal finance professional.

What are donor advised funds?

A donor advised fund is a type of investment account set up for the sole purpose of supporting a particular charity. You can contribute cash, securities, or other assets. These assets are then invested, giving your contribution the ability to grow over time.

Donor advised funds are typically run by the charity they support, but the charitable organization must make requests for using the funds. In this way, the donor advises how the funds will be used.

How do donor advised funds work?

When you set up the donor advised fund account, you are able to immediately make a tax deductible donation. The account is invested, allowing your contributions to grow and support the charity now or over time depending on your charitable goals. Your contribution is able to grow tax free once it’s invested as part of the donor advised fund.

What organizations allow donor advised funds?

As an FCS client, we can work with you to see which community organizations you’d like to support and are eligible to use a donor advised fund. Per the IRS, the charity must be a registered 501(c)(3) nonprofit organization.

Example organizations to consider:

• Your college alma mater or local schools
• Homeless shelters and food banks
• Religious institutions
• Public clinics and hospitals
• Medical research institutes

The conversation will ultimately always come back to: What causes are you passionate about? What institutions would you like to support?  We can find a way to support those efforts as part of your wealth management plan.

Benefits of using donor advised funds versus a private foundation

Private foundations can be a viable method for charitable giving, but there are reasons donor advised funds have been surpassing them in popularity over the years—mostly because private foundations are more costly to set up and run than a donor advised fund.

As we noted previously, donor advised funds are typically managed and run by the organization to which they’re gifted. Private foundations are their own entities. This means they typically take longer to set up. They require their own staff to oversee the organization and the grant-making process, which can make accessing funds harder for the causes you are trying to support. 

Further, private foundations have a minimum 5% required distribution each year. This means that part of the funds must be paid out, even if, for some reason, you as the donor wanted to give a larger donation one year and a smaller donation the next.

Donor advised funds don’t have the same requirement, allowing you more control over how the money gets distributed.

Advantages of a donor advised fund

• More flexibility with donations
• Structured to meet your charitable goals
• Simple set up
• Grow your donation tax free
• Allow for anonymity in donations

Donor advised funds versus a charitable trust

Charitable trusts and donor advised funds have some of the same benefits, such as tax deductions and reducing the size of your estate. Like donor advised funds, charitable trusts must benefit a charitable organization recognized as such by the IRS.

There are two types of charitable trusts: lead and remainder. Both are created with a specific charity in mind; the main difference is in how they distribute the funds earned from their investments.

Charitable Lead Trusts

As you might expect from the name, the charity leads the charge in a charitable lead trust. This type of trust distributes the proceeds from the investments first to the assigned charity, and then the rest is distributed to your beneficiaries. 

Charitable Remainder Trusts

In a procedure somewhat opposite of a charitable lead trust, a remainder trust first provides an income to you (or your beneficiaries) and then the remainder is allotted to the designated charity.

Donor advised funds advantages & disadvantages

• Can choose the charity at a later date
• Charitable trusts require designating a trustee
• Less overhead costs than creating a trust

The main disadvantage of creating a donor advised fund instead of charitable trust is that donor advised funds cannot generate income for you. It’s also important to consider that charitable trusts and donor advised funds are irrevocable contributions. 

It’s also possible to combine charitable trusts and donor advised funds as part of your overall charitable giving strategy. For example, if the donor advised fund is named as the beneficiary of the charitable trust, you could delay the need to pick a specific charity to support.

As required by law, all contributions to a donor advised fund are under the exclusive legal control of the sponsoring Qualified Public Charity. The Qualified Public Charity has sole responsibility and authority for investing the Gift Account assets and may change the Investment option(s) at any time. You should consult with your own tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you will depend on the specific facts of your situation at the time your taxes are prepared.

Donor Advised Donors do not receive investment returns. The amount ultimately available for Donor directed grants may be more or less than Donor contributions to the Donor Advised Fund. While annual giving is encouraged, the Donor Advised Fund should be viewed as a long-term philanthropic program.

While the operations of Donor Advised Funds are regulated by the Internal Revenue Service, they are not guaranteed or insured by the United States or any of its agencies or instrumentalities. Contributions are not insured by the FDIC and are not deposits or other obligations of, or guaranteed by, any depository institution. Donor Advised Funds have not been registered under federal securities laws, pursuant to exemptions for charitable organizations.

Charitable giving and private wealth management, the FCS philosophy

Many of our clients believe that charitable giving is an important part of being a good steward of their wealth. It also tends to come up in conversations about leaving a legacy because charitable trusts, donor advised funds, and private foundations will exist even after the donor passes away.

When our financial advisors start scoping out a wealth management plan, they ask clients to consider where they would like their money to go after they’re gone. It’s not to be morbid, but the reality is that many of our clients have assets that they won’t be able to spend within their lifetime. Further, there are only three places your money can go as part of your legacy: your family (heirs), the government, or charity.

Building your investment plan with that reality in mind can help direct the conversation about charitable giving, leaving a legacy, and what your unique wealth management goals are.

Charitable giving and wealth education

Wealth education is an important part of private wealth management, especially for families with young children. It’s estimated that 70% of wealthy families lose their wealth by the 2nd generation, and only 10% of families retain their wealth through the 3rd generation. 

Some people theorize that this is because there’s a disconnect for subsequent generations and the generation that earned the wealth. The first generation is connected to the work it took to build the wealth. The second generation may understand some, but won’t necessarily have a firsthand experience of what went into creating and earning the wealth. 

The only solution for these discrepancies is to have conversations about wealth management and the values that built the wealth in the first place. Some people have a hard time discussing their wealth with their heirs or other family members, as they might be worried about how it will affect their relationships.

We’ve found in many cases that setting up donor advised funds or charitable trusts can often facilitate larger conversations about wealth and the family’s values to ensure a long lasting legacy. 

FCS is here for all your questions about donor advised funds and charitable giving in Kansas City and beyond!

At FCS Private Wealth Management we have years of experience helping our clients meet their private wealth management goals. Whether you’re looking to navigate charitable giving, estate planning strategy, or increasing your portfolio’s tax efficiency.

Our office is based in Leawood and serves clients from all across the country, including Palm Beach, Nashville, and beyond with trust, competence, and discretion. These three pillars inform everything we do at FCS, you can always rely on us to do what we say we will, when we say we will do it. 

The FCS team believes that if you don’t determine the purpose of your wealth, then your wealth has no purpose. Our team of financial advisors and CERTIFIED FINANCIAL PLANNER™ professionals are ready to assist you in determining your wealth’s purpose and developing a plan to make sure your wealth fulfills that purpose.

Contact us if you’re ready to start the conversation about how charitable giving fits into your long term financial planning. We’ll make a difference for you, so you can make a difference for the world.