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Monday, May 6, 2024
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Case Studies |
Preserving Large Gifts to a Small, Developing Charity
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Case:
Connie Bellweather, 55, was heavily involved for years with helping the homeless in her city. She typically volunteered during the holiday seasons because there was no established shelter in her community offering day-in and day-out support. Fortunately, a nonprofit was created last year whose purpose was to help the homeless. A building and cash were donated to the new shelter after its creation. At the present time, the shelter has a modest endowment of $75,000. Connie, a very wealthy widow, desires to make a substantial gift - about $1 million - to the shelter to ensure its survival and provide her with tax benefits. However, she worries about the shelter's ability to manage such a large gift. She was concerned primarily with three items. First, the shelter may invade principal if it experiences any financial trouble in the future. Second, the shelter does not have a formal investment policy or committee. Finally, the shelter may dissolve or expand its purposes beyond helping the homeless.
Question:
How can Connie create a substantial endowment for the shelter, generate a $1 million tax deduction, and alleviate her concerns regarding her gift to the shelter?
Solution:
After speaking with her financial advisor, Connie decided to establish a Donor Advised Fund ("DAF") with her local community foundation. The DAF would be funded with $1 million and, taking into account Connie's wishes, would pay 5% of the fair market value of its assets annually to the shelter. Typically, the DAF payout would follow the same spending policy that the charity would follow for a restricted endowment fund, but that was not required.
With respect to Connie's concerns, the DAF alleviated all three of them. First, the shelter would never invade the $1 million of principal because the shelter did not have any access to the funds. The $1 million was owned by the community foundation, not the shelter. Second, the funds would be managed professionally by the community foundation's investment committee. Because the community foundation manages over $20 million, it can afford to retain the services of professional investment advisors. Third, the DAF has the flexibility to make payments to a wide range of charities. Thus, if the shelter ceased to exist or began supporting other causes not acceptable to Connie, she could redirect the DAF payouts to another charity. Finally, Connie's DAF would provide a $1 million tax deduction immediately, because it is a full and complete gift at the time of funding. As you can imagine, Connie is very pleased with this plan. Connie is able to support her favorite cause, and provide herself with peace of mind regarding the longevity of her gift. As a result, Connie plans to create the Bellweather Fund for the Homeless, and continue volunteering her time for a cause that means so much to her.
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