Q. Whether I’m establishing a DAF or a private foundation, should I plan to spend the charitable funds sooner or later—or leave them for others to spend in perpetuity?
A. Your decision on timeline should be shaped by your goals and the needs of your focus areas. For example:
When faced with the choice of aiding your intended beneficiaries today or in the distant future, consider this observation by Julius Rosenwald, whose philanthropy aided Black children in the South in the 1920s: “I feel confident that the generations that will follow us will be every bit as humane and enlightened, energetic and able, as we are, and that the needs of the future can safely be left to be met by the generations of the future.”
Q. Can I make political contributions through my philanthropy?
A. Political contributions (other than to certain 501(c)(3) voter registration and “get-out-the-vote” organizations) are not deductible from individual income tax. Contributions to candidates, 501(c)(4) organizations, and other organizations that are not eligible for tax deductions generally cannot be made by DAFs or by public and private foundations. For political contributions, direct giving (or equivalently, giving through an LLC) is your best option. State or federal law may require the disclosure of political contributions.
Q. Can I support advocacy with my philanthropy? What about lobbying?
A. Advocacy is among the legitimate tools an organization can use to achieve its goals. Advocacy refers to a range of activities that aim to protect rights or promote interests at the global, national, or local levels. 501(c)(3) organizations may engage in some activities aimed at legislation, and may engage in largely unrestricted advocacy to influence administrative agencies and courts. You can make tax-deductible gifts to 501(c)(3) organizations that engage in advocacy through direct giving, DAFs, private foundations, and LLCs.
Lobbying is a subset of advocacy that is highly regulated by the Internal Revenue Code as well as state laws. Generally speaking, lobbying is an attempt to influence legislation through direct communication with members or employees of a legislative body, or indirectly by attempting to influence the public to take action on proposed legislation. Lobbying by a 501(c)(3) organization is permitted if it does not constitute a “substantial part” of its activities. (Section 501(c)(3) organizations are totally prohibited from supporting or opposing individual candidates for elective office.) Within limits specified by tax regulations, community foundations, as public charities, can also conduct or fund lobbying..
With narrow exceptions for “self-defense,” private foundations generally may not lobby, but they may support public charities that do so as long as the support is not directed to the lobbying. If you want to engage in lobbying, consider giving directly to 501(c)(4) social welfare organizations.
Q. What is impact investing, and which of the vehicles allow me to make them?
A. As we’ll discuss further in Chapter 12: Socially Motivated Investing, impact investing consists of investing in for-profit companies with the goal of increasing their social impact as well as possibly getting financial returns. You can make impact investments by writing a check, through a private foundation, through an LLC, and through some DAFs as well.
Q. Are impact investments tax deductible?
A. The Internal Revenue Code generally does not differentiate between investments intended just to make money and investments that also have a social purpose. Impact investments are not tax deductible per se; income and realized gains are taxable, and losses are deductible to the same extent as for ordinary investments (although losses are deductible only if the transaction was intended to be profitable). But there are at least two ways that you can make impact investments using charitable funds:
Q. What about giving through estate planning?
A. The vehicles that we’ve mentioned thus far focus on giving while living. Estate planning focuses on preparing for the transfer of your wealth upon your death, and it runs the gamut from drafting a will to establishing trusts and purchasing annuities and insurance. Philanthropy can play a part in all of these—and the Internal Revenue Code has intricate provisions for how these instruments are treated. An estate planning lawyer can help you explore the possibilities.
Giving to public charities (including through DAFs) and private foundations while alive will generally be more advantageous from a tax perspective than giving upon death. A charitable gift during the donor’s lifetime entitles him or her to an income tax deduction and moves assets out of her estate, thus reducing her estate tax. A charitable gift upon death does not yield any income tax benefit beyond the donor’s final income tax return, though it does bring estate tax benefits. For this reason, it is sometimes said that giving during life yields a “double benefit” (an income tax deduction plus a reduction in estate tax liability) while giving at death yields only a “single benefit” (a reduction in estate tax liability).
Donor Story: Leveraging Three Giving Vehicles to Maximize Impact—Matt Rogers, Founder, Incite.org
We currently use three giving vehicles: a foundation, an LLC, and a DAF. This particular model developed over time as we learned about the most effective tools and activities for our impact work. My wife and I started making grants six years ago, which at that time consisted of writing individual checks to various organizations. We quickly realized that was not an effective grantmaking strategy and we wanted to be more tax efficient while maintaining flexibility to best use our assets for impact.
Establishing a Foundation
Mission related investments (MRIs) were important to us and difficult to accomplish through a DAF, so we set up our foundation which is the primary delivery vehicle for our grants and investments. We make about 7-10% in grants and a similar quantity in MRIs every year and use much of the foundation’s corpus for investments in high-impact, high-risk activities, like new battery technologies, power, clean energy, etc.
Flexibility of an LLC
Our next learning emerged as we grew our team. When we hired our first two employees, we could have used the foundation as an employer but quickly realized that would limit the kinds of activities they could perform and the types of organizations we could support to 501(c)(3) public charities. We wanted the flexibility to be able to do whatever it takes; we work in areas like climate change, democracy, voter reform—which are often difficult to engage through a foundation. That’s when we decided to set up an LLC, which we use primarily as an organizational and human resources vehicle. An LLC offers more flexibility and with post-tax dollars there are no constraints around what kinds of activities our employees can be doing across impact investing, political giving, and supporting c4 organizations.
Utilizing a DAF
Once I exited from my startup, I maxed out what I could give, 30% of adjusted gross income, to our foundation, so we set up a DAF for the remaining 20%. We use this for other grants that we write; however, the DAF is not our primary giving vehicle and we plan to wind it down over the next couple years.