Jun 1, 2010 12:00 PM

, By Douglas Moore & Neil P. Murphy

Help your client make informed decisions on funding, investment strategies and asset allocation to successfully run this charitable-giving vehicle

By Douglas Moore & Neil P. Murphy

Choosing among various charitable-giving options can be a challenging proposition for your clients. The most common options are creating a private foundation (PF), contributing to a donor-advised fund (DAF) or making an outright donation. If your client is willing and able to commit both the time and financial resources (in the short- and long-term), then creating a PF may be the way to go. But making the decision to create a PF is just the beginning. Your client must consider how much, what and when to contribute. To help your client make an informed decision, you must consider the nature, value and basis of his assets, anticipated income tax rate increases and the imposition of a 3.8 percent Medicare surtax on net investment income (starting in 2013 for individuals with certain income levels).¹ You must also consider the client's emotions and sense of financial security. These considerations have to be coordinated with a sound investment strategy and asset allocation² directed specifically for the client's PF. We'll discuss the issues you must review with a client about creating and maintaining an effective PF. Analyzing these issues will help your client make an informed decision.

If a client approaches you about creating a PF, your first question should be whether the client is willing to make the significant financial commitment for this option. While some advisors may disagree, the client should be willing and able to contribute at least $5 million (with at least a $3 million initial contribution). The PF has upfront costs for: (1) preparing documents creating the PF (trust or non-profit corporation documents), (2) federal (Form 1023) and state tax filings, and (3) possible filing with the state attorney general's office or other government entities. Also, there are ongoing administration expenses for record keeping, grant making, determining the amount of annual qualifying distributions³ and preparing the Form 990-PFs and possible state filings. If the PF won't be funded with at least $5 million, it may not be cost effective for a client to implement this option.