In this episode, Attorneys Christina Knopke and Annie Rogers address the pros and cons of setting up a foundation with Matt Mentzer, a fellow attorney at Creative Planning.
A Matter of Trust, hosted by Creative Planning attorneys Annie Rogers and Christina Knopke, is a thoughtful, informed discussion about ideas, trends and developments in estate planning. Our mission is to educate and inspire people to make better financial choices through knowledge, tools and strategies that ensure a more prosperous future.
Chrissy Knopke: Welcome to Creative Planning’s A Matter of Trust. I am Chrissy Knopke, one of the attorneys here at Creative Planning with my friend and colleague Annie Rogers, and we also have our special guest Matt Mentzer here with us today. And he specializes in business and tax planning with our clients. And we’re going to review the differences in donor advised funds versus foundation. So last time we had our guest Amanda Burge here with us who kind of filled us in on what a donor advised fund is. But we often get asked questions like, so, well, why wouldn’t I just create a separate foundation that I’m running? So kind of run us through the differences and what the pros and cons of a foundation versus donor advised fund is.
Matt Mentzer: Yeah. And I will tell you that I do not like foundations because they are so complex. But what the donor advised fund, you make your contribution and it’s like a charitable bucket. It sits there and you can spend it tomorrow or wait to spend it 40 years from now. Foundations aren’t like that. Foundations, you have to spend at least 5% of the assets each year and that can be a pretty complicated calculation. You have to file separate tax returns for the foundation, where you don’t need to do that with a donor advised fund.
Chrissy: And just setting it up in general is time consuming and costly.
Matt: Oh, it’s a beast. Yeah.
Annie Rogers: And it can take up to a year, right? To get it approved.
Matt: I’ve got some that are going longer than that. You have to set up with the state first and then apply to the IRS for tax exemption. And that’s based on what programs you’re wanting the foundation to administer. And so, I will tell folks that unless there are certain programs that you absolutely want to administer and those are going to be things like scholarships, if you want to actually have a program where you’re helping people in need, foundation maybe more beneficial for you. But if it’s just, I want to send a check somewhere, a donor advised fund is going to be more powerful from a tax deduction standpoint and ease of administration by far.
Annie: When it does, the foundation has to have a charitable purpose because sometimes we have people who are interested in doing this, but it didn’t really fall under those guidelines.
Matt: Yeah, correct. And that’s part of that tax exemption process that you go through with the IRS. They look to see what is the charitable purpose for this organization or entity. And they will push back on you. So if you don’t really have a true purpose, they may say you’re not tax exempt.
Chrissy: And one of the benefits though other than in the donor advised fund is if you are actually going to have family members run the charities and it is going to be quite a big deal. You’re providing programs and charitable things. You can have family members run that charity and actually get paid through that charity.
Matt: Yeah, maybe.
Annie: But that can also be a tricky thing too also, right?
Matt: Yeah. So with private foundations, you have what are called self-dealing rules, where you cannot have any sort of transactions between yourself and your foundation. And your family is also included in those rules and they are called disqualified persons. And so, well, maybe we can pay your daughter a salary for her services on the board. That’s going to be subject to reasonable compensation, which is great, right? What I think is reasonable, the IRS may not think.
Matt: And there are substantial penalties for noncompliance with the private foundation rules, which is one more reason why I tell folks go to a donor advised fund. Unless the private foundation truly will help accomplish those goals more than a donor advised fund.
Matt: Again, you can’t have a scholarship program run through a donor advised fund that’s-
Chrissy: Unless you’re already donating to a scholarship that’s in existence.
Matt: Yeah. But for most individuals that are want to set the foundation, they want to create the scholarship fund. They want to participate in how the recipients are chosen.
Matt: So, that’s correct.
Chrissy: Well, that’s pretty big differences in the two. So, I appreciate you telling us.
Annie: And these are things that you sit down with people and talk about the pros and cons and help them determine.
Matt: Yeah. It’s not just a five minute conversation.
Matt: There’s a lot that goes into what is the correct to a proper type of vehicle for a charitable gift.
Annie: Thank you for joining us.
Chrissy: Thank you for being with us.
Matt: Thanks for having me guys.
Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.