Reality Check: Did Bill Gates Make the Right Decision?

Yesterday, I sat down with a successful businessman to help him sort through his options in creating an official charitable fund to organize his giving and involve his family. He just sold his business, is retiring, and is wanting to write the next chapter in his life. His initial thoughts were oriented around the most common fund that people are aware of: the private foundation. Hey, Bill and Melinda Gates have one, so it must be the right option, right?

Maybe not. Experts are increasingly saying that you need at least $10 million in a private foundation to make it cost effective. Why? It is a separate charitable organization with a required tax return (IRS form 990), and legal work. Want some more reasons?

• Anyone can get your 990 on the web and see who is on your board, your investments, expenses, and grants.
• Private foundations are required to distribute 5% to charity annually. Mess that up and the IRS can hit you with penalties.
• Private foundations are subject to stringent self-dealing and investment restrictions. Again, think penalties.

So you need at least $10 million in a private foundation to make it worth the hassle. Fortunately, there is an easier way to do good (no matter which side of $10 million you are on). I have three words for you: Donor Advised Fund (DAF).

• You can set one up through a community foundation like Legacy Fund.
• No separate tax return is needed (so no one can see your activity).
• The expenses are less, and you’ll have a partner to handle the back office.
• The minimum is $25,000. You can fund it with a variety of assets, including bequests.
• The tax deduction limits are higher vs. a private foundation (so you can give more and claim it this year).
• DAF’s don’t have a 5% minimum annual distribution. Grow it or give it away—your choice.
• You can involve your family in multi-generational giving, and you can give to any legitimate charity anywhere.

After reviewing all of this with the business man, I could see the light bulb turn on. It’s kind of a “no brainer.” Legacy Fund and CICF administer many DAFs with families because DAFs make it easy (and fun) to do good. Let Bill Gates have all the headaches.