By: Alyssa Razook Wan, Esq. and Heidi Suarez, CPA
There are approximately 1.5 million charitable organizations in the United States with missions that include advancing education, helping the elderly, pairing shelter dogs with veterans to help them manage trauma, training neurodiverse individuals for employment, expending funds to assist with disaster relief efforts worldwide, and everything in between and beyond.
Yet, at times you may wonder if you would be better served by forming your own charitable organization rather than donating to an existing one. Perhaps you want to build a legacy for your family, bolster your business’ reputation, or capitalize on potential tax benefits. There are some situations in which starting your own charity may make sense — and others where supporting an established non-profit organization is the better route.
So, when would it make sense for you to start your own charitable organization? Below are a few decision drivers to consider.
- Efficiently achieve a specific outcome
Organizations change over time. Leadership changes, market fluctuations and staffing adjustments can create a flux such that the operations of an existing organization you once supported may no longer align with your goals, or you may simply believe that you can accomplish your goals more efficiently. In this case, forming a charitable organization may be worth considering.
- Having control and transparency
While working with an already established charitable organization has its advantages, generally you do not control the use of the organization’s funds nor the ultimate direction of the organization. Those wanting a high level of control in these areas may seek to form their own organization.
- Making it a family affair
You may have family members who are highly motivated to be involved with charitable outreach and decision making. Or, you may wish to create a charitable organization to build a family legacy, as well as provide a training ground for working in the family business or managing family wealth. The older and younger generations can work together in carrying out charitable goals, and the baton can be passed to the younger generation when appropriate. Family members generally may receive a salary and benefits for services rendered to the organization so long as they are reasonable within the comparative market.
- Growing the reputation of a business
Consumers are increasingly focused on companies’ environmental, social and governance (ESG) decisions, and want to know what businesses are doing to give back to their communities. A business owner may seek to form a charitable organization to highlight the business’ charitable intentions and commitment to making a positive impact in the community.
- Leveraging tax planning opportunities that align with charitable intent
There are significant continuing costs, administrative support and tax compliance obligations involved with forming and managing a charitable organization. For these reasons, potential tax-savings opportunities should not be the driving reason for you to create your own charitable organization. However, having your own charitable organization may present unique tax savings opportunities for income tax purposes, and also for estate tax purposes, as the organization can serve as a beneficiary of your estate to reduce any estate tax that would be owed.
- Fundraising through grants
If the mission and outreach goals of the charitable organization you want to start align with the requirements of an available grant, obtaining grant funding can be an effective way to support direct outreach and build the organization. Although grant writing is arguably an art unto itself and winning grants is in no way guaranteed, it is possible to successfully raise funds for a specific cause by obtaining grants for your own charitable organization.
- Supporting a specific foreign charity
Another option is forming a “friends of” charity to support one or more foreign charities. When formed and managed properly in compliance with the tax law, owning a “friends of” charity can make you eligible to claim an income tax charitable deduction where it would not otherwise be available if contributed directly to the foreign charity. In some instances, forming a charitable organization may be the only way to provide funds to the foreign charity and be eligible for the charitable income tax deduction.
You may desire more direct involvement with a non-profit, but are hesitant to take on the associated administrative work and compliance tasks. In that case, a better route may be to identify one of the many existing charitable organizations to support, or to contribute to a donor advised fund (“DAF”) with a financial institution.
Establishing or contributing to existing DAFs offers tax deduction opportunities. However, there is a major point to bear in mind – once assets are transferred to a DAF, they are legally out of the control of the donor. This means that, you, as a donor, cannot retain the right to control the assets, including deciding when to sell the assets.
Starting a charity is a big undertaking, but if you have the right strategy, planning and support team in place, it can be a successful way to achieve your charitable outreach goals. To get started, contact qualified tax and legal professionals with expertise in charitable and estate planning. Your professional team can help you consider your objectives and options for charitable giving and long-term outreach goals, and establish a structure that supports your efforts.
Disclaimer: This article is solely for educational and informational purposes, does not discuss all possible factors that may be relevant to any one situation, and does not constitute tax or other legal advice.
Alyssa R. Wan is a shareholder in the Miami office of Fowler White where she practices in the Tax and Trust & Estates groups and serves as a Co-Vice Chair of the Florida Bar Charitable Planning and Exempt Organizations Committee (Real Property, Probate and Trust Law Section). Alyssa can be reached at email@example.com and 305-789-9272.
Heidi Suarez, CPA, is a senior manager in Kaufman Rossin’s estate, trust and exempt organization practice, where she helps high-net worth individuals, charitable organizations, estates and trusts navigate complex tax issues.