Bill Hawke is used to advising financial management clients on charitable planning. In fact, charitable giving is a longtime passion for this financial adviser who was previously a social worker. In the late 1970s, he wrote grants to request money for a juvenile offender program he was running at the time.
Now a certified financial planner with Cleveland Financial Group located on Chagrin Boulevard, Hawke decided three years ago it was time his family understood the importance of giving to charities. He and his wife, Connie, established a donor-advised fund through the Cleveland Foundation. Once a year, the couple, along with their four children, decide to which charities they'd like the Foundation to direct their funds.
"One Christmas after all the gifts were open, we gave the kids a letter we arranged through the Cleveland Foundation telling them we made a significant contribution to the Foundation," Hawke says. "And as a tradition, each year we would gather between Thanksgiving and Christmas to decide as a family where we wanted the money to go."
Hawke's objective was to send a message to his children, who at the time ranged from age 14 to 22.
"We wanted them to be involved in giving as a group, and we wanted our family to take joy and excitement out of sharing our blessings," he explains.
A donor-advised fund is one of the easiest charitable giving vehicles to set up. Typically established with a minimum gift of $10,000, donor-advised funds can be set up through nonprofit organizations such as the Cleveland Foundation or through mutual fund companies.
"Donor-advised funds can be established with gifts of cash, or securities like stocks, or other property," says Caprice H. Bragg, vice president of gift planning and donor relations at the Cleveland Foundation. "It contemplates that a donor is going to make a gift to the organization to create the fund, which is really best thought of as an alternative to a private foundation."
Unlike a private foundation, which is legally a separate nonprofit entity, a donor-advised fund is created under the umbrella of another organization as a public charity. The donor can choose a name for his or her fund, but the legal identity is listed as "[Donor's Choice of Name] Fund of The Cleveland Foundation," for instance.
"The donor retains the right to recommend grants from the fund and the Cleveland Foundation maintains the investment and administrative control of the fund. We work very closely with the donor to identify charitable ideas and to meet the donor's needs," Bragg explains.
Donor-advised funds are tax efficient because gifts made to public charities enjoy some additional tax benefits – the gift can be deducted in the year it is made, Bragg says. The donor can, for tax purposes, make a charitable gift by Dec. 31, then at the beginning of the new year, recommend grants to his or her favorite charity.
"For example, they might recommend a grant of $1,000 to their favorite environmental organization, another grant to their alma mater, which might be out of state, and then another grant to another local favorite charity such as the Red Cross. Donors can support a variety of interests by recommending grants from a donor-advised fund," Bragg says.
To help identify where its charitable contributions go, the Hawke family developed its own internal mission statement to target health care, children's services and education.
"We try to focus on those areas and get input from each of the kids as to where they'd like the money to go. This year we made contributions, for example, to a group called Youth Opportunities Unlimited, which is in Cleveland, and St. Jude's Children's Research Hospital in Memphis," Hawke says.
After donors recommend a grant, the Cleveland Foundation staff conducts some due diligence to determine that the organizations are charitable ones within the requirements of the law and the grants are processed or made in the name of the fund.
"If a family says we are really interested in hunger and homelessness in Greater Cleveland, the staff at the Foundation is available to research nonprofit organizations that work in that area and offer some ideas," Bragg says.
The Cleveland Foundation handles the investment of the funds, another reason why donor-advised funds are attractive. In private foundations, the family must hire a trustee (or it can pay a family member to act as trustee) to control distributions and manage assets.
Private foundations are much more costly. The entity is responsible for all operating costs including legal and accounting fees, insurance, office space, staff and miscellaneous.
There is no cost to establish a donor-advised fund, although annual fees apply based on the amount of the contribution.
"Donor-advised funds have very few moving parts; a lot of the administrative details are handled for you – that's a big advantage for some people," says Richard Tanner, president of Ownership Advisors Inc., a Cleveland-based financial management company. "The big disadvantage is the minute you move money to a donor-advised fund, typically if it's one sponsored through a foundation, you have often made some irrevocable decisions to that organization."
The private foundation gives you absolute control, Tanner says. Not so with the donor-advised fund.
"For very wealthy families who want a lot of control, the private foundation makes a great deal of sense," he says. "There are other things you can do with a private foundation you can't do with a donor-advised fund, but [private foundations] do come with a higher price tag."
Another alternative to a donor-advised fund for families who wish to maintain greater control of the assets without the high cost of a private foundation is a charitable remainder trust.
"We sometimes give it different names to help people better envision its purpose – like ‘capital gains bypass trust' because it sort of describes its purpose," Tanner says. "If a family has an asset that has a large capital gain, they can put that into a charitable trust and get a current deduction."
The charitable remainder trust is tax exempt; the trust can sell the asset and pay no taxes on capital gains.
That trust can then reinvest that money and in turn create an income stream. At the end of the duration of the trust, which is typically a lifetime, whatever is left in the trust goes to a charitable beneficiary, which cannot get less than 10 percent of what was put into it.
"One major advantage of the charitable remainder trust is that in addition to avoiding capital gains, you can then choose if you want to have income come back to you or the family in many different ways. You have a great deal of flexibility that you don't have through the donor-advised fund," Tanner explains.
For Bill Hawke and his family, it is all about the process of giving.
"Our real mission is that over our lifetime, if we can build up a significant amount of money in the fund, then after we are not on the earth anymore, it will be an opportunity for the kids to come back every year," Hawke says.