Charitable Choices

June 2, 2009

Here's how an advisor can alienate a client who selflessly wanted to help others.

A client wants to give money to charity on a regular basis, but doesn't know which legal vehicle is best. His advisor recommends donor-advised funds because he's familiar with them. Or, maybe the advisor has experience setting up private foundations and convinces the client to go that route.

In either case, the client doesn't understand the pros and cons of these charitable vehicles. For instance, the client who set up a private foundation may not have understood all the reporting requirements. The client with the donor-advised fund might have never realized the limited control it provides over charitable donations.

At some point, the client realizes he or she made the wrong choice. Why? The advisor didn't carefully assess their needs.

"A lot of times people create these donor-advised fund [accounts] because they think they're easier," says Douglas Mellinger, vice chairman and founder of Foundation Source, a Fairfield, Conn., advisory fund. "We get phone calls from people every week in foundations who want to do things and are told that they can't."

Still, Mellinger says he likes donor-advised funds when they are appropriate-when the account is under $500,000 and when the client doesn't expect much control over the investment.

Private foundations are as old as the hills. They have been around for centuries, while donor-advised funds have been around for a few decades.

A donor-advised fund is simply a pool of charitable assets, according to Foundation Source. The fund is typically offered by a public charity that is usually affiliated with a local community foundation or a big investment company. Examples of the latter are funds offered by Charles Schwab, Fidelity and Vanguard, among others.

The Vanguard Charitable Endowment Program, for example, was founded in 1997 as an independent, nonprofit organization overseen by independent trustees. Vanguard provides certain investment management and administrative services to the program.

A private foundation is a non-governmental, nonprofit that is typically established and funded by an individual, family or entity. Activities are usually limited to making grants. And those making the grants are limited to small groups of people or maybe just one person. 

Foundation Source's Mellinger says the key issue is control. Most clients want it, he says. With private foundations, he says, clients can control investments, tax issues and whom the foundations hire, which can ensure relatives have jobs.

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