Greater Good Blog

At Arabella, our guiding framework is built on the conviction that the most impactful changemakers are those who use the full array of tools available to them, including charitable grantmaking, impact investing, and policy advocacy. Donors who are committed to deep, lasting change should seek to maximize the reach of their dollars by pulling multiple levers—or at least familiarizing themselves with how to do so.

In our practice, we advise philanthropists of all kinds—particularly families and individuals looking to amplify the impact of their resources—on how to choose giving vehicles and design an approach that enable them to pull these levers in the right ways at the right times, or in tandem. But doing that work upfront can be complicated. How do you choose the right mix for your unique situation?

To begin, we ground our clients in three primary design principles. First, form should always follow function. That is, decide what you want to accomplish and how you wish to engage in your philanthropy, and then select whichever vehicle and tools can facilitate that. Avoid defaulting to the vehicle you’ve heard the most about or that most of your peers or family members have chosen. That could mean using a donor-advised fund in lieu of a private foundation, or it may mean opting to establish an LLC.

Think about which levers are most important to you, such as grantmaking, impact investing, or policy advocacy. It’s important to recognize that some vehicles are better suited to one approach than others. For example, while DAFs excel at enabling grantmaking to 501(c)(3) charities, they are likely not the best tool for donors seeking to influence policy or effect political change. Similarly, impact investments can be deployed out of multiple vehicles, but donors usually have more control of the options when deploying those funds from an LLC or a private foundation.

Second, aim to create the minimum viable structure. Start with the simplest mix of vehicles that enables you to achieve your goals. As your work grows, you can expand on your initial structure.

Third, consider whether it’s important to you to preserve flexibility for future evolutions in your giving. In general, it is easier for donors to move money from vehicles that have fewer restrictions on activity, such as an LLC, to more restrictive vehicles, like a private foundation—but not the other way around.

Arabella is committed to helping donors understand these intricacies. Read on for considerations that can guide you in determining how to use the vehicles at your disposal.

Tradeoffs are a feature of the system, not a bug: The US tax code was designed to both incentivize charitable giving and limit the level of control an individual donor can have over issues relevant to broader society. This means the IRS offers larger tax deductions for types of giving that are more restrictive. For example, private foundations offer significant tax benefits to donors, but they are limited in their ability to fund advocacy and cannot fund political activity at all. Conversely, 501(c)(4) organizations can freely support advocacy and can fund limited amounts of political activity but funding them does not provide the same tax benefit. Thus, donors often must choose between enjoying greater control over their dollars and receiving a larger tax break.

Many factors influence your choice of vehicle, each of which sits on a continuum: In addition to the main tradeoff discussed above, many other factors are at play: administrative burden, cost, privacy, ability to hire staff, timeline, ability to collaborate with others, and more. We often remind our clients that each factor is typically not binary (e.g., zero administrative burden vs. prohibitive levels of burden) but on a spectrum. We spend time asking donors questions to understand the relative importance of each factor, which enables us to situate them along the continuum and point them toward the optimal vehicle(s) based on their preferences.

Be vocal about your priorities: Many wealth advisors report that the majority of their clients prioritize tax incentives over other considerations when deciding how to save or deploy their wealth. You may find that your advisor assumes you share that preference. If that’s not the case, speak up! Make your priorities clear by articulating what matters most to you, whether that’s creating systemic change during your lifetime or establishing a grantmaking vehicle that will be easy for your children to inherit and manage. You may also consider involving philanthropic advisors early on to help you articulate these preferences so you can voice them to other relevant advisors.

If you’re considering launching a new giving entity or pulling additional impact levers, we’re here to help. Our teams are available to be your thought partners as you weigh the above considerations, among many others, to design the impact approach that is right for you.

Jessica Robinson Love is a senior managing director at Arabella, where she partners with donors to turn their philanthropic visions into reality by designing and implementing innovative donor collaboratives, campaigns, and grantmaking initiatives that help them achieve concrete goals. 

Drew Rabe is a managing director at Arabella who leads Arabella’s integrated structures practice, facilitating major charitable giving by providing donors easy access to a wide range of vehicles and support services.

DISCLAIMER: The information above is intended for general guidance only; when making structural determinations about your philanthropic work, please consult with experienced legal counsel and tax advisors.