Estates, Foundations & Charities
Overview
In addition to retail, institutional, and business clients, financial professionals can also open accounts for estates, foundations, and charities. Each of these client types has its own legal structure and account considerations.
Estates
- When a person dies, their assets often become part of their estate.
- ⚠️ Unless a contractual arrangement applies to a specific asset (for example, a transfer on death designation or a trust agreement), the asset generally becomes property of the estate at death. Those assets are then handled through probate court.
Wills, testate vs. intestate
“A will is a legal document that directs how a person’s assets should be distributed to beneficiaries after death.”
🔑 A person may die:
| Status | Meaning | Who settles the estate | How that person is appointed | How distributions are directed |
|---|---|---|---|---|
| Testate | With a valid will | Executor (named in the will) | Executor presents the will to probate court; if the court accepts the will as valid, it issues letters testamentary, which legally authorize the executor to act on behalf of the estate | According to the will |
| Intestate | Without a valid will | Administrator | A family member or friend typically petitions the probate court to be appointed administrator | No will to direct distributions — the probate court often helps determine how assets are distributed |
The executor then:
- Pays the decedent’s debts and expenses
- Distributes the remaining assets to beneficiaries according to the will
The administrator performs a similar function, but without a will to direct distributions.
🔑 Definitions (word-for-word)
| Term | Definition | Example |
|---|---|---|
| Testate | > “Having a valid will in place prior to death” | A decedent whose valid will is accepted by probate court |
| Executor of an estate | > “Person appointed in a will to handle a decedent’s estate” | Receives letters testamentary from the probate court |
| Intestate | > “Not having a valid will prior to death” | Probate court often helps determine how assets are distributed |
| Administrator of an estate | > “Person appointed by the probate court to reside over the estate of someone who died intestate” | A family member or friend who petitions the court |
| Decedent | > “A deceased person” | The person whose assets form the estate |
Fiduciary status & time horizon
- ⚠️ Estate accounts are fiduciary accounts, so they’re subject to fiduciary-specific rules and regulations. In practice, this means the executor or administrator must put the beneficiaries’ interests ahead of their own.
- ⚠️ Because estate assets are often distributed within a few months, the executor or administrator typically isn’t investing with a long-term time horizon.
Foundations and charities
Combining investing with charitable giving has become increasingly common. Investing for charitable purposes often involves impact investing, also called socially responsible investing.
The page quotes a Fidelity Investments charitable giving site describing impact investing as purposefully making investments that achieve social and environmental benefits “while generating financial returns” — a broad term covering everything from investing in companies whose explicit mission aligns with your values to avoiding companies that do not meet those criteria. (Attribution: Fidelity Investments charitable giving site, as quoted on the page.)
- Impact investing is common in charitable portfolios because the investment choices are meant to support the donor’s broader goals.
- Example: if the goal is to support charities focused on climate change, investing in green energy companies may align better than investing in oil companies.
🔑 There are three typical ways to donate assets or securities to charitable causes:
- Direct donations to a charity
- Creation of a private foundation
- Donor-advised funds
🔑 Comparison of the three charitable giving methods
| Method | Structure | Who manages assets | Funding source | Tax treatment |
|---|---|---|---|---|
| Direct donation to a charity | Investor gives assets or securities straight to the charity of their choice | The charity | Donor | Donations are typically tax-deductible, which can reduce the donor’s taxes |
| Private foundation | An organization formed primarily to make charitable donations; investors generally establish their own foundation | The Foundation Board (similar to a corporation’s Board of Directors) | Funded privately by the founder(s), rather than through public fundraising | Assets used to fund private foundations are generally tax-deductible |
| Donor-advised fund (DAF) | “Giving accounts” established at financial institutions (e.g., Fidelity, Charles Schwab) | The donor (or their adviser) | Donor contributes cash, securities, and even cryptocurrencies | DAF contributions are tax-deductible to the donor |
Direct donations to a charity
- With a direct donation, an investor gives assets or securities straight to the charity of their choice. Donations are typically tax-deductible.
- 🔑 In many cases, donating securities can be more tax-efficient than donating cash.
⚠️ Worked example exactly as stated — investor buys $80,000 of stock that grows to $100,000 and wants to donate $100,000:
| Approach | Result |
|---|---|
| Sells the stock and donates cash | The sale may trigger a long-term capital gains tax of up to 20% |
| Donates the stock directly | Can generally deduct the $100,000 value against income and avoid paying capital gains tax on the appreciation |
🔑 Unrealized gain vs. unrealized loss:
| Situation | Best approach | Why |
|---|---|---|
| Donor has an unrealized gain (a gain on a security that hasn’t been sold yet) | Donate the security directly | Donating a security is generally most attractive in this case |
| Donor has an unrealized capital loss on a position they want to donate | ⚠️ Sell the security first and donate cash | That approach can produce both a tax-deductible capital loss on the sale and a tax deduction for the charitable donation |
- Regardless of the method, charitable giving typically provides some form of tax relief.
- Many investors also use charitable giving as part of estate planning. For example, Warren Buffet has pledged to give away 99% of his wealth to philanthropic causes. The more that’s given to charity, the less an individual or estate may be subject to taxation.
Creation of a private foundation
A private (non-governmental) foundation is an organization formed primarily to make charitable donations.
- A well-known example is the Bill and Melinda Gates Foundation. To fund their foundation, Bill and Melinda Gates donated a significant portion of their wealth (they’ve pledged over $100 billion in funding to the organization).
- This structure is typically funded privately by the founder(s), rather than through public fundraising. Investors who want to use this approach generally establish their own foundation.
- While some foundations are extremely large, many are not: roughly 66% of private foundations maintain less than $1 million in assets.
- Once funded, a private foundation is managed by the Foundation Board (similar to a corporation’s Board of Directors). 🔑 The Board’s role is to:
- Manage foundation assets
- Identify charitable giving opportunities
- Make donations when appropriate
- Like direct charitable contributions, assets used to fund private foundations are generally tax-deductible.
Donor-advised funds (DAFs)
- An increasingly popular way to donate to charities. Instead of donating directly or creating a private foundation, investors establish “giving accounts” at financial institutions. Companies like Fidelity and Charles Schwab offer these accounts.
- Investors can contribute a wide range of assets to a giving account, including cash, securities, and even cryptocurrencies.
- After the contribution, the donor (or their adviser) manages the assets. As the account value (hopefully) grows over time, the donor selects an eligible charity to receive a donation. When the donor requests a donation, the firm that holds custody of the giving account distributes the assets to the charity.
- ⚠️ 🔑 Charities generally must be 501(c)(3) public charities to be eligible for DAF contributions. This designation is provided by the Internal Revenue Service (IRS), which recognizes the organization as a legitimate charity.
🔑 There are two types of 501(c)(3) organizations — the key difference is how they’re funded:
| 501(c)(3) type | How it’s funded | DAF eligibility |
|---|---|---|
| Private foundations | Funded internally by their founders | ⚠️ Charities generally must be public charities to be eligible for DAF contributions |
| Public charities | Funded by donations from non-affiliated individuals and organizations | Eligible |
- Like direct donations and contributions to private foundations, DAF contributions are tax-deductible to the donor.
🔑 Numbers & thresholds
| Item | Exact figure / criterion as stated |
|---|---|
| Long-term capital gains tax if appreciated stock is sold before donating | Up to 20% |
| Direct-donation example — cost basis | $80,000 of stock purchased |
| Direct-donation example — grown value / donation amount | $100,000 |
| Deduction if stock is donated directly | $100,000 value deducted against income; capital gains tax on the appreciation avoided |
| Warren Buffet pledge | 99% of his wealth to philanthropic causes |
| Gates Foundation pledged funding | Over $100 billion |
| Share of private foundations under $1 million in assets | Roughly 66% maintain less than $1 million in assets |
| DAF-eligible charity designation | Must generally be a 501(c)(3) public charity, designated by the IRS |
| Estate distribution horizon | Estate assets are often distributed within a few months — not a long-term time horizon |
Key points
Estates
- Represent assets owned by the decedent
- Debts paid off by the executor or administrator
- Assets distributed to beneficiaries by executor or administrator
Impact investing
- Also known as socially responsible investing
- Aligning societal concerns with investing outcomes
Charitable donation of securities methods
- Direct donations to charities
- Creation of a private foundation
- Donor-advised funds
Private foundations
- Organizations formed for charitable giving purposes
- Funded internally by founders
- Contributions are tax-deductible
- The Foundation Board:
- Manages the foundation’s assets
- Identifies charitable giving opportunities
- Donates assets to charitable opportunities
Donor-advised funds (DAFs)
- Accounts established at financial firms for charitable giving
- Investor (donor) contributes cash, securities, or other assets to account
- Contributions are tax-deductible
- Account is managed by investor or adviser
- Investor identifies public charities for donation
- Upon the investor’s request, the firm releases assets to the charity
Sources
Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.
| # | Source | Publisher |
|---|---|---|
| 1 | Estate tax — gross estate, exclusion amount | IRS |
| 2 | 501(c)(3) organizations, foundations and public charities | IRS |
| 3 | Estates and trusts — Form 1041, fiduciary income tax | IRS |
| 4 | Gift tax — annual exclusion, lifetime exemption | IRS |
| 5 | Achievable Series 65 — chapter 2.1.3 | Achievable (course text) |
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