PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP Counselors at Law 330 Madison Avenue, Suite 2401 New York, New York 10017
MEMORANDUM
March 15, 2023
TO: Jonathan R. Caldwell; Eleanor V. Caldwell
FROM: Monica Reyes, Lead Associate, Calderwood & Harkness LLP
CC: Victoria Chambers, Responsible Partner; Sylvia Hartwell, Specialist Partner (Tax); Elliot Nguyen, Working Associate
DATE: March 15, 2023
RE: Comparison of Private Foundation and Donor-Advised Fund Structures for Caldwell Family Philanthropic Program
MATTER NO.: 1034-00004
BILLING CODE: 78412-JRC
THIS MEMORANDUM IS A PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION PREPARED BY CALDERWOOD & HARKNESS LLP FOR THE EXCLUSIVE USE OF JONATHAN R. CALDWELL AND ELEANOR V. CALDWELL. THIS MEMORANDUM IS NOT INTENDED FOR DISTRIBUTION TO ANY THIRD PARTY WITHOUT THE PRIOR WRITTEN CONSENT OF CALDERWOOD & HARKNESS LLP. THE INFORMATION AND ANALYSIS CONTAINED HEREIN ARE PROTECTED BY THE ATTORNEY-CLIENT PRIVILEGE AND THE WORK PRODUCT DOCTRINE.
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I. EXECUTIVE SUMMARY
This memorandum has been prepared at the request of Jonathan R. Caldwell and Eleanor V. Caldwell to analyze and compare two primary vehicles for effectuating the Caldwell family's philanthropic objectives: (1) a private foundation organized as a New York not-for-profit corporation under the New York Not-for-Profit Corporation Law ("N-PCL"), qualifying for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), and classified as a private foundation under IRC § 509(a); and (2) a donor-advised fund ("DAF") maintained at a sponsoring organization, as defined under IRC § 4966. The purpose of this memorandum is to provide a thorough, side-by-side comparison of these two structures across all relevant legal, tax, governance, operational, and financial dimensions, and to recommend the structure best suited to the Caldwell family's specific needs, preferences, and long-term philanthropic vision.
Jonathan and Eleanor Caldwell have expressed a desire to commit approximately $10,000,000 in initial cash funding to a charitable vehicle, with the possibility of additional contributions of cash and other assets over time. The contemplated initial contribution would be funded jointly by Jonathan and Eleanor, with $5,000,000 attributable to each spouse. The Caldwell family's philanthropic mission is centered on support for the arts, education, and environmental conservation, with a particular emphasis on organizations in the New York metropolitan area. These focus areas reflect the family's personal and professional interests and are consistent with Eleanor's extensive background in the visual arts and Olivia G. Caldwell's practice of environmental law.
During our initial client meeting on February 6, 2023, and in subsequent consultations, the Caldwell family identified the following key goals for the philanthropic vehicle:
1. Multi-generational governance and family engagement. All three adult children — Thomas R. Caldwell, Katherine C. Hartfield, and Olivia G. Caldwell — are to participate actively in grantmaking decisions, with the expectation that governance will eventually pass to the grandchildren's generation. Family engagement in philanthropy is a core value, and the chosen vehicle must accommodate perpetual family involvement.
2. Maximum flexibility in investment management. The family desires the ability to engage its own investment advisor, construct a customized portfolio, and invest across a full range of asset classes, consistent with the family's sophisticated investment background.
3. Ability to hire staff or consultants. The family anticipates the possibility of engaging a part-time executive director or program officer to manage day-to-day grantmaking operations as the foundation's activities grow.
4. Enduring institutional identity. Jonathan and Eleanor envision a philanthropic institution bearing the Caldwell family name that will serve as a visible, recognized, and permanent expression of the family's charitable values and legacy.
5. Tax efficiency. While tax considerations are important, the family has emphasized that governance, legacy, and mission alignment are paramount, and that tax efficiency, while desirable, should not be the sole or primary determinant of the vehicle selected.
Based on the analysis set forth in detail below, it is our recommendation that a private foundation is the superior structure for the Caldwell family's specific objectives, notwithstanding certain tax advantages of a DAF. The private foundation is recommended primarily because of the family's strong preference for governance control, multi-generational board involvement, mission-driven grantmaking with an independent institutional identity, and investment autonomy. The incremental tax and administrative costs associated with the private foundation are modest in the context of the family's overall wealth and are substantially outweighed by the governance, flexibility, and legacy benefits that the private foundation provides.
We note that, consistent with our discussions and following the Caldwell family's authorization, the private foundation has been organized as The Caldwell Family Foundation, incorporated under the New York N-PCL on March 20, 2023 (NY Department of State Filing No. 230320-001847). An application for recognition of tax-exempt status under IRC § 501(c)(3) (IRS Form 1023) was filed on May 15, 2023, and a favorable determination letter was received from the Internal Revenue Service on July 14, 2023. The foundation has obtained Employer Identification Number 88-3021547.
II. BACKGROUND AND FAMILY PHILANTHROPIC OBJECTIVES
A. Client Profile
The following background information has been compiled from client intake interviews, engagement questionnaires, and documents provided by the Caldwell family and their other professional advisors. This profile is relevant to the analysis that follows because the optimal charitable vehicle depends in substantial part on the specific circumstances, objectives, and resources of the donor family.
Jonathan R. Caldwell. Jonathan R. Caldwell, age 67 (date of birth: March 14, 1956), resides with Eleanor V. Caldwell at 418 East 72nd Street, Apartment 14A, New York, New York 10021. Jonathan is the founder and former Managing Partner of Caldwell Ridgeline Capital LLC, a New York-based asset management firm with approximately $2.1 billion in assets under management. Jonathan retired from active management of the firm in 2019 but retains a carried-interest position and limited partnership stakes in several of the firm's investment vehicles. Jonathan's estimated net worth is approximately $300,000,000, comprising his interests in Caldwell Ridgeline Capital LLC, limited partnership and fund interests, a controlling membership interest in Stonecrest Realty Holdings LLC (a portfolio of commercial real estate assets), liquid securities and cash, his primary residence, a residence in East Hampton, New York, and miscellaneous personal property and other assets. Jonathan is a graduate of Princeton University (A.B., Economics, 1978) and Columbia Business School (M.B.A., Finance, 1980). He has served on the boards of several nonprofit organizations, including the New York Philharmonic, the Metropolitan Museum of Art (emeritus), and the Princeton University Board of Trustees.
Eleanor V. Caldwell. Eleanor V. Caldwell, age 64 (date of birth: September 22, 1958), is a former partner at the Whitmore-Langdon Gallery, a prominent contemporary art gallery in Chelsea, New York City, which Eleanor co-founded in 1992 and sold to a consortium of investors in 2017. Since her departure from the gallery, Eleanor has been an active philanthropist and nonprofit board member, currently serving on the boards of the Ridgeway Group, the Public Art Fund, and the New York City Ballet. Eleanor holds separate assets of approximately $18,000,000, which are not part of this engagement and are subject to independent legal counsel from Pemberton, Locke & Strauss LLP (Rachel F. Dunlap, Esq.). Eleanor is a graduate of Wellesley College (B.A., Art History, 1980) and the Institute of Fine Arts at New York University (M.A., 1983).
Adult Children. Jonathan and Eleanor have three adult children, each of whom will play an active role in the philanthropic vehicle:
• Thomas R. Caldwell (age 38), Vice President of Acquisitions at Meridian Crest Partners LLC, a New York-based private equity firm. Thomas resides in New York City with his wife, Dr. Sarah L. Caldwell (pediatrician, NewYork-Presbyterian Hospital). Thomas and Sarah have two children: Lucas T. Caldwell (age 3) and Nora E. Caldwell (age 1).
• Katherine C. Hartfield (age 35), a freelance interior designer residing in Greenwich, Connecticut, with her husband, William J. Hartfield (Managing Director, Ridgeway & Co., an investment banking firm). Katherine and William have two children: James W. Hartfield (age 8) and Charlotte M. Hartfield (age 5).
• Olivia G. Caldwell (age 30), an associate at the law firm of Linden & Fairchild LLP in Chicago, Illinois, where she practices environmental law with a focus on clean water and conservation land-use litigation. Olivia is unmarried and does not currently have children.
Grandchildren. Jonathan and Eleanor have four grandchildren: James W. Hartfield (age 8), Charlotte M. Hartfield (age 5), Lucas T. Caldwell (age 3), and Nora E. Caldwell (age 1). While the grandchildren are not currently of an age to participate in philanthropic governance, the Caldwell family envisions their eventual involvement in the charitable vehicle as they mature.
B. Philanthropic Goals
Through our initial meeting on February 6, 2023, and subsequent telephone and video conferences on February 14, 2023, February 22, 2023, and March 1, 2023, we have identified the following philanthropic goals and priorities for the Caldwell family:
Focus Areas. The Caldwell family's philanthropic mission is organized around three core areas of focus:
1. Arts. Reflecting Eleanor's distinguished career in the art world and her continuing service on the boards of the Ridgeway Group, the Public Art Fund, and other cultural institutions, the family intends to support visual arts organizations, artist residency programs, public art initiatives, and arts education for underserved communities. This focus area is expected to receive the largest share of annual grantmaking in the foundation's early years.
2. Education. The family is committed to supporting educational access and excellence, with a particular interest in scholarships for first-generation college students, STEM education in underserved public schools, and mentorship programs. Both Jonathan and Eleanor have expressed interest in establishing a named scholarship program at one or more New York-area universities.
3. Environmental Conservation. Aligning with Olivia G. Caldwell's professional focus in environmental law, the family seeks to support conservation organizations working on habitat preservation, clean water initiatives, and climate resilience in the New York metropolitan area and beyond. Olivia has expressed interest in expanding this focus area to include national and international environmental organizations over time.
Geographic Focus. The primary geographic focus for grantmaking is the New York metropolitan area, consistent with the family's longstanding ties to the region. However, the family desires flexibility to make grants to organizations operating nationally and internationally, particularly in the environmental conservation area.
Family Engagement. Jonathan and Eleanor envision a philanthropic structure in which all three children serve as directors or advisors, actively participate in evaluating grant applications, conducting site visits, and making grantmaking decisions. The structure should eventually accommodate the participation of the grandchildren's generation. Multi-generational governance is a paramount priority — the family has expressed, in the strongest terms, that this is the single most important feature of the chosen vehicle.
Anticipated Initial Contribution. The initial contribution to the charitable vehicle is $10,000,000 in cash, funded jointly by Jonathan and Eleanor Caldwell, with $5,000,000 attributable to each spouse. The contribution is expected to be made on or about April 1, 2023, pursuant to an Initial Contribution Agreement to be prepared by this firm.
Anticipated Year 1 Grantmaking. The family anticipates making at least $500,000 in grants during the first year of operation, consistent with the 5% minimum distribution requirement applicable to private foundations under IRC § 4942. Preliminary discussions have identified several potential grantees, including the Ridgeway Group, the Public Art Fund, the Thackeray Enterprises, Riverkeeper, Inc., and the New York Botanical Garden.
Institutional Identity. Jonathan and Eleanor desire an independent institutional identity bearing the Caldwell family name. The foundation should be recognized as a distinct charitable organization in the philanthropic community, with its own website, letterhead, and public profile. This desire for a visible, branded institution is an important consideration in the vehicle selection analysis.
Future Staffing. The family has expressed interest in hiring a part-time executive director or program officer in the future, as the foundation's grantmaking activities grow in scope and complexity. This individual would manage day-to-day operations, coordinate board meetings, conduct due diligence on prospective grantees, and oversee grant reporting. The ability to hire dedicated staff is therefore a relevant consideration.
C. Integration with Broader Estate Plan
The philanthropic vehicle is one component of a comprehensive generational estate plan being designed and implemented by Calderwood & Harkness LLP for the Caldwell family. The overall estate plan is intended to accomplish multiple objectives: preserving and transferring family wealth across generations in a tax-efficient manner, providing for the financial security of Jonathan and Eleanor during their lifetimes, creating a structure for family governance and communication around shared assets, and establishing a meaningful philanthropic legacy. The principal elements of the broader estate plan are summarized below for context:
• Grantor Retained Annuity Trusts (GRATs). Three zeroed-out GRATs have been established to transfer appreciation on assets to the next generation free of gift tax:
• GRAT A: Funded with $60,000,000 in publicly traded securities and fixed-income instruments.
• GRAT B: Funded with $80,000,000 in Stonecrest Realty Holdings LLC membership interests, valued as of the date of transfer based on an independent appraisal by Kensington Valuation Group LLC.
• GRAT C: Funded with $38,000,000 in Caldwell Ridgeline Capital LP interests and carried interest allocations.
• Caldwell Family Dynasty Trust. A Delaware-situs irrevocable trust with an initial cash funding of $5,000,000, designed to hold assets in trust for the benefit of Jonathan and Eleanor's descendants in perpetuity, taking advantage of Delaware's abolition of the rule against perpetuities. Northgate Trust Company of Delaware serves as institutional co-trustee.
• Caldwell Family Insurance Trust (ILIT). An irrevocable life insurance trust holding a $15,000,000 second-to-die life insurance policy issued by Beacon Life Assurance Company (Policy No. BLA-2023-77419), insuring the joint lives of Jonathan and Eleanor. The ILIT is designed to provide estate liquidity for the payment of estate taxes and administrative expenses upon the death of the surviving spouse.
• Caldwell Revocable Trust. An amended and restated revocable trust serving as the primary vehicle for the disposition of Jonathan's probate estate, coordinating with the GRAT structures and the dynasty trust.
The charitable vehicle provides a significant income tax deduction that will partially offset income generated during the estate plan's implementation period, including income arising from the funding of the GRAT structures and other transactions. Jonathan's estimated 2022 adjusted gross income ("AGI") is $22,500,000, as reported by Strathmore Corporation & Greaves LLP (Martin J. Prescott, CPA, engagement partner). The income tax deduction generated by the $10,000,000 charitable contribution is an important — though not primary — consideration in the timing and structure of the philanthropic vehicle.
Financial advisory coordination for the charitable vehicle's investment management will be provided by Havensbrook Wealth Advisors LLC (Diana R. Linden, CFP®, Managing Director), which also serves as the investment advisor for the Caldwell family's personal portfolios and certain trust assets.
III. OVERVIEW OF STRUCTURES
This section provides a general overview of the two charitable vehicle structures under consideration. A detailed comparative analysis follows in Section IV.
A. Private Foundation
A private foundation is a separate legal entity — typically organized as a not-for-profit corporation or a charitable trust — that is organized and operated exclusively for one or more charitable, educational, scientific, religious, or other exempt purposes described in IRC § 501(c)(3). A private foundation is distinguished from a public charity by its classification under IRC § 509(a): an organization is treated as a private foundation unless it meets one of the specific exclusions set forth in § 509(a)(1)–(4), which generally require either broad public support or functional characteristics inconsistent with private foundation status. Because a private foundation is typically funded by a single individual, family, or corporation and does not receive broad public support, it is subject to a comprehensive federal regulatory regime designed to prevent abuse of the tax-exempt form.
In the case of the Caldwell family, the private foundation has been organized as a New York not-for-profit corporation under the N-PCL, and an application for recognition of tax-exempt status under IRC § 501(c)(3) has been filed with the Internal Revenue Service, with private foundation classification under § 509(a). The foundation has been named The Caldwell Family Foundation, and its principal office is located at 330 Madison Avenue, Suite 2401, New York, New York 10017 (care of Calderwood & Harkness LLP, as registered agent during the initial organizational period).
A private foundation is governed by a self-selected board of directors (in the case of a not-for-profit corporation) or board of trustees (in the case of a charitable trust). The founding family retains full and exclusive control over all aspects of the foundation's governance, including the selection and removal of directors, the formulation of grantmaking strategy and policy, the selection of individual grantees, the determination of grant amounts and terms, the hiring and compensation of staff, and the investment and management of foundation assets. This governance autonomy is one of the private foundation's most significant advantages for families seeking active, hands-on involvement in philanthropy.
However, the private foundation's autonomy comes with correspondingly extensive regulatory obligations. A private foundation is subject to a series of excise taxes and prohibitions under IRC §§ 4940 through 4946, which address the following areas:
• Excise tax on net investment income (§ 4940): an annual tax of 1.39% on the foundation's net investment income.
• Self-dealing (§ 4941): a prohibition on virtually all direct and indirect financial transactions between the foundation and its "disqualified persons" (defined to include substantial contributors, foundation managers, their family members, and entities controlled by them).
• Minimum distribution requirements (§ 4942): a requirement that the foundation distribute at least 5% of the average fair market value of its net investment assets annually for charitable purposes.
• Excess business holdings (§ 4943): a limitation on the foundation's (and its disqualified persons') combined ownership of business enterprises.
• Jeopardizing investments (§ 4944): a prohibition on investments that show a lack of reasonable business care and prudence in providing for the foundation's charitable purposes.
• Taxable expenditures (§ 4945): a prohibition on certain expenditures, including grants to individuals (absent IRS-approved procedures), lobbying activities, and grants to non-public-charity organizations without "expenditure responsibility."
A private foundation is required to file IRS Form 990-PF (Return of Private Foundation) annually. Form 990-PF is a publicly available document, disclosing the foundation's financial statements, investment holdings, compensation paid to officers and directors, a list of all grants made during the tax year (including grantee names, addresses, and amounts), and other operational information. The foundation must also file with the New York Attorney General's Charities Bureau (Form CHAR500) and comply with all applicable state registration and reporting requirements.
The Caldwell Family Foundation has been assigned Employer Identification Number 88-3021547 by the Internal Revenue Service.
B. Donor-Advised Fund (DAF)
A donor-advised fund is not a separate legal entity. Rather, a DAF is an account or fund maintained at a "sponsoring organization," which is itself a public charity described in IRC § 501(c)(3) — typically a community foundation (such as the New York Community Trust or the Marlowe Private Capital) or a charitable organization affiliated with a financial institution (such as the Sterling Reach Equity Partners, the Brightwater Capital Group, or the Dunmore Capital Partners). The term "donor-advised fund" is defined in IRC § 4966(d)(2) as a fund or account that is (i) separately identified by reference to contributions of a donor or donors, (ii) owned and controlled by a sponsoring organization, and (iii) with respect to which the donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account.
The essential characteristic of a DAF is that the donor retains an advisory privilege — not legal control — over the distribution and investment of the funds in the account. When a donor contributes to a DAF, the contribution is an irrevocable gift to the sponsoring organization; the donor receives a charitable contribution deduction at the time of contribution, and the sponsoring organization assumes legal ownership of the contributed assets. Thereafter, the donor may recommend grants from the account to qualifying charitable organizations, and may recommend an investment allocation from among the options provided by the sponsoring organization. However, the sponsoring organization has ultimate legal authority over all distribution and investment decisions and is not obligated to follow the donor's recommendations, although in practice, the vast majority of sponsoring organizations follow donor recommendations as a matter of course (provided the recommended grant is to a qualifying organization and does not result in any private benefit to the donor).
A DAF does not require the donor to form a separate legal entity, apply for tax-exempt status, obtain a separate employer identification number, or file any annual information returns. All formation, tax-exemption, filing, compliance, and record-keeping obligations are handled by the sponsoring organization. The administrative simplicity of a DAF is one of its principal advantages, particularly for donors who wish to make a charitable contribution and obtain an immediate tax deduction without the burden of establishing and operating a separate charitable entity.
Under current federal law, there is no minimum annual distribution requirement applicable to DAFs. A donor may contribute to a DAF, receive an immediate income tax deduction, and defer grantmaking indefinitely, allowing the contributed assets to grow on a tax-free basis within the account. This has been a subject of public policy debate, and legislative proposals — most notably the Accelerating Charitable Efforts Act ("ACE Act"), introduced in the United States Senate in 2021 and reintroduced in subsequent sessions — have sought to impose distribution requirements on DAFs. As of the date of this memorandum, no such legislation has been enacted, but the regulatory landscape remains subject to change.
The individual DAF account is not subject to public disclosure. The sponsoring organization files its own Form 990 with the IRS, which is publicly available, but individual donor account details — including the donor's identity, account balance, investment allocation, and specific grant recommendations — are generally not disclosed on the sponsoring organization's Form 990 or otherwise made publicly available. This privacy feature is a significant advantage for donors who wish to maintain confidentiality regarding their charitable giving.
IV. COMPARATIVE ANALYSIS
This section provides a detailed, issue-by-issue comparison of the private foundation and DAF structures across all dimensions relevant to the Caldwell family's philanthropic objectives. For each issue, we describe the applicable rules for each structure, analyze the implications for the Caldwell family, and provide our assessment as to which structure is better suited to the family's needs.
A. Governance and Control
1. Private Foundation. Under the private foundation structure, the Caldwell family would serve as the directors and officers of The Caldwell Family Foundation, with full and exclusive authority over all foundation decisions. The family selects the board of directors, determines the foundation's mission and grantmaking strategy, evaluates and selects individual grantees, sets grant amounts and conditions, hires and compensates staff, and manages the foundation's investments — all without requiring the approval or consent of any external party (subject only to compliance with the regulatory requirements of IRC §§ 4940–4946 and applicable state law).
The proposed initial board of directors of The Caldwell Family Foundation is as follows:
• Jonathan R. Caldwell — President
• Eleanor V. Caldwell — Vice President
• Thomas R. Caldwell — Secretary
• Katherine C. Hartfield — Treasurer
• Olivia G. Caldwell — Director
• Dr. Margaret P. Elsworth — Independent Director (Professor Emerita, Department of Art History and Archaeology, Columbia University; serving as philanthropic advisor and independent governance voice)
The inclusion of Dr. Margaret P. Elsworth as an independent director is consistent with best practices in foundation governance and provides an external perspective on grantmaking and governance matters. Dr. Elsworth has a long-standing professional relationship with Eleanor and brings significant expertise in arts philanthropy and nonprofit governance.
Critically, the foundation's bylaws can include detailed succession provisions to ensure that future generations of the Caldwell family participate in governance. Specifically, the bylaws will provide that, upon the death, resignation, or incapacity of any family-member director, successor directors shall be nominated from among the lineal descendants of Jonathan R. Caldwell and Eleanor V. Caldwell, in a manner prescribed by the bylaws. This mechanism ensures that Thomas, Katherine, and Olivia will ultimately be succeeded by their children — James, Charlotte, Lucas, and Nora — and by subsequent generations of the Caldwell family. The private foundation is the only structure that allows the family to embed these perpetual succession provisions with the force of corporate governance law.
The foundation also has the ability to hire a part-time executive director, program officer, or other staff as the foundation's activities grow. This operational capacity is essential for a family that envisions an active, hands-on approach to philanthropy, including site visits, grant evaluation, program development, and community engagement.
No external approval is required for any foundation decision, including grantmaking, investment management, staffing, and operations. The board of directors exercises plenary authority over all aspects of the foundation's activities, subject only to compliance with applicable law and the foundation's own governing documents.
2. Donor-Advised Fund. Under the DAF structure, the donor has advisory privileges only. The sponsoring organization — not the donor — retains legal authority and fiduciary responsibility over all distributions and investment decisions. While the donor may recommend grants to specific charitable organizations and recommend an investment allocation from among the sponsoring organization's available options, the sponsoring organization is not legally obligated to follow the donor's recommendations. In practice, as noted above, most major sponsoring organizations follow donor recommendations routinely, provided the recommended grant is to a qualifying public charity and does not create any private benefit to the donor. However, the legal reality is that the donor's role is advisory, not directive, and the sponsoring organization may exercise its independent judgment at any time.
Successor advisor designations are available at most major sponsoring organizations, allowing the donor to name family members or other individuals who may continue to exercise advisory privileges over the DAF account after the donor's death or incapacity. However, these successor advisor provisions are subject to the sponsoring organization's own policies and are typically limited in generational reach. Many sponsoring organizations limit successor advisor designations to one generation beyond the original donor (i.e., the donor's children), and some impose time limits after which the DAF account is absorbed into the sponsoring organization's general charitable funds. The policies governing successor advisors are set by the sponsoring organization and may be modified at any time, without the donor's consent.
A DAF does not provide the donor with the ability to hire staff, create a stand-alone operational presence, or establish an independent institutional identity. The DAF account exists as one of thousands (or, in the case of large sponsoring organizations such as Fidelity Charitable or Schwab Charitable, hundreds of thousands) of accounts within the sponsoring organization's overall structure. The donor cannot create a separate website, letterhead, or public profile for the DAF account. Grantmaking is conducted through the sponsoring organization's platform, and grants are typically distributed from the sponsoring organization's name (though some sponsoring organizations allow the donor to request that grants be identified as coming from a named fund within the sponsoring organization).
Investment options within a DAF are generally limited to the menu of pooled investment vehicles offered by the sponsoring organization. These typically include a range of mutual funds, exchange-traded funds, and model portfolios, but do not generally include the full range of asset classes available to a private foundation, such as direct private equity investments, hedge funds, real estate, or bespoke alternative investment strategies. The donor may recommend an investment allocation from among the available options but does not have direct control over investment decisions and is constrained by the sponsoring organization's investment platform.
3. Assessment for the Caldwell Family. The Caldwell family's paramount desire for multi-generational governance, independent institutional identity, and operational control strongly favors the private foundation structure. The family has expressed, in unambiguous terms, that the ability to control all aspects of the philanthropic vehicle — from board composition to grantmaking strategy to investment management — is the single most important feature of the chosen structure. Jonathan and Eleanor envision a philanthropic institution that will serve as a unifying force for the family across generations, bringing together Thomas, Katherine, Olivia, and eventually James, Charlotte, Lucas, and Nora around a shared set of values and a common philanthropic mission.
A DAF's advisory-only status is fundamentally inconsistent with this vision. The lack of legal control over grantmaking and investments, the limited successor advisor provisions, the inability to hire staff, and the absence of an independent institutional identity would frustrate the family's core objectives. While a DAF may be appropriate for donors who wish to make charitable contributions with minimal ongoing involvement, it is not suited to a family that seeks active, perpetual, hands-on engagement in philanthropy.
On the governance and control dimension, the private foundation is clearly the superior structure for the Caldwell family.
B. Income Tax Deduction Limitations
The income tax deduction available for charitable contributions is one of the most significant tax distinctions between a private foundation and a DAF. The deduction limitations differ based on the type of property contributed and the classification of the recipient organization.
1. Cash Contributions. Private Foundation. Under IRC § 170(b)(1)(B), cash contributions to a private foundation are deductible up to 30% of the donor's adjusted gross income in the taxable year of the contribution. Any excess may be carried forward and deducted in the succeeding five taxable years, subject to the same 30% limitation in each carryforward year, under IRC § 170(d).
Applying this limitation to the Caldwell family's planned initial contribution:
• Jonathan R. Caldwell's estimated 2022 AGI (per Strathmore Corporation & Greaves LLP, Martin J. Prescott, CPA): $22,500,000
• Maximum deduction for cash contributions to a private foundation in Year 1: $22,500,000 × 30% = $6,750,000
• Planned cash contribution: $10,000,000
• Deduction available in Year 1: $6,750,000
• Excess to be carried forward: $10,000,000 − $6,750,000 = $3,250,000 (available for deduction in Years 2 through 6, subject to the 30% AGI limitation in each year)
DAF (at a Public Charity Sponsoring Organization). Under IRC § 170(b)(1)(A), cash contributions to a public charity (including a sponsoring organization that maintains DAFs) are deductible up to 60% of AGI in the taxable year of the contribution. This higher limitation applies because the sponsoring organization is classified as a public charity, not a private foundation.
Applying this limitation to the Caldwell family's planned initial contribution:
• Jonathan R. Caldwell's estimated 2022 AGI: $22,500,000
• Maximum deduction for cash contributions to a DAF in Year 1: $22,500,000 × 60% = $13,500,000
• Planned cash contribution: $10,000,000
• Deduction available in Year 1: $10,000,000 (full amount, within the 60% limitation)
• Excess to be carried forward: None
2. Contributions of Appreciated Property. Private Foundation. The deduction rules for contributions of appreciated property to a private foundation are more restrictive than those applicable to public charities. Under IRC § 170(b)(1)(D), contributions of long-term capital gain property to a private foundation are generally deductible up to 20% of AGI. For contributions of publicly traded securities that have been held for more than one year, the deduction is allowed at fair market value, up to 30% of AGI, under IRC § 170(e)(5). However, for contributions of non-publicly traded property — such as interests in limited liability companies, limited partnerships, or other closely held business entities — the deduction is limited to the donor's adjusted cost basis in the property, rather than fair market value, under IRC § 170(e)(1)(B)(ii). This basis-only limitation is a significant disadvantage for donors holding highly appreciated non-publicly traded assets.
In the Caldwell family's case, this limitation would be relevant if the family were to contribute interests in Caldwell Ridgeline Capital LLC, Stonecrest Realty Holdings LLC, or other closely held entities to the private foundation. The family's current plan calls for a $10,000,000 cash contribution, which does not implicate the basis-only limitation. However, if future contributions of non-publicly traded assets are contemplated, the basis-only rule would reduce the tax benefit of such contributions.
DAF. Contributions of publicly traded securities held for more than one year to a DAF (as a public charity) are deductible at fair market value, up to 30% of AGI. Contributions of other appreciated property may also be deductible at fair market value (up to 30% of AGI), depending on the sponsoring organization's policies and the nature of the property. The DAF's public charity classification provides a more favorable deduction regime for appreciated property contributions.
3. Assessment for the Caldwell Family. The DAF offers a clear tax advantage with respect to the initial $10,000,000 cash contribution: the full deduction would be available in Year 1 (within the 60% AGI cap), whereas the private foundation triggers the 30% AGI cap and requires a carryforward of $3,250,000.
However, this difference is a timing difference, not a permanent loss of deduction. The $3,250,000 carryforward will be fully utilized within the five-year carryforward period permitted by IRC § 170(d), given Jonathan Caldwell's recurring high adjusted gross income. Assuming Jonathan's AGI remains in the range of $15,000,000 to $25,000,000 in subsequent years (which is consistent with the income projections provided by Strathmore Corporation & Greaves LLP), the carryforward will be absorbed within two to three years.
For future contributions of appreciated non-publicly traded assets — which may be considered as part of the family's ongoing estate planning — the private foundation's basis-only deduction is less favorable than the DAF's fair-market-value deduction. However, this disadvantage is secondary given the family's current plan to contribute cash. If future contributions of non-publicly traded interests are contemplated, we will provide a supplemental analysis at that time.
The net tax cost of the deduction limitation differential is relatively modest in the context of the overall estate plan and the family's primary philanthropic objectives. As discussed in the financial impact analysis in Section VI below, the present-value cost of deferring the $3,250,000 carryforward is estimated at approximately $50,000 to $100,000 — an amount that is immaterial relative to the Caldwell family's $300,000,000 estate and $10,000,000 philanthropic commitment.
On the income tax deduction dimension, the DAF is modestly more favorable, but the advantage is a timing difference and is not dispositive.
C. Excise Tax on Net Investment Income
1. Private Foundation. A private foundation is subject to an annual excise tax on its net investment income under IRC § 4940. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 simplified the excise tax by replacing the prior two-tier structure (which imposed a 2% tax, reducible to 1% if the foundation's distributions exceeded a rolling average) with a flat rate of 1.39% on net investment income. Net investment income includes interest, dividends, rents, royalties, and net capital gains, less allocable expenses.
Applying this tax to The Caldwell Family Foundation:
• Assumed initial assets: $10,000,000
• Assumed annual net investment income (conservatively estimated at a blended return): approximately $1,000,000 (assuming a 60/40 equity/fixed-income allocation with modest alternative investment exposure)
• Estimated annual § 4940 excise tax: $1,000,000 × 1.39% = approximately $13,900
• This amount will increase as the foundation's assets grow and as investment returns fluctuate.
2. Donor-Advised Fund. A DAF is not subject to the § 4940 excise tax on net investment income. The sponsoring organization is classified as a public charity and is therefore exempt from the private foundation excise tax regime. Investment income earned within the DAF account grows tax-free.
3. Assessment for the Caldwell Family. The § 4940 excise tax is a real but relatively minor ongoing cost of operating a private foundation. At an estimated $13,900 per year on $10,000,000 in assets, the excise tax is manageable relative to the scale of the Caldwell philanthropy and the family's overall wealth. Even as the foundation's assets grow through additional contributions and investment returns, the excise tax will remain a modest percentage of the foundation's total assets and income.
The DAF's exemption from the excise tax is an advantage, but the magnitude of the tax is not sufficient to warrant selecting a DAF over a private foundation, given the family's other objectives.
D. Minimum Distribution Requirements
1. Private Foundation. Under IRC § 4942, a private foundation is required to distribute at least 5% of the average fair market value of its net investment assets annually for charitable purposes. This minimum distribution requirement is intended to ensure that private foundation assets are deployed for charitable purposes on an ongoing basis, rather than accumulated indefinitely. "Qualifying distributions" that count toward the 5% minimum include grants to public charities, reasonable and necessary administrative expenses of the foundation (including legal, accounting, and investment management fees), and certain set-asides approved by the Internal Revenue Service.
For The Caldwell Family Foundation in its first year of operation:
• Assumed average net investment assets: $10,000,000
• Minimum required distribution: $10,000,000 × 5% = $500,000
Failure to meet the minimum distribution requirement triggers a 30% excise tax on the amount of undistributed income under IRC § 4942(a), and, if the deficiency is not corrected within a specified correction period, a second-tier excise tax of 100% of the undistributed income under IRC § 4942(b). These penalties are severe and underscore the importance of careful planning and monitoring to ensure compliance with the distribution requirement.
The foundation's qualifying distributions for purposes of the 5% minimum include not only grants to charitable organizations but also reasonable administrative expenses. This means that a portion of the foundation's legal fees, accounting fees, investment management fees, and other operational costs will count toward the minimum distribution requirement, reducing the amount of actual grants that must be made.
2. Donor-Advised Fund. Under current federal law, there is no minimum annual distribution requirement applicable to DAFs. A donor may contribute to a DAF, receive an immediate income tax deduction, and defer grantmaking indefinitely, allowing the contributed assets to grow on a tax-free basis within the account. The absence of a distribution requirement has been a subject of significant public policy debate, with critics arguing that it allows donors to receive an immediate tax benefit without ensuring that the contributed funds are used for charitable purposes within a reasonable time frame.
We note that legislative proposals have been introduced that would impose distribution requirements on DAFs. The most prominent of these is the Accelerating Charitable Efforts Act (the "ACE Act"), introduced by Senators Angus King (I-ME) and Charles Grassley (R-IA) in June 2021 and reintroduced in subsequent sessions. The ACE Act would create two tiers of DAFs: one with a 15-year distribution requirement and one with a 50-year distribution requirement, depending on the donor's level of advisory control. As of the date of this memorandum, no such legislation has been enacted, but the regulatory landscape is evolving and the possibility of future distribution requirements for DAFs should be considered.
3. Assessment for the Caldwell Family. The Caldwell family intends to actively grant at least $500,000 per year from the inception of the charitable vehicle, and the family has expressed a clear commitment to ongoing, active grantmaking. The 5% minimum distribution requirement is therefore not burdensome for the Caldwell family; in fact, it is fully aligned with the family's desire for active, ongoing philanthropy. The family's anticipated Year 1 grantmaking of at least $500,000 would satisfy the minimum distribution requirement, and the family may well exceed the minimum in subsequent years as its grantmaking activities expand.
The absence of a DAF distribution requirement is not a meaningful advantage for a family that intends to be actively engaged in philanthropy. The distribution requirement would be a concern only for a donor who wished to contribute to a charitable vehicle, obtain an immediate tax deduction, and defer grantmaking for an extended period — which is not the Caldwell family's intention.
The minimum distribution requirement is not a differentiating factor for the Caldwell family, given the family's commitment to active grantmaking.
E. Self-Dealing and Prohibited Transaction Rules
1. Private Foundation. The self-dealing rules under IRC § 4941 are among the most significant regulatory constraints applicable to private foundations. Section 4941 imposes an excise tax on each "act of self-dealing" between a private foundation and a "disqualified person." The term "disqualified person" is defined broadly in IRC § 4946 to include:
• Substantial contributors to the foundation (including Jonathan R. Caldwell and Eleanor V. Caldwell);
• Foundation managers (directors and officers);
• Family members of substantial contributors and foundation managers (including ancestors, spouses, lineal descendants, and spouses of lineal descendants);
• Entities in which substantial contributors, foundation managers, or their family members own more than 35% of the total combined voting power or beneficial interest; and
• Government officials (in limited circumstances).
Virtually all financial transactions between the foundation and its disqualified persons are prohibited, regardless of whether the transaction is fair to the foundation. Prohibited acts of self-dealing include, among others:
• The sale, exchange, or leasing of property between the foundation and a disqualified person;
• The lending of money or other extension of credit between the foundation and a disqualified person;
• The furnishing of goods, services, or facilities between the foundation and a disqualified person (except for the provision of goods, services, or facilities by a disqualified person to the foundation without charge, and the furnishing by the foundation of goods, services, or facilities to a disqualified person on a basis no more favorable than that on which such goods, services, or facilities are made available to the general public);
• The payment of compensation (or payment or reimbursement of expenses) by the foundation to a disqualified person, except for reasonable compensation for personal services that are reasonable and necessary to carry out the foundation's exempt purposes; and
• The transfer to, or use by or for the benefit of, a disqualified person of the income or assets of the foundation.
The penalties for self-dealing are severe. An initial excise tax of 10% of the "amount involved" is imposed on the disqualified person under IRC § 4941(a)(1), and a tax of 5% is imposed on any foundation manager who knowingly participated in the act of self-dealing under § 4941(a)(2). If the act of self-dealing is not corrected within the applicable "taxable period," a second-tier excise tax of 200% of the amount involved is imposed on the disqualified person under § 4941(b)(1), and a tax of 50% is imposed on any participating foundation manager under § 4941(b)(2).
In the context of the Caldwell family's plan, the self-dealing rules require careful attention to several issues:
• Compensation of family-member directors. Jonathan, Eleanor, Thomas, Katherine, and Olivia will serve as directors of the foundation. While the payment of reasonable compensation to disqualified persons for personal services that are reasonable and necessary to carry out the foundation's exempt purposes is permitted under an exception to the self-dealing rules, the family has decided that no compensation will be paid to family-member directors. This eliminates a potential source of self-dealing scrutiny and simplifies compliance. Only Dr. Margaret P. Elsworth, the independent director, will receive an annual stipend for her service, which is permissible because she is not a disqualified person.
• Use of foundation assets. The foundation's assets, facilities, and resources may not be used for the personal benefit of any disqualified person. The family has been advised that foundation funds may not be used for personal travel, entertainment, or other personal purposes, even if such expenditures are incidentally related to the foundation's charitable activities.
• Transactions with family-controlled entities. No transactions may occur between the foundation and Caldwell Ridgeline Capital LLC, Stonecrest Realty Holdings LLC, Meridian Crest Partners LLC, or any other entity in which the Caldwell family holds a controlling interest, without risking self-dealing liability. The foundation's investment policy will include a provision prohibiting investments in any entity controlled by a disqualified person.
The foundation will adopt a comprehensive conflict-of-interest policy, consistent with IRS requirements and best practices, requiring each director and officer to disclose any actual or potential conflicts of interest and to recuse himself or herself from any decision in which a conflict exists.
2. Donor-Advised Fund. DAFs are subject to certain prohibited transaction rules, but these rules are generally less complex and less restrictive than the private foundation self-dealing regime. Under IRC § 4967, a taxable distribution from a DAF occurs when the sponsoring organization makes a distribution from the DAF to any natural person or to any non-charitable organization, resulting in excise taxes on the donor-advisor and the sponsoring organization. Under IRC § 4958, the sponsoring organization is subject to the excess benefit transaction rules applicable to public charities, which impose excise taxes on "disqualified persons" who receive benefits from the organization in excess of the consideration provided.
Importantly, no grants may be made from a DAF to any individual. Grants must be directed to qualifying public charities (or equivalent organizations). This limitation restricts the DAF's grantmaking flexibility (as discussed in Section IV.K below) but also simplifies the prohibited transaction analysis.
3. Assessment for the Caldwell Family. The self-dealing rules impose meaningful compliance obligations on the private foundation. However, with proper planning, experienced legal counsel, and a robust compliance framework, these rules are manageable. Calderwood & Harkness LLP has prepared a comprehensive compliance memorandum for the Caldwell family, and the foundation will adopt a rigorous conflict-of-interest policy, a code of ethics, and a self-dealing compliance checklist. The family has been thoroughly advised of the self-dealing restrictions and has confirmed its commitment to full compliance.
The incremental compliance burden associated with the self-dealing rules is a real but manageable cost of operating a private foundation. It does not outweigh the governance, control, and legacy benefits that the private foundation provides.
The self-dealing rules are a relevant consideration but not a dispositive factor against the private foundation.
F. Excess Business Holdings
1. Private Foundation. Under IRC § 4943, a private foundation and its disqualified persons may not collectively hold more than 20% of the voting stock (or, in the case of a non-corporate entity, the profits interest) in any "business enterprise." If a third party holds effective control of the business enterprise (as defined in § 4943(c)(2)(B)), the permitted holdings increase to 35%. A de minimis exception under § 4943(c)(2)(C) provides that the combined holdings of the foundation and all disqualified persons do not constitute excess business holdings if they do not exceed 2% of the voting stock (or profits interest) of the business enterprise.
The excess business holdings rules are designed to prevent private foundations from becoming vehicles for the retention of family business interests on a tax-advantaged basis. If a private foundation acquires excess business holdings (whether through contributions, purchases, or bequests), it generally must dispose of the excess holdings within five years, with a possible five-year extension in certain circumstances.
In the context of the Caldwell family's situation, the excess business holdings rules are potentially relevant to any future contribution of interests in Caldwell Ridgeline Capital LLC or Stonecrest Realty Holdings LLC. Given Jonathan Caldwell's substantial interest in these entities, any contribution of such interests to the foundation would need to be carefully analyzed for compliance with § 4943, taking into account the combined holdings of the foundation, Jonathan, Eleanor, and all other disqualified persons.
However, the family's current plan is to fund the foundation with $10,000,000 in cash. A cash contribution does not implicate the excess business holdings rules. If the family later considers contributing interests in Caldwell Ridgeline Capital or Stonecrest Realty Holdings, we will prepare a separate analysis of the § 4943 implications at that time.
2. Donor-Advised Fund. DAFs are not subject to the excess business holdings rules under IRC § 4943. A donor may contribute business interests to a DAF without triggering the excess business holdings restrictions. This is a potentially significant advantage for donors who wish to contribute closely held business interests to a charitable vehicle.
3. Assessment for the Caldwell Family. The excess business holdings rules are not a factor for the initial $10,000,000 cash contribution. This issue would become relevant only if the family later considers contributing interests in Caldwell Ridgeline Capital or Stonecrest Realty Holdings to the foundation. At this time, no such contributions are planned, and the excess business holdings rules do not affect the vehicle selection decision.
The excess business holdings rules are not currently implicated and do not favor either structure for the initial contribution.
G. Investment Flexibility
1. Private Foundation. A private foundation has full autonomy over its investment decisions, subject only to the jeopardizing investment prohibition under IRC § 4944. Section 4944 imposes an excise tax on any investment by a private foundation that shows a lack of reasonable business care and prudence in providing for the short-term and long-term financial needs of the foundation for the carrying out of its exempt purposes. The jeopardizing investment standard does not require a foundation to adopt any particular investment strategy; rather, it requires that the foundation's investments be made with the care and prudence that a reasonable person would exercise, taking into account the foundation's charitable mission, distribution requirements, and overall financial position.
Under this broad standard, the foundation can invest in a full range of asset classes, including:
• Publicly traded equities (domestic and international)
• Fixed-income securities (government, municipal, and corporate)
• Real estate (direct and through REITs)
• Alternative investments (hedge funds, private equity, venture capital)
• Private investment funds (including, with appropriate self-dealing analysis, funds that are not controlled by disqualified persons)
• Cash and cash equivalents
The Caldwell Family Foundation will engage Havensbrook Wealth Advisors LLC (Diana R. Linden, CFP®, Managing Director) as its investment advisor. Diana R. Linden currently serves as the investment advisor for the Caldwell family's personal portfolios and certain trust assets, and she is well-positioned to develop a customized investment policy statement for the foundation that reflects the foundation's charitable mission, distribution needs, risk tolerance, and time horizon. The investment policy statement will be adopted by the foundation's board of directors and will be reviewed and updated annually.
The ability to engage a dedicated investment advisor and construct a customized portfolio is a significant advantage of the private foundation structure, particularly for a family with Jonathan Caldwell's extensive investment background and sophisticated understanding of capital markets and alternative investment strategies.
2. Donor-Advised Fund. A DAF's investment options are limited to the menu of pooled investment vehicles offered by the sponsoring organization. The major sponsoring organizations (Fidelity Charitable, Schwab Charitable, Marlowe Asset Management Charitable, and others) typically offer a range of mutual fund options and model portfolios spanning conservative, moderate, and aggressive allocations. Some sponsoring organizations offer a limited selection of alternative investment options or environmental, social, and governance (ESG) investment strategies. However, no sponsoring organization provides the full range of investment options available to a private foundation, and the donor does not have the ability to engage an independent investment advisor to manage the DAF's assets on a discretionary basis.
The donor may recommend an investment allocation from among the available options, but the recommendation is advisory only. The sponsoring organization retains ultimate investment authority and may change its investment menu at any time. The donor's ability to customize the investment strategy is inherently constrained by the sponsoring organization's platform.
3. Assessment for the Caldwell Family. Given Jonathan Caldwell's extensive investment background as the founder of Caldwell Ridgeline Capital LLC (a $2.1 billion AUM asset management firm) and the family's established relationship with Havensbrook Wealth Advisors, the private foundation's investment autonomy is a significant advantage. Jonathan has expressed a strong preference for a customized investment strategy that reflects the foundation's specific needs and the family's investment philosophy. The family would likely find a DAF's limited investment menu unsatisfactory, and the inability to engage Havensbrook as the foundation's dedicated investment advisor would be a substantial drawback.
The private foundation's investment flexibility is a significant advantage for the Caldwell family, given the family's investment expertise and preferences.
H. Administrative Burden and Cost
1. Private Foundation. The operation of a private foundation involves significant administrative responsibilities. The Caldwell Family Foundation's ongoing administrative requirements include the following:
• Entity Formation and Tax Exemption. The foundation has been incorporated under the New York N-PCL (NY DOS Filing No. 230320-001847) and has applied for and received recognition of tax-exempt status under IRC § 501(c)(3) (EIN 88-3021547; IRS Form 1023 filed May 15, 2023; determination letter received July 14, 2023). The registered address is 330 Madison Avenue, Suite 2401, New York, NY 10017.
• Annual IRS Filin