When establishing a significant charitable account, our clients will often weigh the advantages and disadvantages of opening a Donor Advised Fund (DAF) versus establishing a Private Foundation. While both vehicles provide a way for individuals to fulfill their charitable desires, they do so in different manners and with varying levels of complexities.
Set Up and Administration
A Private Foundation entails upfront costs and extra effort to establish as a legal entity, to agree upon and outline the parameters of your Foundation, and then ongoing expenses related to administration and annual tax filings. On the other hand, the Donor Advised Fund generally requires only an account application and can be set up within a day or so at no cost. A Private Foundation, as a result of its structure, retains control over the assets, while the DAF effectively relinquishes control of the assets. Instead of controlling all grant making and investment decisions, those with a DAF may recommend grants and investments, but final authority is given to the sponsoring charity (Schwab Charitable or Fidelity Charitable) for instance.
Tax Deduction and Tax Treatment
The DAF is more favorable in terms of the tax benefits. Gifts of appreciated assets are eligible for a deduction of up to 30% of Adjusted Gross Income, compared to only 20% with a Private Foundation. Cash deductions are eligible for a deduction of 50% of Adjusted Gross Income and 30%, respectively. In both instances, any unused charitable deductions can be carried forward for up to 5 years before they expire.
Private Foundations are also subject to excise taxes of 1% to 2% of net investment income annually, which detracts the utilization of funds from the overall mission – making charitable gifts.
Annual Reporting and Payouts
Private Foundation’s must file annual public tax returns which detail information on grants made, investment fees, trustee fees, staff salaries among other items. Aside from the expense and effort of filing these reports, they also eliminate any possibility of anonymity that the donor may desire. A big benefit of the DAF to some donors is that it allows them to make gifts anonymously. In addition, the DAF requires no annual reporting.
It is mandatory for the Private Foundations to distribute at least 5% of its assets to charities each year, while the DAF has no such requirement.
Governance and Succession
The Private Foundation can essentially be run as its own non-profit operation. This can be a great way to get the next generation of family involved in philanthropy as the donor builds out a Board and staff to accomplish one’s charitable goals. This structure also allows the Private Foundation to live on in perpetuity if that is the donor’s wish. The DAF also can exist in perpetuity though its structure is much simpler as it is essentially an account held at a nonprofit organization. The donor can simply name successor advisors, often their children, to carry on the charitable legacy upon their passing.
As Donor Advised Funds become more popular the sponsoring companies are building out their own teams of professional philanthropic advisors and providing access to a variety of resources to help donors identify and choose those charities to which they grant their assets.
While the Private Foundation can provide a number of benefits that the Donor Advised Fund cannot, those benefits come with a layer of complexity and cost that it may not be necessary to incur. Every situation is different based on a client’s goals and needs.
If you choose to have (or opt for) a Private Foundation you may be able to experience significant cost savings, lessen your overall administrative burden, and optimize the actual dollars going to charity by converting your Private Foundation to a Donor Advised Fund. If you would like to explore this opportunity further, please do not hesitate to contact us.
|Characteristic||Private Foundation||Donor Advised Fund|
|Tax Deduction||Up to 30% AGI for cash, 20% for Securities||Up to 50% AGI for cash, 30% for Securities|
|Tax Treatment of Account||2% Excise Tax on Net Investment Income||None|
|Recognition vs. Anonymity||Required to make information public about Trustees, grants, investments, etc.||Ability to remain anonymous|
Important disclosure information
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RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.