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Deciding Between A Donor Advised Fund (DAF) And A Private Foundation

Deciding Between a Donor Advised Fund (DAF) and a Private Foundation

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.

Summary

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.

 

CharacteristicPrivate FoundationDonor Advised Fund
Tax DeductionUp to 30% AGI for cash, 20% for SecuritiesUp to 50% AGI for cash, 30% for Securities
Tax Treatment of Account2% Excise Tax on Net Investment IncomeNone
Mandatory Withdrawals5%None
Recognition vs. Anonymity Required to make information public about Trustees, grants, investments, etc.Ability to remain anonymous

 

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

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.

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