When it comes to philanthropy, individuals and families have several options to contribute to their favorite charitable causes. They can do an outright gift of cash or highly appreciated stocks to the organization, or set-up something formal for their charitable giving. Donor-Advised funds (DAF) and Private Foundations are two popular vehicles for philanthropic giving. This article will explore some key differences between Donor-Advised Funds and Private Foundations to ensure you select the best vehicle to meet your philanthropic goals.
Structure and Governance
Donor-Advised Funds (DAFs) are accounts held and managed by sponsoring charitable organizations. Some community organizations have their own DAFs, but most commonly, DAFs are set up with financial institutions such as Schwab and Fidelity. DAFs bear the donor’s name but are not separate legal entities, and do not have income tax filing obligations. In addition, contributions to DAFs are irrevocable gifts, and donors retain advisory privileges to recommend how the funds should be distributed to eligible charitable organizations. Generally, there are minimal fees and expenses to maintain a DAF, though the sponsor will generally charge an asset-based fee to manage the administrative aspects of the account.
Private Foundations (PFs) are independent legal entities established by an individual, family, or group of individuals. PFs require the creation of a legal entity with a board of directors or trustees to oversee the foundation’s operations and grant-making activities. Since Private Foundations are separate legal entities, they are subject to more stringent Federal and State governance and reporting requirements, including income tax filings, and possibly subjecting to federal excise tax. There could be potentially substantial formation and ongoing legal, accounting, and operating costs for Private Foundations.
Tax Benefits
Both Donor-Advised Funds and Private Foundations offer tax benefits, but there are differences in how these benefits are realized. For Donor-Advised Funds, donors can take an immediate tax deduction for the fair market value of the asset contributed, which can be advantageous for those with a significant amount of income in a particular tax year. A DAF charitable deduction is limited by the donor’s adjusted gross income (AGI) – 60% of AGI for an outright cash donation to a qualifying charitable organization, and 30% of AGI for non-cash contributions of capital gain property. One significant difference between a DAF and a PF is that donated funds in the DAF grow tax-free, allowing donors to distribute grants to charitable organizations over time while potentially appreciating in value for even more charitable giving. If possible, the contribution of appreciated securities to a DAF is recommended to avoid capital gain tax that would otherwise be due on the sale of securities.
Private Foundations also offer tax deductions for donors at the fair market value of assets funding a PF. Donors can obtain a tax deduction for contributions up to a certain percentage of their adjusted gross income, which is generally lower than the deduction limits for DAFs. Generally, 30% of AGI for cash donations, and 20% of AGI for non-cash capital gain property. Additionally, Private Foundations are subject to an excise tax of 1.39% on their net investment income and must also annually distribute at least 5% of their net assets.
Flexibility, Control and Anonymity
Donor-Advised Funds offer donors flexibility and convenience in their grant-making process. Donors can recommend grants to eligible charitable organizations and even name successor advisors to continue their philanthropic legacy beyond their lifetime. If a donor prefers to remain anonymous, a grant can be made from the DAF anonymously.
Private Foundations, being separate legal entities, provide donors with greater control over their giving strategy. Donors can set specific missions, focus areas, and even engage family members as trustees to shape the foundation’s direction. Grants and members of the board are disclosed to the public via annual income tax filings.
Conclusion
Both Donor-Advised Funds and Private Foundations serve as powerful vehicles for charitable giving. Donor-Advised Funds provide a straightforward, cost-effective, and tax-efficient approach for individuals to support charitable causes while retaining advisory privileges. On the other hand, Private Foundations offer additional options for control and the opportunity to build a lasting philanthropic legacy.
While there is no legal or IRS minimum for a Private Foundation, the ongoing administration time and professional fees associated with a PF would typically be best for a donor that is willing to fund it with a seven-figure initial donation. If you are interested in setting up a PF, the IRS provides a terrific guide on the life cycle of a Private Foundation. If you are merely looking for a tax-efficient and cost-effective vehicle for your philanthropic giving, a Donor-Advised Fund may be a better option.
Ultimately, the choice between the two depends on a donor’s philanthropic objectives, administrative preferences, and the level of control they desire. If you have any additional questions, please reach out to your Bordeaux Wealth Advisors service team or your CPA.
Unraveling the Differences Between Donor-Advised Funds and Private Foundations
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Direct Gifts to Charity | Donor-Advised Fund (DAF) | Private Foundation (PF) |
| Structure | N/A | An account maintained by a 501(c)(3) sponsoring organization, e.g. Schwab Charitable, Fidelity Charitable. | Legal entity, must obtain tax-exempt status from the IRS |
| Costs | N/A | No start-up cost. Generally minimal annual fee after formation | Potentially substantial legal and accounting fees to set-up and maintain. |
| Tax Deduction for Cash Gifts | Deduction up to 60% of adjusted gross income | Deduction up to 60% of adjusted gross income | Deduction up to 30% of adjusted gross income |
| Tax Deduction for Gift of Appreciated Long-term Securities | • Deduction up to 30% of AGI
• Deduction is based on FMV |
• Deduction up to 30% of AGI
• Deduction is based on FMV |
• Deduction up to 20% of AGI
• Deduction based on FMV |
| Tax Return Filing Required? | No | No | Yes – Form 990-PF |
| Taxes | N/A | N/A | Annual excise tax |
| Distribution Requirement | N/A | None | Required annual distribution of 5% of net assets |
| Control | Yes, donor has complete discretion | To some extent, donor recommends grants to DAF | Yes, donor has complete discretion |
| Privacy Considerations | Donations can be made anonymously | Grants can be made anonymously | Grants, contributions, and board members are disclosed in publicly available tax filings |
| Grant Recipients | 501(c)(3) organizations only, if tax deduction is desired | 501(c)(3) organizations only | Can be individuals, 501(c)(3) organizations, non 501(c)(3). Grant-making decisions are fully controlled by the foundation |
| Lifespan | N/A | Lasts the duration of the donor’s lifetime, or may be passed once to the next generation, then become part of the endowment fund of the sponsoring organization | Perpetuity |
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