Charitable Giving: Private Foundation vs Donor Advised Fund

Charitable Giving: Private Foundation vs Donor Advised Fund

When an individual or family wants a more systematic and tax-efficient way to meet their charitable objectives, most will consider one of the two most common charitable vehicles: a private non-operating foundation or a donor advised fund (DAF).

While both allow donors to grant funds to charitable organizations in a tax-efficient manner, each vehicle is unique in its benefits. Below is a chart that outlines the primary differences donors often consider when choosing between the two entities. Note, not all differences are discussed.

Private Foundation Donor Advised Fund
Entity Structure An independent legal entity set up for charitable purposes An independent legal entity set up for charitable purposes
Start-up Costs Legal and registration fees to incorporate, file for tax-exempt status, and register with state None
Acceptable assets Cash, securities, land, buildings, art, other tangible assets and some complex assets Typically limited to cash and securities. Some sponsor organizations may allow other complex assets
Timing of Tax Deduction Year of funding Year of funding
Tax Deductibility Up to 30 percent of adjusted gross income for cash gifts and up to 20 percent of adjusted gross income for long-term appreciated publicly traded assets.

For closely held-businesses and real estate, gifts may be limited to cost basis.
Up to 60 percent of adjusted gross income for cash gifts and up to 30 percent of adjusted gross income for long-term appreciated publicly traded assets.
For closely held-businesses and real estate, deductions are for fair market value
Annual Administration (Legal, Tax) Must file annual tax form 990-PF and meet state requirements None
Salary Can pay a reasonable salary to trustees/family members as foundation employees No
Investments Foundation exercises full control over its investments and can choose to self-direct or hire an outside manager. A Foundation may also engage in mission-related/impact investments and hold other private and complex investments. For smaller accounts, investments are limited to a pre-defined pool. Larger accounts can be advised by an independent advisor and may be able to access additional investments. Depending on the DAF platform, some complex investments can be held.
Taxation Excise Tax – up to 2% of annual investment income None
Required Distributions The IRS requires an annual 5% distribution based on the previous year’s net assets. Grants and certain expenses qualify towards the 5%. None. Donors choose the timing and amount of gifts. Typically, there are no distribution requirements, but the sponsoring organization may enforce a minimum.
Grant Recipients 501(c)(3) public charities, DAFs, and individuals (ex. for scholarships) or international organizations that meet IRS requirements Primarily limited 501(c)(3) public charities. Also, assets contributed to a DAF are no longer legally under the control of the donor. The donor may advise on the use of those assets, but the sponsoring organization may have limitations.
Anonymity No. All grants are documented and reported in the annual tax filing Yes. Grants can be made anonymously
Legacy Can be maintained in perpetuity, opportunities for Board/trustee selection and succession planning Depends on sponsoring organization. Some DAFs have time limits.
Outside Funding Can receive donations from public Can receive donations from public
Conversion A Foundation can be converted to a DAF Contributions to a DAF are irrevocable, owned and held by the sponsoring organization

 

This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

Please consult with your tax and legal professionals for more information

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PETER MALLOUKPRESIDENT
& FOUNDER, CREATIVE PLANNING