An effective giving strategy aligns charitable spending with personal priorities, but it also hinges upon a philanthropist’s ability to select the most appropriate tool — whether that’s a donor-advised fund, a private foundation or a combination of the two.
A donor-advised fund allows the donor to contribute assets and enjoy immediate tax advantages, make grants on a flexible timetable, build a charitable legacy, and increase philanthropic funds for future grantmaking. It’s a good fit for those who seek a consolidated giving strategy with a lower donation threshold and who want a sponsoring organization to accept some control over assets and administration.
A private foundation is an independent charitable organization created and controlled by an individual, family or business. Like a donor-advised fund, a private foundation also provides an immediate tax advantage. Grants can be distributed on a flexible schedule meaning future philanthropic funds can increase (or decrease). Private foundations can foster family involvement and allow a charitable legacy to extend beyond the donor’s lifetime that can last generations. The major difference is that a private foundation has more administrative responsibilities than a donor-advised fund of which can be handled by third-party organizations. A private foundation maintains its own set of bylaws and is managed by its own trustees and directors. This powerful giving vehicle is best suited for those who want more control and want to involve family in the management of philanthropic endeavors. However, there are more administrative responsibilities than a donor-advised fund.
Both vehicles support strategic giving, but each offers unique opportunities and benefits that can aid a philanthropist in different ways. Before establishing a strategy, ask yourself:
| Donor-Advised Fund | Private Foundation | |
| Which causes would you like to support? | · Allows for donations to any 501(c)(3) qualified charity · May not make grants to individuals or families | · Grantmaking decisions fully controlled by the foundation · Can include international organizations, direct scholarships and fellowships, and for-profit endeavors |
| Who will be involved in the charitable gifting decisions? | · Administered by a sponsoring organization and does not have ultimate control over the account · Account privileges — which include grantmaking recommendations — available to multiple family members. · Can be useful when a main donor’s philanthropic pursuits may not be shared by future generations | · A collaborative enterprise with paid employees and an independent board of directors (employed or volunteering) · May include family, professional contacts or anyone the founder chooses to appoint · Can last for successive generations and can help establish an intra-generational family legacy or can also be set up for a particular period of time (example: 30 years) |
| How would you like your charitable donations to be acknowledged? | · Anonymous grantmaking permissible | · IRS form 990-PF required · All grants and contributions become public record |
| What types of assets will be part of your charitable contribution? | · Typical investments include cash equivalents, publicly traded securities and mutual funds. Additional potential investments include unique assets such as art, antiques, real property and S-Corp stock. · Above a certain dollar threshold in the account, some sponsoring organizations may permit outside investment advisor to manage underlying investments. | · A wide universe of investment options available which may include hard-to-value assets like art, antiques or real property as well · Can self-direct or appoint investment advisor |
| How important is the tax treatment of underlying assets to your overall charitable goals? | · 60% AGI deductibility for cash contributions · 30% AGI deductibility for publicly traded securities, real property and privately held assets · Income tax deduction generally equals fair market value of gift for cash or publicly traded securities | · 30% AGI deductibility for cash contributions · 20% AGI deductibility for publicly traded securities, real property and privately held assets · Up to 2% excise tax on annual net investment income · Must file IRS Form 990-PF annually (state filing requirements may also apply) |
| What level of control and flexibility is important to you? | · Simple to establish · Account administration is offloaded onto the sponsoring organization · Sponsoring organization takes responsibility for all due diligence related to grantmaking | · Must file with the state, establish as a corporation and apply to the IRS for private foundation status · Foundation must appoint a board of directors and hire staff to run administration of organization · Foundation is responsible for all legal, compliance and due diligence associated with grantmaking |
| How much capital can you commit to the charitable vehicle? | · Minimum contribution is typically around $5,000 (no start-up costs) | · Initial contribution typically starts between $1 million and $2 million · Costs associated with legal filing and accounting will be incurred |
| Have you established a timeline for charitable giving goals? | · There is no established timeline or annual minimum for the distribution of funds. · Easy to accelerate giving during high-income years or via a “bunching” strategy (taxpayer groups deductions into a single year to surpass the itemization threshold) · In off-years (or “skip-years”), donors take standard deduction · Can hold the cache of charitable dollars, which can then be distributed to charities for years to come | · The IRS requires private foundations to distribute 5% of the fair market value of their assets each year. If a private foundation fails to distribute the required 5% by the end of the subsequent fiscal year, it is subject to a 30% excise tax on the undistributed amount. If the required amount remains undistributed, the foundation may be subject to an additional excise tax of 100% of the undistributed amount. |
| What is your vision for the succession plan? | · Can name individuals and charities as successors for the account | · Successors and officers confirmed only by vote of the organization’s board of directors or trustees. For family foundations, the board is typically made up of family and friends who support the mission. |
A donor-advised fund and private foundation can be used as complementary vehicles
There’s no such thing as a one-size-fits-all charitable strategy, which is why it is often beneficial to apply the advantages of more than one vehicle. Using the vehicles in concert with each other may be valuable:
When making an anonymous donation
While donations made through a private foundation are a matter of public record, those made through a donor-advised fund are not. A donor-advised fund can be used as a complementary vehicle through which to make anonymous donations when looking to minimize solicitation from similar organizations, to avoid scrutiny or to donate to a cause that may not align with the foundation’s overall mission.
When seeking advantageous tax treatment
The charitable income tax deduction is generally preferential for a donor-advised fund over a private foundation. For cash donations, an individual can receive a deduction of up to 60% of adjusted gross income (AGI) when donating to a donor-advised fund while a private foundation donor can receive a deduction of up to 30%. For appreciated securities, the deduction for a donation to a donor-advised fund is 30% of AGI, 20% for private foundations.
For non-publicly traded stock donations held for more than one year, the deduction for a donor-advised fund is generally the fair market value on the date of contribution. Inversely, if the assets are held for a year or less, the deduction will be limited to the lesser of current fair market value or the asset’s cost basis. For a private foundation, the deduction is the cost basis. Unused deductions can be carried forward for five years.
As a learning opportunity for the next generation
The management of a smaller donor-advised fund can act as a succession planning tool that gives offspring the opportunity to gain philanthropic experience before taking on a leadership position within a family foundation.
To fulfill the mandatory annual distribution requirement
A donor-advised fund can act as a vehicle to receive the 5% annual distribution required for foundations. This can come in handy at the end of year if a donor has yet to make a final funding decision.
The takeaway
When determining the best vehicle to solve for your philanthropic goals, it is important to consider the pros and cons of each charitable vehicle and how they apply to your overall giving goals. It’s also key to understand that donor-advised funds and private foundations can be used complementarily. Contact your wealth advisor to discuss which option can best meet your long-term charitable goals.
