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Charitable Planning: Is a Donor-Advised Fund or Private Foundation Right for You?

Brush up on the differences between donor-advised funds and private foundations as you consider your philanthropic strategy.
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There are many ways to plan for charitable giving, and often discussed are the options of a donor-advised fund (DAF) or a separate private foundation. These options can both help accomplish a philanthropic strategy, but there are significant differences between the two. A DAF and a private foundation have significant differences from a legal perspective and in structure.

First, it’s important to explain how a DAF works. A DAF is a fund set up at a sponsoring organization. The sponsoring organization is a public charity that may be established through an investment advisor’s charitable fund, a local community foundation, or a university. These funds usually have low fees but can be invested tax-free. Once set up, you can contribute personal assets to the fund. Most often, this is cash or stock but can be other types of assets, depending on what types of assets the sponsoring organization is willing to accept. When the contribution to the DAF is made, you receive an immediate tax deduction for the full amount of the contribution. This allows you to plan the timing of your charitable deductions in order to take advantage of itemized deductions, offset tax years with large income or gains, or plan for expected tax changes in the future. Often, a DAF is used to implement a plan for your charitable giving for the next certain number of years. For example, if you plan to give $10,000 per year, you can make a $50,000 contribution to the DAF in one year to take a larger deduction in that year. In each of the next five years, the fund would distribute $10,000 to charities. From the charities’ perspective, they have received the same amount, but you’re in a better tax position because you were able to get a better tax benefit.

The biggest difference between a DAF and a private foundation is control. A private foundation is a legal entity in which the donor, along with other selected board members, retains complete control. With that control comes much more overhead and administrative responsibilities, including legal setup costs, annual record-keeping, and publicly available tax return filings. In addition, private foundations have annual distribution requirements for amounts that must be granted to public charities. A private foundation is a separate legal entity and with that comes a lot more responsibility for running the organization, but with that responsibility comes some advantages that a DAF does not allow.

A private foundation is allowed to make the following types of distributions upon IRS approval and criteria that a DAF cannot:

  • Provide scholarships and fellowships, and choose the recipients
  • Make grants directly to individuals and families facing hardships
  • Make international grants
  • Engage in program-related investments

From a tax perspective, donors also should consider charitable-giving limitations. All charitable giving is limited at the donor level to a percentage of adjusted gross income (AGI). Cash contributions—including contributions to a DAF—are limited to 60%, but cash donations to a private foundation are limited to 30%. This could be a factor depending on levels of planned giving.

Both a DAF and private foundation can be great ways to plan your giving and create a legacy. In general, a private foundation is going to have more legal and administrative costs but gives you more control over operations and a longer legacy. A DAF is much easier to set up and administer but may not accomplish your long-term legacy goals. A private foundation makes sense if you plan to substantially fund it to offset the administrative costs. A DAF can be funded with any amount of assets, but usually there is a minimum funding requirement of $5,000 to $25,000, depending on the sponsoring organization. Setting up a private foundation would typically make the most sense for significantly more, such as $250,000 or $1 million with anticipated additional contributions and growth in the future. These charitable-giving options can offer tax-efficient strategies, but it is most important that any charitable-giving plan is made to meet your underlying goals.

If you have any questions or need assistance, reach out to a professional at FORVIS or submit the Contact Us form below.

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