Surprisingly, Donor Advised Funds and Foundations Don’t Really Have Much in Common Other Than Philanthropic Impact.
The two most popular charitable vehicles for donors who possess considerable assets are the Donor Advised Fund and Private Foundation. The two have obvious differences and the contrast leads to a clear choice for most donors.
A donor-advised fund (or DAF) functions much like a combination savings and investment account for charitable assets. The donor creates the fund through a financial institution, community foundation, or single-issue charity such as a university or hospital. The fund is easy and inexpensive to manage by the custodian institution.
A private foundation is a tax-exempt operation governed like any legal entity with articles of incorporation, bylaws, and a board of directors. Legal and accounting services are required at startup and the cost can be substantial. Most foundations are launched and managed by families, but corporations and large nonprofit institutions often create foundations to manage charitable initiatives.
Donor Advised Fund Advantages
- DAFs are quick and inexpensive to establish and have low minimum investment requirements. However, to take advantage of the significant tax advantages, we recommend initial gifts of some size. Conversely, launching a foundation can have substantial start-up costs and will usually take months.
- DAF tax deductions are immediate (when income-eligible).
- High tax deduction limits: up to 50% of adjusted gross income can be deducted for cash gifts, and up to 30% of adjusted gross income for gifts of equities or property (compared with 30% and 20% for foundations).
- When donating appreciated assets, capital gains are eliminated after gifting to the (charitable) DAF.
- Cash contributions can be invested for tax-free growth, and there is no required grant payout (some exceptions apply). The timing and amount of grants to nonprofits is at the discretion of the donors. Foundations are required to gift 5% of net asset value annually.
- Grants may be made to any nonprofit 501(c)(3) organization.
- When a DAF is created through a financial institution, there is usually high flexibility to invest in the entire spectrum of exchange-traded assets, including positive impact responsible investing and ESG funds (environmental, social, governance).
- Donors have no legal, financial, accounting, excise tax, and insurance responsibilities, nor liability exposure. In Foundations, board members are responsible for all of the above.
- With a DAF, names of philanthropic parties can remain confidential if preferred, including anonymous gifts. Foundations are required to file detailed tax returns and financial information that are public record, and cannot gift anonymously.
Private Foundation Advantages
- Foundations can exist in perpetuity so they are suitable for ultra high net worth families that expect a long-term legacy of philanthropy for generations to come.
- The donors of a foundation have complete control of all grant and investment decisions. In theory, this is not true for DAFs as the gifts are irrevocable and grants must be approved (in practice, grants are almost always approved).
- Private foundations have the flexibility to manage their own direct charitable activities/initiatives, and may grant to individuals, families, and entities other than 501(c)(3)s, including scholarships and fellowships.
- Foundations may hold all types of assets. DAFs primarily hold cash and publicly-traded securities.
- Foundations establish a board of directors for guidance and mentoring and often include family members who play a role in decision-making.
- Foundations offer greater prestige and visibility.
Interestingly, some entities use both a foundation and a DAF together. It is also possible for a foundation to grant all of its assets to a DAF (converting to a DAF). Some large donors who might have created foundations in the past are now using DAFs to reduce costs and bureaucracy, notably in the case of smaller families.
Helping Aspiring Philanthropists to Get Organized and Maximize Philanthropic Impact
If you’re interested in launching a charitable giving initiative, philanthropy is an integral facet of our strategic wealth and financial planning services at Cary Stamp & Co. In the five years from 2016-2020, we guided clients to the creation of charitable funds and foundations that donated 100+ grants to 58 nonprofits, totaling $1.7 million. This work has continued in 2021-22.
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– Josh Weller, AIF®
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.