Donor-Advised Funds vs. Private Foundations: Which One is Right for You
Jaime Aulicino, EA
When it comes to charitable giving, there are many ways one can achieve their philanthropic goals. For taxpayers who want to invest sizeable amounts to these goals, two vehicles come into play: donor-advised funds and private foundations. Both options allow you to donate to charities but differ in the administration and tax affects.
Donor-Advised Funds
A donor-advised fund (DAF) is similar to an investment account with the sole purpose of supporting charitable organizations. DAFs are established by public charities who serve as the sponsoring organization. These funds are simple to set up and only take a day or two to establish. They can be formed with local nonprofits or financial institutions. There are typically no fees to open a fund and the minimum amount commonly starts around $25,000.
In a DAF, donors only have advisory privileges, meaning they can only recommend charities they would like to support. The DAF sponsor then approves or rejects the recommendation. However, by having the sponsor, donations remain completely anonymous for the taxpayer. The sponsor also takes care of all administrative work, so contributing to a DAF is comparable to donating directly to a charity.
On the tax side, contributing to a DAF is also similar to donating cash as donors generally can deduct up to 60% of their Adjusted Gross Income (AGI) in the year the money is contributed, subject to certain limitations. The balance in the DAF is not included in the donor’s estate and the contributions grow tax-free through investing. Investing these assets allows your contributions to go even further than if you gave cash to a charity today.
Private Foundations
A private foundation (PF) is a type of charitable organization that supports charitable activities. This type of charitable vehicle is beneficial when donors have larger sums to contribute. Generally, the minimum amount needed to create a PF is around $2 million.
It does take longer to establish a PF as you will typically need to hire an attorney and appoint board members. PFs are required to file informational returns, which can be made available to the general public, hold annual meetings, and provide minutes of those meetings. However, the donor does get to control their assets, choose their board members, and choose their charities.
Taxpayers donating to a PF generally can take a charitable deduction of up to 30% of their AGI in the year the money is contributed, subject to certain limitations. PFs have an excise tax of 1.39% on net investment income and must distribute at least 5% of their net asset value annually. Because of this distribution requirement, some PFs donate their assets to a DAF if they want to keep letting their assets grow or don’t have a specific donation goal for that year.
Conclusion
While donor-advised funds and private foundations can be great ways to achieve charitable goals, the two vehicles differ in many ways. DAFs are typically quicker and easier to set up, while PFs take some planning and require more administrative work. While PFs tend to allow more control over the donation than DAFs, the latter offers a larger charitable deduction on the donor’s personal income tax return than the former. Choosing the right charitable vehicle traditionally comes down to how much you want to contribute and how much control over the assets you would like to retain.
If you would like to more about charitable giving options, please reach out to your trusted Louis Plung and Company advisor today or email [email protected]
