Donor Advised Fund vs. Private Foundation: Choosing the Right Path for Your Philanthropy

Dan Reiter, CFP®, CPA

When it comes to charitable giving, both donor advised funds (DAFs) and private foundations offer attractive options for those looking to make a significant impact. But deciding which one is right for you depends on your specific goals, resources, and desired level of involvement. Here we offer an introduction to both donor advised funds and private foundations, and discuss the pros and cons of each.

Donor Advised Funds (DAFs) and Private Foundations – An Introduction

A donor advised fund (DAF) is essentially a charitable giving account managed by a public charity. Think of it like a charitable investment account that allows you to make tax-deductible contributions and then recommend which charities receive grants over time. Here's a breakdown of its key features:

• Tax Benefits: Get an immediate tax deduction for your contribution to the DAF, regardless of when you recommend grants to charities.

• Flexibility: Contribute a variety of assets like cash, stocks, or even real estate. There's also no pressure to distribute funds annually, allowing you to strategically plan your giving.

• Management: The sponsoring public charity handles the administrative hassle, including paperwork and investment management, freeing you to focus on your charitable goals.

• Grantmaking: You have advisory privileges, recommending which charities receive grants from your DAF. However, the sponsoring organization has final approval (though rejections are uncommon).

• Anonymity: Many DAFs allow for anonymous giving to charities.

A private foundation is a tax-exempt charitable organization established by an individual, family, or corporation. Unlike a donor advised fund (DAF), it's a completely independent legal entity with its own board of directors and management structure. Here's a closer look at private foundations:

• Mission and Control: You define the foundation's charitable mission and have complete control over its operations, including grantmaking decisions and investment strategies.

• Legacy Building: Private foundations can be a lasting family legacy, allowing you to involve future generations in your philanthropic endeavors.

• Funding and Minimums: Typically funded with a large initial donation, they often have higher minimum contribution requirements compared to DAFs.

• Tax Benefits: Donations to the foundation are tax-deductible, and the foundation itself enjoys tax-exempt status.

• Distribution Requirements: Unlike DAFs, private foundations are legally obligated to distribute at least 5% of their assets annually to qualified charities.

• Complexity and Cost: Setting up and managing a private foundation requires significant legal and administrative work, which can be expensive.

Donor Advised Funds (DAFs) and Private Foundations – Pros and Cons

Donor advised funds (DAFs) have several advantages, but a few limitations, when compared to private foundations.

First, donor advised funds are easy to set up and require minimal administrative hassle. The sponsoring organization handles the paperwork and investment management, allowing you to focus on your charitable giving. Setting up and managing a private foundation requires significant legal and administrative work, which can be expensive.

Second, you can contribute a variety of assets to a DAF, including cash, stocks, and real estate. There's also no pressure to distribute funds annually, allowing you to strategically plan your giving over time. Private foundations are legally obligated to distribute at least 5% of their assets annually to qualified charities.

Finally, many DAFs allow for anonymous giving, which can be appealing to privacy-conscious donors. Private foundations, on the other hand, may be required to disclose key information including the identities of contributors.

However, there is one key area where private foundations outshine donor advised funds: control. Private foundations offer far greater control over grantmaking decisions and overall operations of the foundation. With a donor advised fund, the sponsoring organization technically has final approval over grant recommendations. You may also have less control over investment decisions with a donor advised fund. Once more, the sponsoring organization has ultimate say over the investment choices offered, and most sponsoring entities only provide a limited lineup of investment funds to choose from.

Choosing the Right Path:

Donor advised funds are a great option for donors who want a simple, tax-efficient way to give back without the burden of administrative duties. Private foundations are ideal for those who desire complete control over their philanthropy, have a long-term vision for giving, and have the resources to manage a complex entity.

Ultimately, the best choice depends on your individual circumstances. It's wise to consult with a financial advisor and legal professional to determine which option best aligns with your philanthropic goals. If you are interested in discussing this topic or broader charitable goals further, give us a call at (816) 587-7526 or schedule a no-obligation thirty-minute call.

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