The philanthropic community continues to debate whether donor-advised funds or private foundations are better giving vehicles for major donors. After all, more than 175,000 DAFs hold more than $40 billion, and more than 80,000 private foundations hold more than $500 billion.
There is no simple answer.
Each tool offers its own advantages and disadvantages. The best tool for the job depends entirely upon a donor’s unique situation and goals.
A DAF is a philanthropic account established at a public charity. It allows a donor to make a charitable contribution, receive an immediate tax benefit and recommend donations from the fund to qualified charities over time. The number of DAFs has increased rapidly in the past five years.
DAFs can be found at national sponsoring organizations usually associated with investment firms, such as Fidelity Charitable, or at more than 700 community foundations, such as The Denver Foundation, or at other public foundations or charities.
A private foundation is an independent legal entity that must be approved by the Internal Revenue Service as a 501(c)(3) organization. Private foundations receive their funds from one or very few sources such as an individual, a family or a business. They can be “endowed” with a one-time gift or can serve as a “pass-through” vehicle for periodic gifts.
Today, more than 75,000 private foundations in the United States hold more than $500 billion.
Some of the differences between DAFs and private foundations are:
Startup: DAFs can be established quickly with an initial contribution of $5,000 to $25,000. Private foundations take longer and require significantly more money. They are more expensive to establish because they require IRS approval, creation of a board and other legal actions.
Control: Donors to a DAF may “advise” the sponsoring organization on which contributions they would like to make. Although such recommendations are typically followed, there is less control at a DAF than at a private foundation. Also, a DAF typically must donate directly to U.S.-based charitable organizations.
With a private foundation, the donor has the final word on the entire contribution process. The foundation can donate internationally with greater ease, establish its own scholarship programs and even (in special hardship circumstances) give to private individuals.
Tax Deductibility: Generally, cash donations to a DAF can be deducted up to 50 percent of the donor’s adjusted gross income. Cash donations to private (non-operating) foundations are deductible up to 30 percent. However, there is usually much more flexibility in the kinds of donations beyond cash that private foundations can accept.
Investment control: At a DAF, investment decisions are usually made by the sponsoring organization. Sometimes, for large accounts the donor may retain some investment control. Program or Mission Related Investments are typically not allowed at DAFs. At a private foundation, the board selects how and where the endowment is invested. In either case, investment management fees will apply.
Transparency and anonymity: Usually, donations to a DAF are not public, and contributions from a DAF may be kept completely anonymous. Major donors to and grants made by a private foundation are made public on the foundation’s Form 990-PF filed annually with the IRS. They are freely discoverable.
Administration: A DAF requires no administration and little paperwork. Private foundations require IRS filings, board minutes and other documentation. Even with excellent services such as Foundation Source to facilitate such paperwork, a private foundation is more expensive to administer than a DAF.
Giving levels: Once a DAF is funded, there is no requirement that the funds be donated to charities in any amount or within any time frame. Private foundations must pay out each year 5 percent of the prior year’s assets in grants and administrative fees.
Perpetuity: In a DAF, sponsoring organizations often limit the ability of future generations to advise on contributions. Private foundations may exist in perpetuity, creating a legacy vehicle for future generations.
Because the rules governing DAFs and private foundations are so complicated, the choice is not easy. Many factors must be balanced. Before selecting one tool or the other, seek advice from your tax, legal, financial or philanthropic advisor.
Nonprofit of the month
We Don’t Waste partners with sports teams, event venues, caterers, restaurants and major food providers ensuring that the most vulnerable in our community have access to life-giving nutrition by rescuing fresh, perishable food — food that would otherwise be thrown away — and distributing it to nonprofits that feed underserved people. Since September 2009, it has distributed food valued at more than $2.5 million, totaling more than 3 million servings for Denver’s hungry.
Bruce DeBoskey is a Colorado-based philanthropic strategist and adviser, helping businesses, foundations and families design and implement their philanthropic initiatives.