Charitable giving is an important part of philanthropy, and it can take many different forms. Two popular ways that individuals can give back to their communities and support causes they care about are through Donor Advised Funds and private foundations. While both can help donors achieve their philanthropic goals, they differ in important ways.
Donor Advised Funds
Donor Advised Funds (DAFs) are a type of charitable giving vehicle that allows individuals to make a tax-deductible donation to a public charity, such as a community foundation or a nonprofit organization. Once the donation is made, the donor can recommend how the funds should be distributed to other charities over time. The sponsoring organization of the DAF is responsible for managing the funds and ensuring that they are distributed in accordance with the donor’s recommendations.
One of the key advantages of a DAF is that it allows donors to receive an immediate tax deduction for their entire donation to the fund while giving them the flexibility to make charitable gifts over time. Donors can also take advantage of the expertise of the sponsoring organization to manage the assets in the DAF, which can help them to maximize the impact of their giving.
Private foundations are another type of charitable giving vehicle that is established as a separate legal entity. Unlike DAFs, private foundations are typically established by an individual or a family and usually are meant to last many years. Private foundations give the board greater control over how charitable funds are invested and distributed, with a requirement to distribute a minimum of 5% of their assets each year to qualified charities.
One of the advantages of a private foundation is that it allows donors to have greater control over their charitable giving. They can establish a board of directors to oversee the foundation and make decisions about how the funds should be distributed. Private Foundations can also provide a way for families to involve future generations in their philanthropy, creating a legacy of giving that can last for many years.
While both DAFs and private foundations provide opportunities for charitable giving, there are several key differences between the two. Some of the main differences are:
Control: Donors have greater control over the investments and distribution of funds in a Private Foundation, while in a DAF, the sponsoring organization has responsibility for managing the assets and ensuring that they are distributed according to the donor’s recommendations.
Tax Deductibility: Both private foundations and DAFs offer donors a tax deduction for their charitable contributions. However, the tax benefits may be greater for donations to a Private Foundation, especially for those making large contributions.
Costs: Private foundations can be expensive to establish and maintain, with ongoing administrative costs, legal fees, and compliance requirements. DAFs, on the other hand, typically have lower costs and require less administrative overhead.
Privacy: Private foundations are required to file annual tax returns that disclose information about their assets and charitable giving, while DAFs are not subject to the same reporting requirements. For some donors, the greater privacy offered by a DAF may be an advantage.
Overall, donors must consider their philanthropic goals, budget, and level of involvement when choosing between a DAF and a private foundation. Amounts below $1 million are best suited for a DAF, whereas a larger amount is likely suited for the benefits of a private foundation. Both options offer unique advantages and provide effective ways for individuals to make charitable contributions and lasting impact in their communities. Donors should carefully evaluate all options and consult with their financial advisor or tax professional before making any financial decision.
“Donor Advised Funds and Private Foundations?”, Fidelity Charitable, https://www.fidelitycharitable.org/guidance/philanthropy/private-foundations.html, as of April 19, 2023
“What is a Private Foundation?”, Schwab Charitable, https://www.schwabcharitable.org/maximize-your-impact/align-your-giving-vehicles/donor-advised-vs-private-foundation, as of April 19, 2023
“Donor-Advised Funds And Charities: Partnering to Provide Lasting Support”, Forbes, https://www.forbes.com/sites/forbesnonprofitcouncil/2023/03/20/donor-advised-funds-and-charities-partnering-to-provide-lasting-support/?sh=9dca43232dba, as of March 20, 2023
“Should a Private Family Foundation be Your Legacy?”, Forbes, https://www.forbes.com/sites/forbesfinancecouncil/2023/03/09/should-a-private-family-foundation-be-your-legacy/?sh=4bcd369a2e1d, as of March 9, 2023