Charitable Gifting: Donor Advised Funds Versus Family Foundations
Donor-advised funds (DAFs) have been created in record number over the past decade, and yet many attorneys, accountants, and advisors report that a select number of clients still express an interest to create to create a private foundation (PF). In this article we will examine both structures and explore the benefits of each.
Ten years ago, there were approximately 75,000 PFs and 150,000 DAF accounts; currently, the number of PFs have barely increased to 82,000, while there are now over 463,000 DAFs. To realize the benefits of a PF over a DAF most attorneys and advisors indicate that a client should not begin to contemplate a PF unless they intend to fund it with at least $10 million.
As awareness of DAFs has increased rapidly among donors who already have PFs, many of them are closing and converting their PFs to DAFs or are establishing DAFs to complement their PFs. Research indicates that 88% of PFs are below $5 million and two-thirds are below $1 million.
Philanthropists increasingly realize, often with the help of their advisors, that they can accomplish their charitable goals through a DAF rather than a PF and for significantly less cost they are able to reduce the burden, responsibility and complexity of operating the PF. Even still, for those UHNWIs who intend on having large philanthropic goals (again, those willing to fund a PF with at least $10 million), PFs offer a range of interesting benefits and customization that DAFs are unable to achieve. A PF allows for more flexibility with gifting, opportunities to market for the cause you support, the ability to hire staff and to run expenses related to the charity through the private foundation. Generally, if your priorities are shifting to philanthropy for a cause or causes you care deeply about – and you have a significant sum to contribute – a private foundation may be the right instrument for your new calling or to meet your family’s large-scale charitable intentions
As awareness of DAFs has increased rapidly among donors who already have PFs, many of them are closing and converting their PFs to DAFs or are establishing DAFs to complement their PFs. Research indicates that 88% of PFs are below $5 million and two-thirds are below $1 million.
Philanthropists increasingly realize, often with the help of their advisors, that they can accomplish their charitable goals through a DAF rather than a PF and for significantly less cost they are able to reduce the burden, responsibility and complexity of operating the PF. Even still, for those UHNWIs who intend on having large philanthropic goals (again, those willing to fund a PF with at least $10 million), PFs offer a range of interesting benefits and customization that DAFs are unable to achieve. A PF allows for more flexibility with gifting, opportunities to market for the cause you support, the ability to hire staff and to run expenses related to the charity through the private foundation. Generally, if your priorities are shifting to philanthropy for a cause or causes you care deeply about – and you have a significant sum to contribute – a private foundation may be the right instrument for your new calling or to meet your family’s large-scale charitable intentions
Benefits of Charitable Vehicles
There are many advantages for donors to create a charitable vehicle, regardless of whether it is a DAF or PF. These include:
- They can donate assets to the vehicle and receive a tax deduction in the year of the donation.
- If donors have a liquidity event or large income in a particular year, or they are approaching retirement while continuing to earn a big paycheck, they can donate to the vehicle to receive a significant tax benefit and make grants in subsequent years when their income is less.
- Donors may not want to donate too much to a charity at one time.
- Donors can continue to grant consistent amounts from their vehicle even when their income or investments drop in value in certain years.
- Charities are often unable to accept donations of complex assets, and it is cumbersome for some to accept even publicly traded stock. Charitable vehicles, especially DAFs, regularly accept illiquid assets.
- Vehicles can be used to help teach philanthropy and pass on family values to children and heirs and keep the family united for the future.
- Donors may want their giving to continue with future generations.
- Vehicles can enable donors to more easily keep track of donations and grants to and from the vehicle.
Comparing DAFs and PFs
The following table provides a side-by-side illustration of the differences between a DAF and a private foundation:
| Donor Advised Fund | Private Foundation | |
|---|---|---|
| Requires setup fee? | No | Yes |
| Requires attorney to set up? | No | Yes |
| Requires family to administer? | No | Yes |
| May name family advisors? | Yes | Yes |
| Low minimum contribution? | Yes ($10,000) | No |
| Tax deduction for cash contributions? | Up to 60% of AGI | Up to 30% of AGI |
| Tax deduction for security and real property contributions? | Up to 30% of AGI | Up to 20% of AGI |
| Annual excise tax? | None | 1% to 2% of net investment income |
| Estate taxes on contributions? | No | No |
| Requires annual distributions to a qualified charity? | No | Yes, minimum 5% of investment return |
| May recommend investment options? | Yes | Yes |
| May recommend charities paid? | Yes | Yes |
| Charitable donations may remain private/anonymous? | Yes | No |
| Requires a separate tax filing each year? | No | Yes |
These basics can lead you to a better sense of the direction you want to take your philanthropic giving. Speak with your tax and legal advisor to more carefully understand your options and whether a donor advised fund or a private foundation may meet your needs. At Boxwood Consultants we are uniquely positioned to provide the additional resources needed as a strategic consultant helping you to develop a high-level philanthropic plan and coordinating with your other advisors to bring all the detailed pieces together in the most efficient way for you.
Attention
Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a donor advised fund for federal and state tax purposes.
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