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Compare the benefits and responsibilities of two popular giving vehicles your clients may be considering for their charitable giving.

Your clients may wonder about the differences between donor advised funds and private foundations, and how to choose the best option for their giving.

Both options have advantages for making a charitable impact. They differ in the start-up costs, allowable charitable deductions and administration. Read on for a side-by-side comparison.

Benefits to Opening a Donor Advised Fund

A donor advised fund (DAF) is a great way to invest in the future vitality of the community while benefiting from a relationship with an organization that handles the administrative and fiduciary responsibilities.

In addition to cash, your clients can contribute non-cash assets such as stock, mutual funds, real estate and cryptocurrency and recommend grants at any time to causes they care about. They can also choose to remain anonymous if they would like.

Benefits of Having a Private Foundation

A private foundation is a tool that provides the donor with primary control, making them accountable for managing their fund’s charitable activities.

It may be a great fit for someone who is looking to make a significant financial and time commitment to their philanthropy. It often requires staffing, substantial legal, accounting and operational start-up costs, as well as an annual grant or grants made each year.

How to Decide What Charitable Giving Vehicle to Recommend

When comparing charitable giving options, you may want to discuss these questions with your client to help them determine what’s best:

  • What amount of work are your clients able to do — or hire staff to do — related to their grantmaking?
  • What tax deduction works best for their personal situation?
  • Do your clients want to potentially grant anonymously?

At the Foundation, we work with donors who have DAFs, private foundations or both. We can also assist your clients in converting their private foundations to DAFs. For more information about our services, talk to a gift planner by calling 651.224.5463 or emailing philanthropy@spmcf.org.

At A Glance: Comparing a Donor Advised Fund to a Private Foundation

Donor Advised FundPrivate Foundation
Creating the structureEstablished at a community foundation or other DAF providerNonprofit corporation or trust organized as a private foundation
Tax-exempt statusShares the public charity tax-exempt status of the community foundationMust apply for private foundation tax-exempt status from IRS
Start-up costsNo up-front cost to donorSimilar to corporate start-up requiring substantial legal, accounting and operational start-up costs
Charitable deductions — cash giftsTax deduction available up to 60% of adjusted gross income in any one yearTax deduction is limited to 30% of adjusted gross income in any one year
Charitable deductions — appreciated property
  • Tax deduction available up to 30% of adjusted gross income in any one year
  • Deduction available for full fair market value
  • Tax deduction available up to 20% of adjusted gross income in any one year
  • Deduction available for full fair market value only if publicly traded stock
  • Other appreciated assets receive deductions limited to cost basis

AnonymityContributions, grants and donors can be anonymousContributions, grants and board members are listed on annual tax documents, which are available for public review
Donor control of grantmaking Donor recommends grants; IRS requires that the final approval rests with the community foundation or sponsoring organizationDonor retains complete control over investments and grantmaking, subject to IRS requirements
Payout requirementsDoes not legally applyAnnually must distribute for charitable purposes at least 5% of its asset value regardless of its income
Administration (includes staffing, facility, financial and grant management)Services provided by the community foundation or sponsoring organizationMust establish and/or obtain these services
Annual taxesNoneGenerally tax-exempt, but subject to excise tax of up to 2% of net investment gain including net capital gains
Annual tax returnsNot required (reported as part of community foundation’s annual reporting)Must be filed by the private foundation with required supporting schedules
InvestmentsFund assets are professionally invested through the community foundationMust manage its own investments
Self-dealing rulesFederal law prohibits any grant, loan, compensation or other similar payment to donors, advisors, members of their family and related entitiesStrict regulations prohibit most transactions between a private foundation and its donors (including related persons or corporations)
Fiduciary responsibilityCommunity foundation fulfills the associated fiduciary responsibilitiesPrivate foundation board has full fiduciary responsibility

Benefits of Partnering with the Saint Paul & Minnesota Foundation

  1. We meet with you and your client
  2. We work with you to help identify your client’s charitable goals
  3. We work with you to establish the best giving vehicles to achieve your client’s goals
  4. We work with you and your client to create a comprehensive giving plan

To learn more, contact one of our experienced gift planners to discuss your clients’ goals and how the Foundation may be able to support them.

The Saint Paul & Minnesota Foundation does not provide tax, legal or accounting advice. Please consult your own tax, legal and accounting advisors regarding your individual situation before engaging in any transaction.

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