Compare the process, benefits and responsibilities of two popular giving vehicles.
At the Saint Paul & Minnesota Foundation, one of the questions we often get when working with donors and professional advisors is what the differences are between donor advised funds and private foundations, and how to choose either or both options.
Both options have advantages. Here we will explore the benefits of a donor advised fund (DAF) vs. a private foundation to help you determine the best option for your situation.
Benefits to Opening a Donor Advised Fund
A DAF is a great way to invest in the future vitality of the community. It is a flexible giving vehicle that allows donors to focus on the causes they care about.
When opening a DAF, there is no start-up cost for the donor. They can contribute a wide range of assets including cash, and non-cash assets such as stock, mutual funds, real estate and cryptocurrency.
Gifts to a DAF are tax-deductible at the time of the contribution and are invested, so they may grow over time while still being used to support the community. Once a DAF is established, the donor can recommend grants at their discretion at any time. They also may remain anonymous for some or all grants, if that’s what they prefer.
Benefits of Having a Private Foundation
Unlike a DAF, a private foundation is a tool that places primary control in the hands of the donor, making them accountable for managing their fund’s charitable activities.
Anyone setting up a foundation is also responsible for managing anything contributed to the foundation, as well as establishing and obtaining staffing, facilities and financial and grant management if needed.
A private foundation requires substantial legal, accounting and operational start-up costs, as well as an annual grant or grants made each year.
How to Decide
When making a decision, a donor may want to consider these questions:
- What amount of control do you want to have related to your grantmaking?
- What amount of work are you able to do — or hire staff to do — related to your grantmaking?
- What tax deduction works best for your personal situation?
- Do you want the ability to grant anonymously?
At A Glance: Comparing a Donor Advised Fund to a Private Foundation
|Donor Advised Fund||Private Foundation|
|Creating the structure||Established at a community foundation||Nonprofit corporation or trust organized as a private foundation|
|Tax-exempt status||Shares the public charity tax-exempt status of the community foundation||Must apply for private foundation tax-exempt status from IRS|
|Start-up costs||No cost to donor||Similar to corporate start-up requiring substantial legal, accounting and operational start-up costs|
|Charitable deductions — cash gifts||Tax deduction available up to 60% of adjusted gross income in any one year||Tax deduction is limited to 30% of adjusted gross income in any one year|
|Charitable deductions — appreciated property|
|Anonymity||Contributions, grants and donors can be anonymous||Contributions, 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||Donor retains complete control over investments and grantmaking, subject to IRS requirements|
|Payout requirements||Does not legally apply||Annually 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||Must establish and/or obtain these services|
|Annual taxes||None||Generally tax-exempt, but subject to excise tax of up to 2% of net investment gain including net capital gains|
|Annual tax returns||Not required (reported as part of community foundation’s annual reporting)||Must be filed by the private foundation with required supporting schedules|
|Investments||Fund assets are professionally invested through the community foundation||Must manage its own investments|
|Self-dealing rules||Federal law prohibits any grant, loan, compensation or other similar payment to donors, advisors, members of their family and related entities||Strict regulations prohibit most transactions between a private foundation and its donors (including related persons or corporations)|
|Fiduciary responsibility||Community foundation fulfills the associated fiduciary responsibilities||Private foundation board has full fiduciary responsibility|
Converting a Private Foundation to a Donor Advised Fund
We work with donors who have DAFs, private foundations or both. We also assist donors in converting their private foundations to DAFs.
Often donors choose to convert a private foundation when they decide they are no longer interested in handling the accounting, legal and investment responsibilities, and they would like to focus their time on grantmaking. Some donors choose this as they find a donor advised fund is also a lower-cost option for them or better for their tax situation.
Regardless of the reasons why, the Foundation can be a partner in this effort while still preserving the name and giving priorities of the original private foundation.
Benefits of Partnering with the Saint Paul & Minnesota Foundation
We works with donors and their professional advisors to support donors in identifying their charitable goals and establishing the giving vehicles to help them achieve those goals.
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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