Giving fund or private foundation? Which one should you establish to best meet your mission? Private foundations represent the classic avenue for charitable giving, but a giving fund (donor advised fund) offers a great alternative with some substantial perks. During the 1990s, these funds became more visible and thus more popular. These days, donor advised funds are a rapidly growing mechanism for charitable giving, outnumbering traditional foundations by three to one.
Public charities establish donor advised funds (DAF) so that donors can make charitable contributions and receive an immediate tax deduction. These funds are typically segregated funds within an existing public charity. Donors can contribute as often as they like, and can even contribute items like stock and real estate. Over time, grants from the fund are made. In short, DAFs follow a “give when you can, grant when it is needed” mantra.
Once a donation is made to a DAF, the donor no longer legally controls the funds, but can advise on the use of the funds. However, DAFs are under no legal obligation to follow donor recommendations, though most actually do honor donor requests.
A donor advised fund is not a separate legal entity from its sponsoring organization. A private foundation is an independent legal entity, therefore it is more structured regarding both formation and operation. Therefore, they tend to take more time and cost more to set up and administer. Plan on taking more than one year to set up a private foundation, and plan for even more time to maintain reporting and compliance requirements.
Private foundations are required to distribute five percent of their assets every year. Conversely, DAFs are more flexible regarding timing of distribution, though most have a plan to distribute assets. Private foundations have much more flexibility regarding grants, which can be given in the form of scholarships to individuals. A DAF is further limited regarding grants, which must go to a public charity and cannot go to an individual.
While donations to both private foundations and DAFs are tax-deductible, donations to DAFs are limited and cannot exceed 50 percent of a donor’s gross income. Foundation donations cannot exceed 30 percent gross income. The two choices are equal regarding donations of stock, which is assessed based on fair market value for both. Private foundations are typically subjected to a two-percent excise tax on investment income. Donor advised funds are not.
If you are concerned about privacy, a DAF may be the best route because these funds are not required to provide a public listing of donors, thus allowing donors to make anonymous gifts. On the contrary, public foundations must file a form 990-PF disclosing lists of both contributors and amounts given.
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Hopefully this article has provided some food for thought regarding which charitable mechanism is right for your mission. There’s quite a bit to consider, but it’s important to choose the right structure for your philanthropic priorities and purpose. With a little research and careful consideration, you can find the best mechanism for your charitable giving.
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