Charitable Giving: Donor-Advised Funds vs. Private Foundations

Updated: Sep 30, 2019


Private foundations (PFs) are not the only tools by which philanthropic investors can preserve their legacy of charitable giving. Donor-advised funds (DAFs) are becoming a popular option for donors who desire a more flexible giving structure that allows for more family involvement in giving. Here is my summarized comparison of the two:


Organization Formation


DAF: The donor pays a fee to a sponsoring organization. The sponsoring organization sets up the DAF and assigns the necessary staff to process all grant-making needs.

PF: The donor completes the necessary state and federal applications to form a separate, tax-exempt corporation. (Most donors hire an attorney or a firm to accomplish this).

Management


DAF: The sponsoring organization essentially does all of the administrative work – they monitor assets, hire staff to administer grants, take care of tax compliance, and provide expertise.

PF: The organization establishes a Board of Directors and can hire staff to manage assets, grant making, investments, and other organizational needs.

Tax Compliance


DAF: Minimal tax compliance is involved and is handled by the sponsoring organization. We should, however, expect tax compliance updates in the near future as the IRS had DAFs on it's 2018-2019 Priority Guidance Plan.

PF: The foundation must file Form 990-PF and all necessary state returns. A PF is also required to pay an annual 2% excise tax on net investment income (which can be reduced to 1% if certain qualifications are met). Furthermore, the foundation is subject to self-dealing restrictions, mandatory distributions, and other stringent tax rules and regulations.


Grant-Making


DAF: The donor is not required to follow a formal grant-making structure or minimum payout. However, the sponsoring organization makes the final decision on which grantees are selected.

PF: The foundation must make qualifying distribution of at least 5% of the prior year’s average investment net assets. In addition, private foundation directors have the ultimate authority over what grants are made.

All things considered, both DAFs and private foundations allow donors to establish a legacy by which they can instill the value of giving throughout family generations. Tax implications, philanthropic values, and compliance all must be considered when choosing the best giving vehicle. For more information about donor-advised funds or private foundations, contact The Little CPA.


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.

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