Donor Advised Fund vs. Private Foundation
Donor advised funds (DAF) and private foundations are both great tools for helping charities while saving income taxes. While the creation of private foundations used to be the norm, more and more people are considering donor advised funds as a charitable giving option.
Administration
There are pros and cons to each type of strategy.
Private foundations are separate legal entities. They usually require legal counsel to form and operate. There are generally annual reporting costs. Larger foundations are better able to handle the administrative expenses, legal fees, and other factors than smaller trusts. It is possible to close a private foundation, if the cost of management becomes burdensome, for example – and then transfer the foundation assets to charities through the use of Donor Advised Funds.
A DAF is generally just a separate fund within a public charity. This means the start-up time and costs are much less than for a foundation. A DAF is essentially a gift that is made to an existing 501(c)(3) organization. Contributions to the 501(c)(3) can be done quickly.
Timing and Legacy
Private foundations can last forever. The people who manage the fund may change but the foundation can be used to remember the family name. Private foundations allow for succession planning and the selection of a board to manage the foundation.
Since a DAF is not a separate legal entity, carrying on the family name is less visible. There may also be time limits on how long the DAF contributions can be used by the charity.
Depending on the arrangement with the sponsoring charity, the section 501(c)(3) organization, DAFs may have time limits. Although the fund may carry a family name, a DAF is not legally separate from the sponsoring organization.
Controlling the assets
Once the donor transfers the assets by using a DAF, the donor no longer controls the assets. Instead, the charity legally controls the assets. The donor can give advice on when and how to make distributions, and the charity normally obliges.
Private foundations must distribute five percent of the FMV (fair market value) of the investment assets each year. While DAFs don’t have a mandatory distribution requirement, a main reason donors contribute their assets is that the charity can actually use the finds – instead of just investing them.
There are also rules for grantmaking and scholarships that an experienced Arizona charitable funding lawyer can explain – such as if and how grants or scholarships can be made to individuals.
Tax considerations
Donations to both private foundations and DAFs are tax deductible. There are limits though. Private foundation deductions have a lower percentage of gross income limitation than donor advised funds do. There may also be differences on whether a cash contribution is being made or some other contribution such as stock. There are also rules for determining the fair market value of the contributions. A small excise tax does apply to private foundations but not to a DAF.
Privacy
The list of contributors/donors to a private foundation is made public each year. It includes the name of the person and the amount. Donations through a DAF are not public.
Contact a premier charitable fund lawyer today
Which option to use, the DAF or a private foundation, depends on many factors. An experienced Arizona charitable planning attorney will review your goals, financial needs, legacy concerns, tax issues, and other issues before advising you. Once a decision has been made as to the best method, the lawyer can create the necessary documents to meet your goals. At Yaser Ali Law, we help clients who want to invest in charities of their choice while minimizing taxes and associated administrative costs
To learn more about donor assisted funds and private foundations, please call our Tempe Arizona charitable planning lawyers at (480)-442-4175 or use our contact form to make an appointment.