Donor Advised Fund (DAF) or Private Foundation

Answer: For those who are charitably inclined, DAFs and Private Foundations are ways to make charitable gifts. They differ in complexity, control, and flexibility.

Donor advised funds (DAFs) are extremely popular and meet the needs of most people. They allow donors to contribute assets, receive an immediate tax deduction, and make grants to charities over time.

Private foundations are more complex, have restrictions, limitations, and constraints while providing more control. According to Foundation Source, private foundations typically make sense for individuals or families with $5 million or more in charitable assets. In contrast, the Raymond James DAF can be opened with a minimum of $10,000 in cash or appreciated stock.

Charitable giving and foundations have a deep history in our country. Long before the Carnegies and Rockefellers set up their own charities in 1911 and 1913, the country’s first private family foundation, the Russell Sage Foundation, was established in 1907. Russell’s wife, Margaret Olivia Slocum Sage, set up the foundation in memory of her husband, who was a railroad magnate. The Foundation was initially funded with $10 million (about $350 million today) and continues to make grants focused on social science research, including Behavioral Economics.

Private Foundations tend to suit high net worth donors looking for control and flexibility. The trade-off is stringent reporting requirements, legal restrictions, and board governance.

The DAF is popular due to its simplicity and streamlined approach. Funds grow tax free and making gifts to qualified charities is as easy as going online or making a phone call to your CERTIFIED FINANCIAL PLANNER® Professional.

Many families, including ours, established a DAF for the multigenerational benefits. We introduced the grandkids to the DAF over Thanksgiving dinner years ago and began including them in the discussion of selecting which organizations to support. Fast forward, and now the grandkids warm my heart by suggesting charities that have meaning to them as recipients of our DAF gifts. We are confident that our family’s philanthropic spirit will live on effortlessly for generations to come.

Determining whether a DAF or a Private Foundation is best depends on your goals. Private Foundations are 501(c)(3) charities suited for those wanting control and investment flexibility. If you’d like to establish a scholarship program, evaluate applications, and give money to individual recipients, you may need a private foundation. In contrast, with a DAF, you can make a direct gift to an existing 501(c)(3) scholarship fund program without the record keeping and administration overhead required of a private foundation.

If a family already has a Private Foundation, there still may be room for a DAF. Funding a DAF could make it easier for heirs, including multiple siblings and siblings-in-law, to find clarity. Families can open multiple DAF accounts and distribute assets between them, allowing each member to manage an account and make grants at their own discretion. If there’s not a clear plan for succession and dollar amounts don’t warrant the costs of heightened oversight, it’s probably time to move into the simpler structure of a DAF.

Here are the differences in potential tax benefits and consequences.

Private Foundation: Deduct up to 30% of AGI on cash gifts and 20% on illiquid assets. They’re exempt from federal income tax but are subject to an excise tax of 1.39% on net investment income.

Donor Advised Fund: Deduct up to 60% of AGI on cash gifts and 30% on illiquid assets. DAF assets grow tax-free.

If you’ve already established a private foundation and want to shift your strategy to a DAF, it’s a straightforward process of opening a DAF, gifting remaining funds to the DAF to dissolve the private foundation, and filing a final tax return. Keep in mind that DAFs can only make distributions to public charities.

Ultimately, any decisions and actions related to gifting should align with your goals, financial situation, and overall financial plan. Donors are urged to consult their attorneys, accountants, or tax advisors regarding the deductibility of distinct types of contributions for tax purposes and to maximize benefits for the causes you care about. Always stay humble and kind. Stay focused and plan accordingly.