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Donor Advised Funds vs. Private Foundations

| November 12, 2018
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Many of my clients come to me wanting to contribute to charity in same way shape or form but simply don’t know the best route for them. Should they set-up a donor-advised fund or go toward a private foundation? Each of these options will allow you to contribute to a worthy cause but one may be better for you over the other. Let’s take a look at the differences between both.

 

What is a Donor-Advised Fund?

A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities or other assets to a donor-advised fund at a public charity, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity.

When you give, you want your charitable donations to be as effective as possible. Donor-advised funds are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity.

What is a Private Foundation?

A private foundation is a type of charitable organization that is typically established by an individual, family or corporation to support charitable activities. A board of directors or trustees oversees a private foundation and is responsible for receiving charitable contributions, managing and investing charitable assets, and making grants to other charitable organizations. It is also responsible for filing tax returns and other administrative reporting requirements.

Benefits of a donor-advised fund

  • Grow your donation tax-free
  • You can support virtually any IRS-qualified public charity
  • Eligible for an immediate tax deduction
  • Simplified recordkeeping
  • Support your legacy planning
  • Authorize your financial advisor to help you take full advantage of your donor-advised fund
  • Contributing other assets besides cash is simple. Assets accepted include:
    • Cash equivalents
    • Publicly trades securities
    • Certain restricted, controlled, or lock-up stock
    • Mutual fund shares
    • Bitcoin
    • Private equity and hedge fund interests
    • Real estate
    • Certain complex assets, such as privately held C-corp and S-corp shares

Benefits of a private foundation

  • Create a legacy beyond your lifetime
  • Family members can be employed or serve as members of the board of your private foundation
  • Support organizations other than 501(c)(3) public charities
  • Potential immediate tax deduction: up to 30% of adjusted gross income for cash gifts and up to 20% of adjusted gross income for long-term appreciated publicly traded assets
  • Potential elimination of capital gains tax for gifts of long-term appreciated securities
  • Ability to accept many types of assets.

 

Donors thinking about establishing a private foundation should consider several factors before making this significant financial and legal commitment. For instance, you will need to immerse yourself in the foundation’s granting strategy. And you will need to help operate the foundation, including hiring staff and investment managers, managing grantmaking, and fulfilling all reporting requirements.

Private foundations are powerful giving vehicles, but they can be costly, time consuming and an administrative burden. If you and your family are interested in creating a charitable giving vehicle that is efficient, simple and impactful, you might want to consider alternatives like a donor-advised fund.

This is not always an easy decision to make. Let me help you by talking through your ideas and thoughts about your charitable planning and which option is best suited to your circumstances.

 

*Definitions and information from www.fidelitycharitable.org.

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