Charitable giving is an opportunity to use your wealth to benefit others while providing you with tax benefits. If you’re searching for a way to reduce your tax bill and give back to the community, a donor-advised fund (DAF) or a private foundation (PF) may be worth considering. Here is what you should know about DAFs and PFs to help you determine which is suitable for your situation:
donor-advised funds (dAFs)
DAFs are owned and controlled by a sponsoring organization such as a non-profit organization, charity, educational institution, or religious organization. A DAF is a giving account that enables funds to remain inside the DAF until the charity uses them later. DAFs do not need to make a minimum distribution each year and have no timeline of when they must distribute the funds to the charity unless it has $1 million or more, requiring the DAF to distribute 4% of assets annually.
When a donor contributes to the DAF, they immediately receive a tax write-off. However, the charity does not always receive the benefit (grant) immediately, sometimes not for years. The donor can recommend to the sponsoring organization how the funds are invested and granted but gives up all legal control of the DAF.
The sponsoring organizations may restrict granting activity, such as a minimum or maximum dollar amount or the number of grants per year, before any remaining funds revert to the sponsoring organization. Here are other things to consider before using DAFs for your charitable giving:
- DAFs often have a limited choice of investment options
- Assets used to fund a DAF may be liquidated upon donation, which can result in additional transaction fees.
- Can only grant to 501(c)(3) public charities
- Can’t convert to a private foundation
- DAFs do not create a permanent legacy
- Tax deduction limit on cash of 60% of Adjusted Gross Income (AGI)
- Tax deduction limit on stocks and real property of 30% of AGI
- Valuation of gifts is Fair Market Value (FMV)
- Immediate start up time
- No distribution to charity requirement
- Donors not disclosed to the public (private)
private Foundations (pFs)
PFs are legal entities classified as tax-exempt, 501(c)(3) organizations by the IRS that generally have one funding source, such as an individual, a family, or a corporation. PFs give the donors control over granting and investment decisions, the mission of the PF, where the assets are invested, managers, and to whom and when the funds are granted.
PFs can be funded with almost any asset- private equity, tangible assets, real estate, and intangible personal property. A private foundation can perpetuate creating a legacy that encourages family giving across the generations. PFs can grant in various ways, for example:
- Granting to individuals
- Granting through scholarship programs
- Providing program-related investments
- Giving through direct charitable activities
- Participating in International granting
- Can convert to a DAF
- Startup time can be weeks or months
- Legal and other fees should be considered
- Tax deduction limit on cash of 30% AGI
- Tax deduction limit on stocks and real property of 20% of AGI
- Must distribute 5% annually for charitable purposes, including grants to other charities
- Valuation of gifts is FMV for publicly traded stocks and cost basis for all other gifts.
- Returns must be filed and are available to the public
Meet with your financial professional
Your financial and legal professionals can help you understand the differences between a donor-advised fund and a private foundation and help you determine which is appropriate for your unique situation. Talk to your financial professional today!