Comparing donor advised funds and private foundations
The charitable action that follows many families’ charitable intent can be quickly met with charitable confusion as they compare the various instruments available to see their philanthropic goals met.
But while the overlap of philanthropy, taxes and financial planning can be complex, understanding two common avenues for giving gets simpler when you focus on the notable differences.
Among the most popular instruments for well-planned philanthropists are donor advised funds, known as DAFs, and private foundations. The differences at first glance can seem subtle, but while both instruments have some of the same benefits, they require very different levels of investment – both in time and resources – and have unique constraints.
As for similarities, contributions to both are tax deductible and removed from your taxable estate. You may also influence fund investments and contribute advice about which charities receive charitable donations. And further, both instruments can be named in honor of your family.
However, they differ in cost and administration, so you’ll need to consider your philanthropic wishes and how much time, effort and expense you want to invest.
DAFs can be the easier and less expensive route. With a DAF, you sign an agreement with an endowment fund manager that gives you the latitude to advise how the charitable gifts are managed and distributed. The administrative, investment and recordkeeping services are provided by the fund. And unlike a private foundation, a DAF is not subject to excise taxes on investment income.
DAFs, such as those administered by the Raymond James Charitable, typically require a lower minimum contribution than a private foundation – around $10,000. Because a private foundation has more administrative and tax-filing expenses, it should be funded with a much greater amount to help cover those expenses. DAFs allow you to create a charitable legacy that offers flexibility with grant-making and advantageous tax deductions without needing to start an organization to meet the regulatory and legal obligations that come with running a private foundation.
A private foundation, however, allows for more flexibility with gifting, opportunities to market for the cause you support, the ability to hire staff and to run expenses related to the charity through the private foundation.
Generally, if your priorities are shifting to philanthropy for a cause or causes you care deeply about – and you have a significant sum to contribute – a private foundation may be the right instrument for your new calling or to meet your family’s large-scale charitable intentions.
This may be part of your life plan, eventually, so in the meantime a DAF can serve as a meaningful, low-maintenance and beneficial in-between. Keep in mind that DAFs may not distribute funds to a non-operating private foundation, so you’ll want to take that into consideration before funding the DAF. However, the reverse is possible. You can start with a private foundation and then dissolve it and push the funds to a DAF if you decide to simplify your giving later.
The following table provides a side-by-side illustration of the differences between a DAF and a private foundation.
|Donor advised fund||Private foundation|
|Requires setup fee?||No||Yes|
|Requires attorney to set up?||No||Yes|
|Requires family to administer?||No||Yes|
|May name family advisors?||Yes||Yes|
|Low minimum contribution?||Yes ($10,000)||No|
|Tax deduction for cash contributions?||Up to 60% of AGI||Up to 30% of AGI|
|Tax deduction for security and real property contributions?||Up to 30% of AGI||Up to 20% of AGI|
|Annual excise tax?||None||1% to 2% of net investment income|
|Estate taxes on contributions?||No||No|
|Requires annual distributions to a qualified charity?||No||Yes, minimum 5% of investment return|
|May recommend investment options?||Yes||Yes|
|May recommend charities paid?||Yes||Yes|
|Charitable donations may remain private/anonymous?||Yes||No|
|Requires a separate tax filing each year?||No||Yes|
These basics can lead you to a better sense of the direction you want to take your charitable giving. Speak with your advisor about your options and whether a donor advised fund with Raymond James Charitable will meet your needs. Charitable planning and tax planning can be complex, so we recommend you work with your financial advisor and your legal and tax professionals to coordinate the most appropriate instrument for your situation.
Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a donor advised fund for federal and state tax purposes.
To learn more about the potential risks and benefits of donor advised funds, please contact us.
Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.