Your private foundation’s goals may be more easily met with a DAF
Gifting a private foundation’s assets to a donor advised fund can simplify philanthropy
Where a private foundation can offer a lot of flexibility in charitable giving, for many private foundation founders, a donor advised fund can provide a simpler, more cost-effective option for creating and maintaining your charitable legacy.
Shifting your private foundation’s assets to a donor advised fund (DAF) may be able to serve your philanthropic goals without the administrative costs, and some added benefits.
Knowing the difference
Most of the benefit of a donor advised fund comes from the built-in infrastructure that a private foundation has to maintain for itself, such as legal advice, bookkeeping and accounting, investment services, reporting, tax preparation and staffing. Private foundations also have to pay an excise tax on net investment income and require minimum annual distributions, unlike DAFs.
In comparison, the organizational functions of a DAF are handled by the fund sponsor like Raymond James Charitable. Donors can structure their gifts to suit their desires and can request grants be made to qualified charitable organizations by advising the fund administrator. Like private foundations, DAFs can be named in honor of a family member.
Typically, private foundations can be a good choice for philanthropists who have a significant sum to invest and distribute and want to take a very active role in the running of the organization. For some wealthy individuals, shifting their focus from earnings to building their philanthropic legacy is part of their life plan – this is where a private foundation can excel. These kinds of organizations can operate selective scholarship programs, hire their own staff and sponsor events, for example.
For other philanthropists who aim to support charitable organizations with direct contributions, a DAF allows them to do so without the complex administrative effort. For others still whose private foundations are shifting from a more actively managed approach (like a selective scholarship fund) to more of a platform for funding service organizations (like a local service organization’s scholarship program), converting a private foundation to a DAF can be a wise move. DAFs can provide better efficiency, greater tax benefits and lower administrative costs, which can also mean more of the dollars are available to go to charity.
Converting to a DAF
Winding down a private foundation and spinning up a DAF involves gifting the foundation’s assets to the donor advised fund. It’s important to note, however, that it is not possible to reverse the process, so making sure the foundation can cover any unpaid expenses or taxes is crucial. Then you can dissolve the organization when you file its final tax return.
What DAFs lose in flexibility compared to a private foundation, they gain in convenience, simplicity and efficiency. While a DAF won’t suit every philanthropist’s goals, it’s worth talking to your financial advisor about whether its capabilities align with yours.
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.
Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.