Weighing the Options: Private Foundation or Donor Advised Fund?

Myth #1: Only private foundations can be customized to reflect the client’s needs.

Private foundations differ from donor advised funds in their status as separate legal entities, the deductibility rules for gifts, and opportunities to customize governance. “Donor advised fund” is simply a term used to describe the structure of a fund and its relationship with a sponsoring organization.  They are actually extremely flexible. Here’s why:

• Donor advised funds allow your client to make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. Later, your client can recommend gifts to favorite charities from the fund when the time is right.  
• Donor advised funds can be fully anonymous and /or fully obvious.  Your client can name their donor advised fund as they wish, including calling it their family name foundation or conversely, using a name that would not identify them at all.
• A donor advised fund at The Community Foundation allows your client to be part of a community of giving with opportunities to network with others who share similar interests. And you can rely on The Community Foundation’s deep knowledge about the needs of our region and the nonprofits meeting those needs.  
• The Community Foundation can work with you and your client to build a charitable giving plan for now and for future generations. Our team can support your clients in strategic grant making, family philanthropy, and opportunities to learn about local issues and nonprofits making a difference.

Myth #2: Deciding whether to establish a donor advised fund or a private foundation mostly depends on size.

The size of a donor advised fund is unlimited.  Indeed, the decision to open a donor advised fund may depend on other factors, including:

• Donor advised funds can help meet the need for anonymity in certain grants, which is typically difficult for private foundation. The Internal Revenue Service provides public access to private foundations’ Form 990 tax returns.  This does not happen with individual donor advised funds.  
• A donor advised fund can receive a client’s gifts of highly-appreciated, nonmarketable assets such as closely-held stock and real estate, and benefit from favorable tax deduction rules (higher deductibility limitations and fair market valuation for hard-to-value assets) not available for private foundations.
• Donor advised funds can be an effective alternative to a private foundation, thanks to fewer expenses and no excise taxes.

Myth #3: Donor advised funds and private foundations are mutually exclusive

In fact, it might make sense for your clients with private foundations to consider transferring their assets or a portion of them to a donor advised fund to carry on the foundation’s mission. A donor advised fund is a great tool for next generation family members to learn and practice philanthropy outside of the family foundation.  Sometimes, terminating a private foundation and consolidating giving through a donor advised fund is the best alternative for a client when the day-to-day management and administration of the private foundation has become more time-consuming than expected, or the family members who handled these functions have retired or passed away.

Our team is here to help you.  Please reach out if you’d like to discuss the pros and cons for your client, or if a donor advised fund at The Community Foundation makes sense for your clients. I hope to hear from you!