Private Foundation or Donor Advised Fund? - Rodgers & Associates

Private Foundation or Donor Advised Fund?

Have you ever thought of starting your own foundation? Start-up costs and annual admin­is­trative duties and expenses can make running a private foundation daunting. You should be consid­ering a signif­icant initial contri­bution to make a private foundation a viable option. You can achieve similar objec­tives with minimal expenses and smaller contri­bu­tions through a donor-advised fund (DAF).

A DAF is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organi­zation, which is called the sponsoring organi­zation. This organi­zation has been created for the purpose of managing chari­table donations on behalf of an organi­zation, family, or individual. A DAF provides an easy-to-establish, low cost, flexible vehicle for chari­table giving. In exchange, the donor enjoys a conve­nient, cost-effective, and tax-advantaged way to make chari­table gifts through the DAF.

The donor has their own account composed of their personal contri­bu­tions. The donor may receive a federal income tax deduction up to 50% of adjusted gross income (AGI) for cash contri­bu­tions and up to 30% of AGI for appre­ciated securities. Contri­bu­tions to private founda­tions are capped at 30% of AGI for cash contri­bu­tions and 20% of AGI for appre­ciated securities. The donor instructs the DAF on which charities will ultimately receive their gifts through grant making out of the account.

One of the overlooked advan­tages of using a DAF is the ability to manage your capital gains. Suppose you have a large capital gain in gold and you want to avoid paying the higher tax rate on collectibles if you sold some of it. You can move some of the position to your DAF until you determine what charity will ultimately receive the proceeds.

There are other consid­er­a­tions when choosing the best vehicle for your chari­table giving. A private foundation gives much more control than a DAF. There are no rules of thumb to determine when a foundation is more cost-effective. You may want to talk with a financial adviser that is familiar with these issues before you make a final decision.