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.