Donor Advised Fund vs. Private Foundation

By Stephen Benevento, CFP®, CTFA
From the Winter 2013 Edition of Values

Countless articles outline the pros and cons of donor advised funds (DAF) and private foundations. As with any financial planning decision, the answer to the question of which is better for you is: It depends.

Compared to private foundations, DAFs are cheaper to establish, allow for privacy since there are no IRS filing requirements, have no payout requirement, are administratively simple, and provide increased tax advantages. In particular, cash contributions to DAFs can be deducted up to 50 percent of adjusted gross income (AGI), while the limit on donations to a private foundation is 30 percent of AGI. Certain appreciated assets, when donated to DAFs can be deducted up to 30 percent of AGI, while similar contributions to a private foundation can only be deducted up to 20 percent of AGI. Investment gains in a DAF are generally tax-free while gains in private foundations are subject to an excise tax of up to 2 percent. Private foundations also require an annual 5 percent payout.

For some donors, however, other goals may be more important than the tax implications or the administrative simplicity of a giving program. A private foundation may be more suitable for individuals and families who want to create a long-term legacy, make an impact in a focused area, or have full control over the donated funds. When making a donation from your DAF you are technically “recommending” the donation to the fund sponsor. While these recommendations are normally honored, a private foundation guarantees that the funds are applied to your exact specifications. Furthermore, private foundations generally allow more flexible giving than DAFs, such as grant making to individuals or to for-profit entities. Private foundations also allow for more investment options beyond the selection of mutual funds often offered by DAFs. Still, given the additional costs and complexities, a private foundation would not typically be considered unless the initial funding value is at least $1 million.

A combination of both a donor advised fund and a private foundation may be needed to provide a giving program that satisfies all goals.

As always, we strongly recommend consulting with your tax advisor prior to making any decisions related to your tax or estate plans.