 | By Eitan Balloul, Tax Manager, Not-for-Profit |
Private foundations and Donor-Advised Funds are both vehicles to engage in philanthropic activities. Understanding the differences between the two is critical in determining which is more appropriate for your unique circumstances. Whether you prefer the greater control afforded by a private foundation or confidentiality and fewer restrictions of a DAF, each has its proper use.
A Private Foundation is an exempt organization, a legal entity under section 501c3 that is not classified as a Public Charity. Such entity can be formed by an individual, family, or another for-profit entity and typically involves an initial large donation. Usually, private foundations will not solicit funds from the public. Exempt status is maintained by supporting public charities or engaging in other activities that serve the public good.
A Donor-Advised Fund is a Charitable investment account that is usually managed separately. The account is an asset component in a section 501c3 organization. A contribution to this account gets an immediate tax deduction. The individual who makes the donation may recommend prospective recipients to the sponsor. However, the sponsoring entity has the right to make the final decision.
The following chart summarizes the main differences between the two vehicles:
| Private Foundation | Donor-Advised Fund | |
|---|---|---|
| Structure | Legal Entity governed by its own set of bylaws. | Account held with Sponsoring Charitable entity. |
| Start-up costs | Legal fees and other associated start-up costs can be substantial. | Minimal. Often covered by the sponsoring entity. |
| Control | Full Control over Grant Decisions and Investments. | Can recommend grants and Investments, but the sponsor has the legal authority. |
| Administrative Responsibilities | Hold Board meetings, maintain records, select charities, administer grants, hire staff. | Make Grants Recommendations. |
| Federal and State Filing Requirements | Required to file tax return (form 990-PF) and comply with other state filing requirements. | Federal and State filing are not required. |
| Excise Tax | Yes. Foundation required to pay 1.39% excise tax on investment income and realized capital gains. | No. Excise tax not applicable to DAF. |
| Give Anonymously | No. Must file form 990-PF annually, listing assets, contributors, and grantees. | Yes. In making grant, the donor may remain anonymous. |
Tax Considerations
| Private Foundation | Donor-Advised Fund | |
|---|---|---|
| Deduction limit for Cash Gifts | Up to 30% of Adjusted Gross Income | Up to 60% of Adjusted Gross Income |
| Deduction limit for Gifts of Appreciated Securities and Real Estate | 20% of Adjusted Gross Income | 30% of Adjusted Gross Income |
| Valuation of Real Estate | Limited to Lesser of FMV or Cost Basis. | FMV |
Ultimately, Private Foundations and Donor-Advised Funds are both effective ways to manage wealth and achieve philanthropic impact. may be different when making decisions between. Some may find a Donor-Advised Fund more beneficial in terms of meeting financial goals. However, others may prefer the intangible value in giving and helping others, making a positive impact, and leaving a personal and family legacy.