In the world of philanthropy, there have been some changes in recent years in the way money and other assets are donated to charity. Long gone are the days of having just one or two options to make a financial impact on the cause that you choose to support. Today, there are more ways than ever to donate to charity.
As executive wealth managers, we’ve identified a couple of standouts when it comes to the delivery method for getting a donation from an executive to the charity of their choice. Those methods include a donor-advised fund (DAF) and a private foundation. One of the changes we’ve seen has come in the rise of the donor-advised fund as an easy way to donate to your cause without jumping through too many hoops. In fact, the number of donor-advised funds is now three times that of private foundations in the United States.
That’s not to say that private foundations don’t have their benefits, as well. So rather than telling you that one is better than the other, let’s take a look at the donor-advised fund vs. private foundation by considering the benefits and drawbacks of each, with the goal of guiding you in choosing a method that best suits you and your charitable giving endeavors.
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The Pros and Cons of a Donor-Advised Fund vs. Private Foundation
When choosing between a donor-advised fund and a private foundation, one important consideration to make is the administration of your donation vehicle. How much time it will take to set up and manage? How much it will cost you?
A private foundation is classified as its own legal entity, which means it will require the help and cost of an attorney to establish. There will also be an ongoing operational cost and reporting expense.
In contrast, a donor-advised fund is established through your financial advisor and his or her financial trading platform. This can typically be established without cost, but you may have some ongoing asset management fees built into the fund or the investments themselves. In addition, you will typically receive an annual statement from your DAF free of charge. So, administratively, a DAF usually costs less than a private foundation.
When it comes to distributing money from either a donor-advised fund or a private foundation, each has its own set of stipulations. For example, a private foundation must distribute 5% of the current market value of its overall investments each year. On the flip side, donor-advised funds do not have any current restrictions on how much needs to be distributed in a given year. Obviously, the plan for either of these methods is to distribute funds to charity, so this may not matter much to some executives.
This is still an important consideration, however—especially if you are dealing with a smaller amount of investable assets, less than $5 million, for example. If you choose to utilize a DAF for your charitable giving, you won’t be required to donate money in a given year if your overall investments were down due to market volatility. If, however, you have a good asset allocation strategy and have a larger sum of investable assets, then donating 5% year after year through your private foundation might not be an issue for you.
When it comes to tax favorability between donor-advised funds vs. private foundations, there really isn’t one clear winner. Both can accept donations as tax deductions for the donor. However, a private foundation will typically limit the amount of your tax deduction for the donation to a maximum of 20-30% of your gross income. Meanwhile, a donor-advised fund tax deduction is usually a maximum of 30-50% of your gross income.
There are many variables that can affect the amount that can be treated as a tax-deductible donation, which is why it is important to consult with a CPA in addition to a trusted financial advisor when establishing a charitable giving plan. If you choose to donate stock rather than cash to either a DAF or private foundation, you will be able to use the fair market value of the stock as part of your tax-deductible charitable donation for that given year.
The filing required for a private foundation is considerably different than that required for a DAF. This can be a differentiator for executives choosing between these two vehicles.
If you prefer to remain anonymous and not publicize your name or the amount of your charitable donation, you might want to consider a donor-advised fund. A private foundation is required to file a form 990-PF every year with the IRS. This is a document that is made available to the public that lists all of the contributors and the amount that they chose to give during that particular year. Donor-advised funds, on the other hand, are not required to release donor names or the donation amount to the public. This is one reason we see more and more executives looking to the DAF when it comes to methods for making charitable donations.
Choosing a Donor-Advised Fund vs. Private Foundation
When it comes to charitable gift planning, one of the biggest hurdles that executives face is the stigma that you need to be a billionaire to effectively set up and execute a donor-advised fund or a private foundation. The truth is, there are options available for executives to pursue charitable goals at any monetary threshold.
No matter the method you choose to deliver your charitable donations, ensure you are making the most of the time and resources you’re putting toward a philanthropic endeavor by working with an expert. Due to the complex nature of donating money and other assets to charity, it is imperative that you work with an expert executive financial advisor who has experience helping top-level executives achieve their charitable goals, and ultimately, plan their legacy.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for charitable gift planning for executives, including establishing donor-advised funds and private foundations.
Are these strategies right for you? Reach out to the Carpenter Team today for a complimentary consultation to discuss your charitable giving goals. We can meet with you in person or online.
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