Key takeaways
With donor-advised funds, you provide a donation to an existing 501(c)(3) organization. You don’t have control over how the organization uses the donation. The donation is tax-deductible in the year it’s made.
A private foundation is a 501(c)(3) organization that you establish and fund with an initial donation. It’s managed by a trustee or board of directors and comes with many administrative requirements, including filing annual tax returns. You’ll have complete control over your donations.
Your giving style and objectives can help you determine whether one or both charitable vehicles are best suited for you and your family.
If you’re thinking about being more strategic with your yearly charitable donations and turning your giving into a legacy, the first question you might consider is “how.” Two of the more common ways to create a charitable legacy are donor-advised funds and private foundations.
The right choice for you likely depends on what you’re hoping to achieve. “I always start by asking clients what their goals are,” says Dan Harris, national director of philanthropic services at U.S. Bank. “Having a goal in mind can make a big difference as you determine whether a donor-advised fund or private foundation is better equipped to help you achieve it.”
“Having a goal in mind can make a big difference as you determine whether a donor-advised fund or private foundation is better equipped to help you achieve it.”
Dan Harris, senior vice president and national director of Philanthropic Services at U.S. Bank
A donor-advised fund is an easy, tax-efficient way to make a charitable impact. It’s also been the fastest growing type of charitable vehicle for more than a decade.
Setting up a donor-advised fund is as simple as finding an existing 501(c)(3) organization with which to partner. Also called a sponsor or sponsoring organization, it could be a community foundation, a university, or even a national charity created specifically to support donor-advised funds.
Your initial contribution may be as little as $5,000 and can be a gift of cash, publicly-traded securities or other types of assets that have appreciated in value. Since these gifts are considered irrevocable, the sponsoring organization owns them and sets the rules for how they’re donated. While donors can influence and advise on charitable investments, you won’t have the ultimate say.
“Some types of giving don’t work well with donor-advised funds,” Harris says. “For instance, if you want to create a scholarship program and you want complete control to decide on scholarship recipients.” Donor-advised funds don’t allow you such control.
Contributions into a donor-advised fund are immediately tax-deductible in the year they’re made. The sponsoring organization handles all tax filings and generally doesn’t provide details on how your money is spent. This can be a positive if you want to keep your giving private.
A private foundation is a 501(c)(3) organization established by an individual or family. It’s funded with an initial gift of assets and managed by trustees or a board of directors. Because it’s an independent legal entity, a private foundation allows you more control over your donations but may also require a larger initial investment to create.
Private foundations also come with a variety of administration requirements. These include creating a formal board of directors, holding meetings, tracking investments, making grants, and filing annual tax returns.
This level of formality can be very attractive for some families, Harris says. A family foundation may help to pass on a tradition of charitable giving through the generations, to share philanthropic values, and to keep a family together even as the generations spread across the country or the globe. Family foundations are often established to exist in perpetuity, which can create a legacy to honor the ideals of the donors.
Read more about the benefits of setting up a private family foundation.
Your giving style and philanthropic objectives can help guide your decision for establishing a private foundation or donor advised fund or both. If you want to create a specific scholarship or be targeted with your giving, a foundation offers more flexibility. If you have a general area you want to support — and you trust in a sponsor entity — a fund that allows you to advise on donations could be best for you.
Donor-advised funds:
Private foundations:
In addition to what you hope to achieve, you may want to consider the tax implications. Both donor-advised funds and private foundations offer tax deductions, but the significance of these deductions varies. Harris points out that these benefits are often not the deciding factor for donors. Read a guide to tax deductions on charitable donations for more details.
Consider working with your attorney and other trusted advisors to determine which option is best suited for your family, your goals and your objectives.
Learn about charitable giving services from U.S. Bank.
Qualified charitable distributions from IRAs and gifts of appreciated stocks offer prime opportunities to enhance your giving and potentially take advantage of greater tax savings.
Charitable donations can help your wealth make a greater impact – and by maximizing tax deductions for donations, you can help your money go even further.
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