Private foundations vs. donor advised funds

Financial Planning

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. Dan Harris, national director of philanthropic services at U.S. Bank, says he always starts by asking clients what their goals are. 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.

What is a donor-advised fund?

A donor-advised fund is an easy, tax-efficient way to make a charitable impact and it’s 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.

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.

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.

What is a private foundation?

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 may 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 how private foundations can unify intergenerational families.

Weighing your choice between a private foundation and donor-advised fund

Your giving style and philanthropic objectives can help guide your decision for establishing a private foundation or donor advised fund. 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:

  • Simple and easy to set up
  • Have relatively few rules
  • Allow most donors to accomplish their goals

Private foundations:

  • Takes time and money to set up
  • Have several administrative requirements
  • Donors control grants to qualified charitable organizations

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 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 more about charitable giving services from U.S. Bank.