Choosing Between a Private Foundation vs. Donor-Advised Fund

With the Tax Cuts and Jobs Act, you’ve read about how charitable planning can provide higher tax savings. But you may be asking yourself if you should set up a private foundation or donor-advised fund. So, which one is the better option? It really depends on a multitude of issues, and we’ll explore the reasons why you may prefer one over the other.

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In 2019, the standard deduction is $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly as well as surviving spouses. For a married couple who file jointly, in order to even consider charitable donation, it should be a sizable one that exceeds the standard deduction.

What is a Private Foundation?

A private foundation is a section 501(c)(3) nonprofit organization that isn’t a public charity. It can be set up by an individual, family or corporation and typically involves a large initial donation to get it started. For the most part, donations come primarily from individuals or businesses and are managed by the trustees of the foundation.

There are two types of private foundations: 1.) operating; and 2.) non-operating. An operating private foundation must spend at least 85% of its adjusted net income or its minimum investment return, whichever is less, on its activities. Therefore, most private foundations are non-operating, which means these foundations make grants out of their own assets to other charities instead of their own activities.

What is a Donor-Advised Fund (DAF)?

A donor-advised fund is a separately managed charitable investment account that is operated by a section 501(c)(3) organization, also known as a sponsor or sponsoring organization. You can contribute cash, appreciated securities, real estate and other property and receive an immediate tax deduction. Those assets grow tax-free, and in turn you can make recommendations to any IRS qualified charity, although the sponsoring organization makes the final decision.

Before choosing between a private foundation or donor-advised fund, make sure you distinguish the following three areas between each:

1. Tax considerations

It’s important to know the tax deduction limits for cash, appreciated securities — such as stocks, bonds and mutual funds — real estate and other privately held assets when making a donation. Other aspects include valuation of gifts, and excise taxes on investment income.