The global pandemic provided a greater appreciation for (and participation in) philanthropy. During the past two years, both new and longtime donors have risen to the occasion to seek ways to help others in this collective time of great need.
During 2020, the U.S. saw a 3.8% increase in overall charitable giving. Early indications are that overall charitable giving in 2021 may have far eclipsed this number, jumping 8.9%, according to a report from Blackbaud.
New givers or those looking to expand their giving may be considering strategies to add structure to their philanthropy and grow the impact of their giving. What’s more, the United States is experiencing one of the most extensive wealth transfers in its history, as those in my parents’ generation leave money to children (or not) and to their favorite charities.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Faced with how and to whom they should leave their money, donors may naturally wonder what kind of charitable vehicle they should use to advance their goals and legacy. Often this is a choice between two popular strategies: Start a family foundation or open a donor-advised fund (DAF).
The choice between a foundation or DAF comes down to how donors value the unique benefits of each option. Which tool is more likely to help someone achieve his or her philanthropic goals and cement their charitable legacy?
Let’s examine some of the benefits donors might look for as they consider the trade-offs between the two charitable-giving vehicles.
Privacy
A donor-advised fund offers donors any level of privacy they wish to have from the receiving organization. This level of privacy can also change per grant, enabling the donor flexibility on when to be private or not. A DAF provider lists its grantees, but there is no disclosure from which account that grant was requested and approved. With the foundation, each gift is listed on the publicly available Internal Revenue Service (IRS) Form 990 and is tied directly to the foundation’s name – and board of directors.
The bottom line: If you want to avoid prying eyes on your giving – whatever your reason – go with a DAF.
Control
A donor or family acts as a board member for a foundation, holding complete control over investments, grant decisions, selection of additional board members and staff. With a DAF, on the other hand, your gift is an irrevocable gift to the fund provider – i.e., you cede control when you make the gift, retaining only advisory privileges. The DAF provider can – and for requests outside its boundaries will – say no to gifts.
The bottom line: For donors who prize control over all else, the foundation is the way to go.
Tax Benefits
Donors can deduct up to 60% of their AGI for cash gifts into a DAF – the same benefit as direct giving to an operating public charity. Giving to a private foundation allows only a 30% deduction. One can deduct 30% of AGI for stock gifts to a DAF. For foundation giving, that same deduction is only 20%. Foundations may face excise taxes on investment gains, not so with DAFs.
The bottom line: DAFs, then, are generally the most tax-advantaged structure.
Scope of Giving
A DAF only allows a donor to give to 501(c)(3) organizations, meaning grants can only support non-profit organizations recognized by the IRS. That is generally true for foundations too. Giving to individuals is possible through a scholarship. Foundations must give away 5% of their assets each year, while DAFs lack a legally required payout. Foundations can sponsor events or do things where some nominal family benefits result. Personal benefits related to DAF gifts are prohibited.
The bottom line: It’s a close call, but foundations have more flexibility in a couple important ways.
Family Involvement
Involving family members is possible with both tools. A foundation may offer more formal involvement via board seats or even employment. With a DAF, families may include children in decision-making or even set up subsidiary accounts to help them develop their own charitable skills.
The bottom line: It’s a toss-up.
Financial Requirements
The initial amount to open a DAF account typically ranges from $1,000 to $25,000. At DonorsTrust, for example, our initial contribution is $10,000 (or $1,000 for givers under the age of 40). A simple application is the only paperwork required. Foundations, in theory, can open at any amount, though financial experts generally suggest a minimum of $5 million to $15 million to make it worthwhile, given the startup costs, attorney fees, etc.
The bottom line: For anyone other than the truly wealthy, donor-advised funds are the obvious option.
Staff
Want a robust network of program officers? A private foundation is likely the best choice. However, finding a mission-driven or single-purpose donor-advised fund that shares your values and interests may provide you with a close approximation. Leverage the staff at the DAF provider to offer recommendations.
The bottom line: A tie.
Life of the Fund
Generally, both foundations and DAF accounts can continue perpetually. Carefully consider if this is what you want, however. Will future generations share the same commitment to your charitable priorities that you do? It may be better to establish a sunset provision, which one can do with either a DAF or private foundation.
The bottom line: Another tie.
The vehicle that best suits your needs will depend on your individual circumstances and how you weigh the trade-offs mentioned above. Do you place a premium on privacy? A DAF is likely the best bet. Is maintaining as much control as possible important to you? Then a private foundation may be the better choice.
When deciding on a charitable vehicle, the best answer is not necessarily one or the other. In fact, it could be “both.” It is not uncommon for donors to leverage the power of both vehicles, using each for different aspects of one’s giving. You are the donor, so the right approach is the one that best serves your philanthropic goals.
-
Is Your Social Security Earnings Record Wrong? Here's How to Fix ItYour Social Security benefits are based on your Social Security earnings record. It's important to review your records to avoid having your benefits reduced.
-
Stock Market Today: Markets Discount Another U.S. DowngradeAfter Friday's closing bell, Moody's followed Standard & Poor's and Fitch and cut its rating on U.S. government debt.
-
Donating Complex Assets Doesn't Have to Be ComplicatedIf you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Think a Repeal of the Estate Tax Wouldn't Affect You? WrongThe wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
In Your 50s? We Need to Talk About Long-Term CareMany people don't like thinking about long-term care, but most people will need it. This financial professional recommends planning for these costs as early as possible to avoid stress later.
-
Social Security Pop Quiz: Are You Among the 89% of Americans Who'd Fail?Shockingly few people have any clue what their Social Security benefits could be. This financial adviser notes it's essential to understand that info and when it might be best to access your benefits.
-
Such Attractive Yields in High-Grade Munis Are Rare and May Not Last LongAccording to this munis expert, the last time munis were this cheap was a brief period in 2023. If you kicked yourself for missing out then, you have a second chance now.
-
Financial Analyst Sees a Bright Present for Municipal Bond InvestorsHigh-tax-bracket investors have an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.
-
I'm an Insurance Pro: How Not to Get Dumped by Your Insurance AgentYour insurance agent or broker might show you the door if you do any of these five things. Being a good customer is about more than paying your bill on time.
-
Two Estate Planning Issues You Should Never OverlookThis estate planning attorney explains why proper asset titling and beneficiary designations make a big difference when it's time to transfer your wealth.
