Private Foundations vs. Donor Advised Funds: How to Choose for Investments
A few days ago, I attended the Candlelight Concert at Segerstrom Performing Arts Center. What a tremendously rewarding experience! This elegant event raised over $2 million to support the organization’s artistic and educational activities and programming. The foundation has done such a good job, providing 300 days of educational performances and workshops, teacher professional development, and 3,000 free or low-cost educational performances and workshops. I am so proud to have been among the 500 guests. It was gratifying to see the Who’s Who of Orange County attending in support.
Making Your Gift
After attending the event, it gave me pause and I wanted to reach out with some (hopefully) valuable information regarding charitable intent. I can’t tell you how many times I am asked to opine for our family office clients on the subject of using a private foundation, or, whether a donor advised fund may be the better route to choose.
In the past, many individuals focused on private foundations as a way to donate wealth and support charitable causes. Unfortunately, with the ever-increasing focus of the IRS on the mechanics and intent when setting up and operating a Private Foundation, many of our clients are now pursuing charitable goals via the Donor Advised Fund avenue. The decision is left to you to make, but my objective with the following discussion is to offer assistance and clarification, that should serve to assist you, your financial advisor, and accountant in enabling you to determine what will work best for you.
Cost Considerations: Typically, private foundations will cost considerably more to set up with legal costs and the need to have appropriate tax counsel as well, and more to maintain, and can be especially expensive to donations of less than $1 million. This is partially due to the requirement that private foundations must donate at least 5% in assets each yea. When utilizing a donor advised fund, this requirement will not exist. Annual administration costs, including testing and tax filings, for private foundations tend to be quite a bit more expensive as well. Donor advised holders can write off as much 50% (50% of adjusted gross income) of their cash donations and up to 30% of income for securities. Private foundations are limited to 30% for cash and 20% in securities.
Control Considerations: The amount of direction and control you wish to have in directing funds to the appropriate charitable organization(s) also plays a role in the decision-making. In a private foundation, you maintain more control and play an advisory role in most decisions. With donor advised funds, you are only making recommendations to the fund, although it would be a rarity if they were ignored.
Privacy Matters: Another key area of consideration for high net worth families is privacy. In the Internet-focused world we live in, a lot of assumed private information is available online. This could prove to be especially troubling for a private foundation. When using donor advised funds, it is quite possible to protect your identity, and that may be an important consideration for you.
Which Charitable strategy is the right one for you? A good advisor, or your family office relationship should be able to assist you to make the appropriate, in fact custom, decision. You will need to consider; the size of your donation, your concerns regarding privacy or public information, your need to have ongoing input and control over the application of your donations as well as the future earnings resulting from the donated funds, and the types of charities and the level of sophistication of their staffs. The larger your donation is, the more likely you will be led to consider creating a private foundation. But we are seeing many more of todays charitably minded wealthy investors forgoing the costs and complexity of the Private Foundation route and choosing instead to utilize the benefits of a donor advised funds strategy.
