Are you thinking about changing the scale, impact or longevity of your charitable giving in 2020? Perhaps you have been considering forming a private foundation or creating a donor-advised fund to accomplish your philanthropic goals. Understanding the pros and cons of each giving strategy can help as you determine the best option to meet your family development and philanthropic goals.
The difference between a donor-advised fund and a private foundation.
- A donor-advised fund is a charitable vehicle administered by a public charity. Although the donor can advise as to the recipient of grants made by the public charity for a certain period of time, the fund is managed and administered by the charity.
- A private foundation is an independent, grant-making organization that is not affiliated with any other charitable entity. The donor and governing body for the foundation have complete control over investments and distribution decisions and are also responsible for the administration of the foundation.
Why should I consider a donor-advised fund?
- Quick, easy and inexpensive to create
- Fixed administrative fee (typically around 1%)
- No management or administration responsibilities, and no separate tax returns
- High contribution deductibility
- 60% of adjusted gross income for donations of cash (until 2026)
- 30% of adjusted gross income for other donations such as stock or real estate
- No minimum annual payout
- Few legal limitations on making grants
- Pooling of the charity’s assets provides access to investment managers or vehicles that may not be available or efficient for many foundations
Why should I consider a private foundation?
- Opportunity for whole family involvement – committee and board positions provide excellent training for the next generation in investing, grant-making, taxes, compliance and entity governance
- Potential to create shared giving interests and goals for the family
- Helps pass family values and legacy to the next generation as they watch family decision making in action
- No limit on duration of family member involvement
- Full control over investments (strategies, managers, etc.)
- Flexibility for unusual grants or multi-year commitments
Disadvantages of a donor-advised fund.
- Limited family involvement
- Time frame for family involvement is limited to one or possibly two generations
- Administrative fee may exceed actual administration costs for funds larger than $1M
- Little flexibility to make multi-year support commitments
- No control over investment performance or remedy for sub-standard performance
Disadvantages of a private foundation.
- Legal and accounting fees to create the entity and qualify with the IRS
- Responsible for grant processing and administration, including tax and state reporting
- Requires a separate tax return each year
- Lower contribution deductibility limits
- 30% of adjusted gross income for cash
- 20% of adjusted gross income for donations of appreciated, publicly traded stock, valued at fair market value
- 20% of adjusted gross income for donations of real estate, closely held stock and bonds, valued at cost basis
- 5% of net investment assets must be distributed through grants to public charities (and other approved recipients) annually
- Subject to a 1.39% excise tax on net investment income
- Foundation and managers subject to strict rules and penalties regarding self-dealing, excess business holdings and investment restrictions
- Potentially limited access to investment managers or products
- Some limits on making grants
This is by no means a comprehensive list of advantages and disadvantage for the two options, but rather a high-level overview to help you start thinking about your choices. Of course, each family’s situation is different, so contact your Warner attorney or Jennifer Remondino (jremondino@wnj.com or 616.396.3243) to discuss how these options are appropriate for your family’s situation and philanthropic goals.
