Donor Advised Funds vs. Private Foundations - Many Donors Choose DAFs in the After Math of 2009's Financial Meltdown


Click on the image above to see a comparison of philanthropic vehicles done by the National Philanthropic Trust.

An intergenerational passing of wealth or the profitable sale of property or a business often raises the question to philanthropically inclined people – Is a private foundation the best way to steward charitable dollars or would a transfer of assets into a donor advised fund be a wiser decision?

The financial meltdown in 2009, in which many foundations experienced a significant decline in the value of their assets as well as heightened Internal Revenue Service of all charitable tax incentives, including private foundations, has caused donors to re-think decisions to create private foundations. Many are in fact converting to donor advised funds or supporting organizations that can be set-up very easily at a community foundation.

In thinking about which charitable vehicle to create to support current and future giving, there are three important factors to consider: control, cost and privacy.

Control

Having direction over where grants go, and how funds are distributed and invested, are key factors in determining whether or not to set-up a private foundation.

A private foundation provides more control than a donor advised fund. With an advised fund, the donor is technically only making recommendations to a sponsoring organization (like a community foundation) that is managing and distributing the money. In reality, donors’ recommendations are rarely ignored, but there are limitations. For example, donors may not make pledge agreements in a binding way from a donor advised fund because they are not technically controlling that fund. Nor can grants to individuals such as students or specific victims of disasters be made.

From an investment standpoint, private foundation donors can control how the organizations' assets are invested whereas donor advised funds are invested and managed by the sponsoring organization. Of course, the ultimate control over any foundation is the Internal Revenue Service who is concerned about donors using foundations as private slush funds. Donors need to be aware that self-dealing is not allowed.

Cost

From a practical point of view, many advisers agree that there is a size consideration in determining which type of philanthropic vehicle to establish, since private foundations cost more to maintain. There are no hard and fast rules to determine when a foundation is more cost-effective. The Council on Foundations recommends at least $1 million in assets, while some advisors recommend a minimum of $10 million.

There are several reasons for this. To begin with, a private foundation needs to give away at least 5% of its assets each year; a donor advised fund does not. A foundation also needs to earn enough on its investments to cover administrative costs, which, depending on the size and activity, can approach up to 8% a year. Donor advised funds utilize the record keeping and financial services of the sponsoring organization to do record keeping and tax filings. Setting up a private foundation often requires legal and accounting expertise, where a donor advised fund is simple to set-up once decisions about fund name, investment options, and successor advisors are made. Additionally, private foundations pay an annual excise tax to the government of up to 2% of their assets.

For some donors, a determinant issue is the size of the tax deduction. Donor advised fundholders can write off 50% for cash donations and 30% for securities as opposed to a private foundation, where the deduction is 30% for cash and 20% for securities.

Privacy

In the online world, key facts and documents about foundations are readily available on the Internet. Charity Navigator, GuideStar, and other databases publish I.R.S. filings, annual reports, and even private foundations' board members. In addition, anyone can search certain criteria, including grant recipients. Donor advised funds can be set-up to protect the donor’s anonymity.

Best of Both Worlds

In some cases a “one or the other” choice is not the best when it comes to selecting the most appropriate charitable vehicle. Several donors at the Santa Barbara Foundation have found that utilizing both a private foundation and an advised fund offers the flexibility they need to carry out their philanthropic passions. Here are a few examples:

  • Because the Santa Barbara Foundation is a public charity (501(c)(3)), private foundations may make contributions into an advised fund (to make their 5% distribution requirement) and then take their time determining when and to whom to make grants. A very well known foundation made a substantial gift to a fund at the Santa Barbara Foundation late last year when it became apparent that the timing was not right for them to make their required distribution.
  • A donor with a private foundation is considering setting up a charitable lead trust where the earnings of the trust go into a donor advised fund to support a specific cause. Other like minded donors can then make contributions to the fund. Upon their passing, the remainder of the trust goes back to the private foundation where the donor's heirs can continue the stewardship.
  • A well known community philanthropist has a private foundation and two advised funds. The donor wanted to set-up advised funds in order to connect with the expertise of the Santa Barbara Foundation’s staff and management around community issues.

Having all the facts, the right advisors, and the expertise of the Santa Barbara Foundation all work together to assist donors in creating the charitable giving vehicle that is right for them and for their family. With decades of experience about giving of all kinds, the foundation staff is ready, willing and able to connect with donors to make their philanthropic dreams a reality!

Click here to find out more about opening a donor advised fund or call Jan Campbell, chief philanthropic officer, or Lynette Muscio, director of development, at (805) 963-1873.

Santa Barbara Foundation | 1111 Chapala Street, Suite 200, Santa Barbara, CA 93101
(805) 963-1873 | info@sbfoundation.org