Private Foundation or Donor-Advised Fund?

For many reasons, the private foundation has been the preferred charitable giving vehicle of the wealthy.  Among these reasons are the ability to: (i) retain control by choosing the board, (ii) compensate family members for their services, (iii) retain control over grantmaking; and (iv) retain control over investment decisions.

However, as the popularity of donor-advised funds (DAF) has risen, many donors are evaluating whether a DAF is a better solution.  How do you know if it is time to start the conversation of transition from a private foundation to a DAF?

Common reasons that support the decision to transfer a private foundation’s assets to a DAF include:

• • Reducing administrative burden;
  • Reducing overall expense; and
  • Increased privacy and anonymity

Reduce Administrative Burden

Evaluating administrative burden is a function of money, time and interest.  The difficulty and expense of properly vetting charities to ensure they are qualified grant recipients loses its luster over time.  Private foundations must distribute a minimum of 5 percent of value for charitable purposes every year.  As children leave home, many families find it increasingly difficult for the foundation board to gather for meetings.  Moreover, as children immerse themselves into new communities and causes, finding common ground on grants that fit within the original mission of the foundation can become difficult and create family friction.

Reduce Overall Expense

Private foundations incur a number of ongoing expenses including:

• • Maintaining accounting records;
  • Preparing and filing IRS Form 990-PF and any related state forms;
  • Preparing and filing regulatory reports with the Secretary of State and/or Attorney General of the state where the foundation is doing business;
  • Paying the excise tax; and
  • Cost of educating the board and officers of their compliance responsibilities.

Increase Privacy and Anonymity

The private foundation’s annual tax return must be available for public inspection and is easily accessible on several websites, such as www.guidestar.org.   Among the required disclosures on the annual tax return are the identity of board members and their compensation (if any), the identity of any donors and their contributions, the identity of grant recipients and their grant amount, and the value of the private foundation and the composition of the investment portfolio.  In addition, it is nearly impossible for a private foundation to make an anonymous grant, unless it filters the grant through a DAF.

What can a DAF do that a Private Foundation can’t?

• • Eliminate administrative burden on the family so they can focus on effective grantmaking
  • Lower costs since there are no taxes to file or regulatory reports
  • Provide complete anonymity, if desired
  • No minimum distribution requirement