24 Apr Weighing the options: Private foundation or donor-advised fund?
When you’re working on the charitable components of your estate or financial plan, one of the first areas you’ll likely explore is the structure. Certainly you are familiar with both private foundations and donor-advised funds as useful charitable giving tools. Before you jump into one or the other, it’s important to review the similarities and differences between the two so that you can best achieve your goals.
To help you evaluate your options, here are three common myths about the differences between private foundations and donor-advised funds.
Myth #1: Donor-advised funds are all the same and only private foundations can be customized
Private foundations will always differ from donor-advised funds in important ways, not only because of their status as separate legal entities and the deductibility rules for gifts to these entities, but also because of the opportunities to customize governance. But it is a mistake to assume that a donor-advised fund is a cookie-cutter vehicle. Indeed, “donor-advised fund” is simply a term used to describe the structure of a fund and its relationship with a sponsoring organization such as The McPherson County Community Foundation. The donor-advised fund vehicle itself is extremely flexible. Here’s why:
– Donor-advised funds are popular because they allow you to make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. Then, you can recommend gifts to favorite charities from the fund when the time is right.
– A donor-advised fund at MCCF is frequently a more effective choice than a donor-advised fund offered through a financial institution. That’s because at The McPherson County Community Foundation, you’re part of a community of giving and have opportunities to collaborate with other donors who share similar interests. Plus, MCCF is local and deeply knowledgeable about the needs of our region and the nonprofits meeting those needs.
– The McPherson County Community Foundation can work with you to build a charitable giving plan that extends for multiple future generations. That’s because the team at MCCF supports you in strategic grantmaking, family philanthropy, and opportunities to learn about local issues and nonprofits making a difference.
Myth #2: Deciding whether to establish a donor-advised fund or a private foundation mostly depends on size
The size of a donor-advised fund, like the size of a private foundation, is unlimited. The United States’ largest private foundations are valued well into the billions of dollars. Information about private foundations, ironically, is not so private. The Internal Revenue Service provides public access to private foundations’ Form 990 tax returns. That is not the case for individual donor-advised funds.
Similarly, donor-advised funds are not subject to an upper limit. Although information on the asset size of individual donor-advised funds is not publicly available, anecdotal evidence suggests that some donor-advised funds’ assets may total in the billions.
Indeed, a donor-advised fund of any size can be an effective alternative to a private foundation, thanks to fewer expenses to establish and maintain, maximum tax benefits (higher deductibility limitations and fair market valuation for contributing hard-to-value assets), no excise taxes, and confidentiality (including the ability to grant anonymously to charities).
The takeaway here is that the decision of whether to establish a donor-advised fund or a private foundation—or both—is much less about size than it is about the objectives you are trying to achieve.
Myth #3: Donor-advised funds and private foundations are mutually exclusive
Make sure you’re aware of the benefits of using both a donor-advised fund and a private foundation to accomplish your charitable goals. For example:
– Donor-advised funds can help meet the need for anonymity in certain grants, which is typically difficult using a private foundation alone.
– A donor-advised fund can receive a gift of highly appreciated, nonmarketable assets such as closely held stock and real estate, and benefit from favorable tax deduction rules not available for gifts to a private foundation.
– An integrated donor-advised fund and private foundation approach can help you balance and diversify investment and distribution strategies to ensure that giving to important causes remains steady even in market downturns.
Some private foundations are even considering transferring their assets to a donor-advised fund at The McPherson County Community Foundation to carry on the foundation’s mission. Terminating a private foundation and consolidating giving through a donor-advised fund is sometimes the best alternative when the day-to-day management and administration of the private foundation has become more time-consuming than expected and is taking time and focus away from nonprofits, the community, and making grants.
Along these lines, some families find that the tax rules related to investments, distributions, and “self-dealing” have become harder to navigate and are perhaps even preventing the family from maximizing the tax benefits of charitable giving. Finally, the administrative load of managing a private foundation sometimes becomes overwhelming—especially if the family members who handled these functions initially have retired, passed away, or simply become busy with other commitments.
The bottom line: We encourage you to reach out to the team at The McPherson County Community Foundation anytime you are evaluating how to structure a charitable giving plan to achieve both your charitable and financial goals. Our team is here to help. In many cases, MCCF’s tools and services are a great fit for your needs. If not, we’ll point you in the right direction.