Should You Have a Donor-Advised Fund or a Private Foundation?

October 20, 2014

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The season of giving is fast approaching. November and December are the months when you find yourself opening your wallet more frequently to support your favorite, deserving charity, and snag that year-end deduction! When was the last time you considered which method of charitable gifting works for you?

There are a variety of ways to financially support charities: from an outright gift of cash to sophisticated charitable trusts, such as a Donor-Advised Fund or a Private Foundation. Fine-tuning your specific giving objective before the holidays may help reveal the best vehicle for your charitable donations. If the charity you support needs immediate funds to provide services, then cash makes sense. However, if you are looking to provide sustained gifting over a long period, most compare Donor-Advised Funds (DAF) and private foundations.

A DAF is a contractual arrangement with a sponsoring charity through which donors make irrevocable charitable contributions typically through a community based non-profit organization. As the name would imply, the donors make a gift to one entity, which in turn may go to several charities based on the donor’s advice. Ultimately, both the donors and their designees (foundation board or committee) retain the right to recommend grants to qualifying charities in amounts and frequencies of their choosing. Private foundations may be organized as a non-profit organization or as a charitable trust to allow donors to make gifts to an unlimited number of charities over time and may involve family members in the decision-making process.

So which process is right for you? In both cases, gifts made are tax deductible. The deductions are higher in a DAF, though. DAF income deductions for cash donations may be up to 50% of adjusted gross income (AGI) and up to 30% for non-cash. Appreciated assets such as stocks are limited to 30% AGI for cash donations and 20% of appreciated assets with private foundation gifts. Many communities also have a pre-determined design for DAFs, while private foundations require the donor to determine the design of the foundation, which may result in substantial legal fees.

One of the primary reasons a DAF might be preferable to a private foundation is that this option allows you to choose to make tax deductible gifts but requires no immediate distributions. By contrast, private foundations are required to make a 5% annual distribution. Another important benefit to the DAF is that the taxpayers can lock in the deduction even if they have not identified the intended beneficiaries. Money can accumulate for large gifts later or you can skip a year if the stock market does not cooperate.

However, private foundations are not without appeal. Distributing that annual 5% may have some benefits, for instance supporting the chosen charity, which may be facing immediate financial needs. Private foundations also allow the donor and her family to retain complete control over the decision making process regarding select beneficiaries. She may also have the ability to compensate individuals to manage the operation and administration of the foundation. A notable distinction is that in a private foundation, you have the final say over where your donations are going.

There are many pros and cons to investigate before establishing either a Donor-Advised Fund or a private foundation, but it ultimately depends on what best suits your charitable objectives and the objectives of your family in this season to be jolly!

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither FSC Securities Corporation, nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

Deborah Stavis is a member of the DailyWorth Connect program. Read more about the program here.

Securities offered through FSC Securities Corporation, member FINRA/SIPC. Advisory and insurance services offered through Stavis & Cohen Financial, a registered investment advisor not affiliated with FSC Securities Corporation.

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