Choosing the right vehicle for your charitable giving is a crucial step toward establishing your philanthropic legacy.
One of the most rewarding aspects of our work as advisors is helping clients align their giving with their philanthropic goals and values. Whether it’s a nonprofit looking to build their endowment to serve those in need, an entrepreneur seeking to invest in tandem with their values, or a family wanting to dedicate a portion of their wealth to charitable endeavors, it is a privilege to partner with clients to help them structure their giving in a way that may improve alignment with their mission.
For those who wish to establish a philanthropic legacy, the conversation about their plans often includes a wide variety of topics including: developing a financially sound and tax-efficient gifting strategy, crafting their specific philanthropic mission, finding organizations to support that are aligned with their mission, and determining the right giving vehicle that can help maximize their impact.
Paul Sullivan, the popular New York Times financial writer, once wrote:
“After all, how you help favored causes could be as much a part of your legacy as which groups you support.”
We have certainly found this to be the case with our clients.
In considering the best philanthropic structures, we most often consider either donor-advised funds or private foundations. Each offers its own advantages and disadvantages, with a donor-advised fund offering greater support and operational flexibility, and a private foundation offering a greater amount of control. The ultimate decision of which vehicle to use depends entirely on the donor’s unique situation, preferences, and goals.
Donor Advised Fund Accounts
A donor-advised fund (DAF) is a charitable account established with an entity that is considered a public charity or DAF charitable organization, with the day-to-day operational issues administered by that organization. The main benefit is the simplicity of administration. DAFs are a good choice for those who are dedicated to a specific cause (or set of causes) but are not interested in or capable of taking on a heavy operational, reporting, or organizational burden.
The structure and ease of opening a DAF also allows you to decouple or separate the tax deduction benefits of a charitable donation from the decision and timing of when and how to support a specific charity. Once the DAF is set up and funded, you receive an immediate tax benefit as the contribution to your DAF qualifies as an actual donation to a qualified charity. The decision of which charity to ultimately support, though, can be made at a later time. This flexibility can benefit those who face a financial event in the current year and wish to offset a taxable gain with a charitable donation, but are not ready to make decisions about how to disburse those funds.
DAFs are also a good tool for those who want to remain anonymous in their charitable giving, as DAFs are private accounts held within a DAF organization and offer flexibility on the information provided with grants to charities. When the charitable sponsor administers a grant on behalf of the donor, the charity is legally distributing its own assets, meaning the donor can choose to remain anonymous or to be recognized publicly. In comparison, private foundations must file annual reports that disclose members of their board, grant recipients, and other information that prevents them from remaining anonymous.
Along with ease of administration and privacy benefits, DAFs include low required fund minimums and high limits on the deductibility of contributions. Cash donations to DAFs are deductible up to 50% of your adjusted gross income (AGI), whereas stock and property gifts are deductible up to 30% of your AGI. Compare these benefits to the operating costs and administrative requirements that private foundations require, and it’s clear why DAFs have quickly gained popularity over time.
However, it’s important to note that contributions to a DAF, from a legal standpoint, are an actual charitable donation and thus relinquish legal control over those assets. Donors are able to make recommendations to the DAF charitable organization that administers the DAF funds but lack the legal right to actually direct to whom grants are made and how assets are invested. In our experience, most grant recommendations are accepted by the DAF organization, though there are restrictions in recommending a charitable grant to an individual, or receiving any goods or services in exchange for the grant (like a ticket to a gala).
Additionally, most DAF charitable organizations offer several investment options, including the option to have an investment advisor of your choice manage the funds if your DAF is above a certain value. Further considerations are included in the table that follows.
Private Foundations
Private foundations may be appropriate for clients who desire a high degree of control over the disposition of their funds, and who have the desire and capability to play an active role in the management and administration of their contributed assets. Private foundations are also the choice for clients who seek to ensure their legacy is passed on to future generations, as private foundations offer unlimited succession for control of the foundation, whereas DAFs may have limitations on successions.
A private foundation is a tax-exempt charity that is founded and controlled by an individual or a family and must be approved by the IRS as a tax-exempt organization. Although the financial and organizational burdens associated with creating and managing a private foundation can be substantial and the tax deduction limits are lower than DAF limits, private foundations provide donors complete, unmitigated control of the management, distribution, and use of their contributed assets. For many, this additional administrative work is well worth the investment. As of recent years, more than 90,000 private foundations in the U.S. hold more than $1.5 trillion in assets.
In addition to the substantial responsibilities that accompany establishing and running private foundations, including filing annual tax returns and disclosures, they do not offer the same tax deductibility limits as DAF organizations—with a 20% deduction limit of AGI for contributions of stock and property and a 30% limit of AGI for cash contributions. Private foundations are also required to distribute 5% of their total assets annually and pay a variety of annual operating costs.
The table below provides a visual comparison of the characteristics of private foundations and DAF charitable accounts.
| Donor-Advised Funds | Private Foundations | |
| Start-Up/Shut-Down Costs | None | Legal and accounting fees, which can be considerable |
| Start-Up Time | Immediate | Can take several weeks, even months |
| Ongoing Administrative and Management Fees | 0.85% or less of the sponsoring charity, depending on the charity size of the DAF plus investment management fees | Can be in the range of 250-400 basis points (2.5% to 4% per year). Operating costs for administration, record keeping, tax filing and grant administration. Outsourcing options exist that may lower the cost for smaller foundations. |
| Tax Deduction Limits: Gifts of Cash | 60% of adjusted gross income | 30% of adjusted gross income |
| Tax Deduction Limits: Gifts of Stock of Real Property | 30% of adjusted gross income | 20% of adjusted gross income |
| Valuation of Gifts of Long-Term Property | Fair market value | Fair market value for publicly traded stock, cost basis for all other gifts, including gifts of closely held stock or real property |
| Minimum Annual Distribution | None | Must expend 5% of net asset value annually, regardless of how much the assets earn |
| Excise Tax | None | Excise tax on 1.39% of net investment income annually |
| Privacy | Names of individual donors can be kept confidential if desired, and grants can be made anonymously | Must file detailed and public tax returns on grants, investment fees, trustee names, staff salaries, etc. |
| Administrative Responsibilities | Recommend grants to favorite charitable causes | Manage assets, keep records, select charities, administer grants, file state and federal tax returns, maintain board minutes, etc. |
| Succession Planning | Can be limited | Unlimited |
In Summary
Choosing the right philanthropic vehicle is just one step where we help clients identify and implement their charitable giving goals and to make a difference. Ultimately, we focus on helping clients evaluate which approach may best align with their circumstances and objectives, goals, tax situations, and desire to stay actively involved in charitable activity, as all of these factors will help determine if a DAF charitable organization or a private foundation is a good choice. With either solution, we believe these structures can provide clients with a framework to pursue their philanthropic goals and legacy.
Important Disclosure: This content is for informational purposes only and is not personalized investment, tax, or legal advice. Examples are for illustration and do not represent a recommendation. Tax treatment depends on individual circumstances and may change; consult your legal and tax advisors before making decisions. All investments involve risk, including loss of principal. Past performance or stated benefits are not guarantees of future results. Litman Gregory Wealth Management, LLC (“LGWM”) is an SEC-registered investment adviser; registration does not imply a certain level of skill or training. For more information, see our Form ADV at www.adviserinfo.sec.gov.