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Donor-Advised Fund, Private Foundation or Both?

By
September 27, 2018

Member for

1 year 8 months
Submitted by satya.billa on Thu, 09/27/2018 - 16:55

Earlier this year, Mary Jovanovich, a senior manager at Schwab Charitable™, was asked to review the giving goals of a client with a private family foundation worth $3.5 million.

The family had been granting up to $250,000 each year to the same eight tax-exempt 501(c)(3) organizations. Had they been awarding scholarships to specific recipients or making loans to their preferred charities, a private foundation might have made sense. However, their straight-up grants made Mary think there might be a better way. “It’s difficult to justify the considerable administrative costs of maintaining a private foundation if you’re not going to take advantage of its unique benefits,” she says.

Enter the donor-advised fund. One reason assets in such funds have been growing at double-digit rates since 20101 is that their administrative costs tend to be far lower than those of private foundations, which can range from 2.5% to 4% a year.2 “By switching to a donor-advised fund, this family saved thousands of dollars that they were then able to pass on to their charitable organizations of choice,” Mary says.

Beyond the potential cost advantages, donor-advised funds allow benefactors to give anonymously, with minimal paperwork and significantly greater tax advantages than private foundations (see below). Still, both private foundations and donor-advised funds have their pros and cons. Here’s a look at how they differ:

 

Donor-advised fund

Private foundation

Basics

Allows donors to make charitable contributions, receive an immediate tax benefit and recommend grants over time.

Typically created and funded by an individual, a family or a group of individuals; has its own board of directors.

Costs

Startup and ongoing administrative costs can be comparatively low.

Startup and ongoing legal and managerial costs may be significant.

Flexibility

Grants are permitted to IRS-qualified public charities based in the U.S. (Some donor-advised funds, including Schwab Charitable, offer international granting.)

Grants are permitted to IRS-approved, U.S.-based public charities, as well as individuals and international nongovernmental organizations if approved in advance by the IRS.

Privacy

Grants can be made anonymously and names of donors can be confidential.

Tax returns must specify grant recipients, staff salaries, trustee names and more.

Board of directors

Not required.

Required.

Taxes

Deductions are limited to 50% of adjusted gross income for cash gifts and 30% for real property* or stocks.

Deductions are limited to 30% of adjusted gross income for cash gifts and 20% for real property* or stocks.

Timing

Donors can typically take their time deciding when and where to give.

Foundations are required to distribute at least 5% of their assets each calendar year.

*Real property is deductible at fair market value for donor-advised funds and at cost basis for private foundations.
 

Despite their differences, the two vehicles can be used in tandem to powerful effect. For example, you can use a donor-advised fund to contribute to IRS-qualified charities while establishing a private foundation to fund causes that lack tax-exempt status, such as certain international aid organizations not eligible under donor-advised-fund guidelines. Private foundations can also make grants to individuals for study, travel and other purposes, provided certain IRS requirements are met.

“Given the differences between donor-advised funds and private foundations,” says Denise Schuh, managing director and legal counsel at Schwab Charitable, “some clients find that a complementary approach is a more efficient way to help maximize the impact of their philanthropy.”

The Schwab Charitable donor-advised-fund account

A simple way to incorporate giving into your everyday life.

A Schwab Charitable donor-advised-fund account is a tax-efficient investment solution that allows you to:

  • Make a bigger impact. Your contribution will be invested for potential growth so you can maximize your giving over time.

  • Be more tax-efficient. You can contribute cash, appreciated assets and investments that have been held for a year or more without paying capital-gains taxes.

  • Streamline your giving: You can contribute to your account and recommend grants quickly and easily through the Schwab Charitable Client Center or Schwab Mobile app.

 

To learn more, visit schwab.com/charitable.

12016 Donor-Advised Fund Report, National Philanthropic Trust.

2Ibid.

High Net Worth