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Donor-Advised Fund, Private Foundation or Both?

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September 27, 2018

Member for

2 years 1 month
Submitted by satya.billa on Thu, 09/27/2018 - 16:55

Last year, a client with a private family foundation worth $3.5 million asked Schwab Charitable™ Senior Manager Mary Jovanovich to review their giving goals.

Had they been awarding scholarships to specific recipients or making loans to their preferred charities, a private foundation might have made sense for their situation. Instead, they were making annual grants of up to $250,000 to the same eight tax-exempt 501(c)(3) organizations, and this made Mary think there might be a better way.

“It’s difficult to justify the considerable administrative costs and other fees of maintaining a private foundation if you’re not going to take advantage of its unique benefits,” she says.

Enter the donor-advised fund.

The administrative fees of donor-advised funds tend to be lower than those of private foundations and that’s one reason their assets have been growing at double-digit rates since 2010. 1

“By switching to a donor-advised fund, this family saved thousands of dollars in administrative fees over the course of a year that they were then able to pass on to their charitable organizations of choice,” Mary says. This was clearly a better fit for this client’s unique needs versus donating through a private foundation.

Beyond the potential cost advantages, donor-advised funds allow donors to give anonymously with minimal effort and—in most cases—greater tax advantages than private foundations (see below). Still, both private foundations and donor-advised funds have their pros and cons.

Donor-advised funds versus private foundations

 

 

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.)2

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 60% 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 within a certain time period.

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. Deductions are for stocks held longer than one year. Consult your tax advisor for more information.

Despite their differences, donor-advised funds and private foundations can be used in tandem for a more efficient way to help maximize the impact of a client’s philanthropy.

For example, a donor can use a donor-advised fund to contribute to IRS-qualified charities while establishing a private foundation to support 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.

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.

12018 Donor-Advised Fund Report, National Philanthropic Trust. | Grant minimums and fees may apply. Contact Schwab Charitable Donor Relations at 800-746-6216 to learn more.

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