I have had a lot of experience with private foundations. During the first five years of my practice, I helped clients form more than 100 private foundations. In the following 20 years, that number probably hit 300.
A client who wants to sponsor her own scholarship program or send money to charities outside the US may need a private foundation. But I won’t form a private foundation now unless the client has had a meaningful discussion with a donor-advised fund sponsor. That’s because DAFs are likely to be more efficient.
So, what is a DAF?
It’s a giving account established at a public charity. Community foundations were pioneers in this area, but there are now more than 50 national DAF organizations. The largest ones are associated with investment firms such as Schwab, Fidelity, and Vanguard, which established tax-exempt related organizations to hold and manage grants from the accounts while the investment firms invest donated assets.
You put money into a DAF, take a charitable income tax deduction for the gift, and direct distributions to specific organizations over the years. You can create private foundation-like committees and structures, like boards, junior boards, and family councils, to engage family members in the family’s philanthropy. But you sidestep the administrative burdens of running a private foundation, such as filing annual state and federal tax returns, monitoring conflicts of interest, and worrying about the special taxes imposed on private foundations and their officers and directors.
Surprisingly, DAFs offer better tax deductions than private foundations.
A donor can only deduct a certain percentage of their adjusted gross income based on charitable donations. A private foundation donor’s deduction is limited to 30% of AGI (although, in some cases, the limit drops to 20% of AGI), while DAF donors can deduct up to 50% of AGI — or even 60% if their donation is in cash.
Forming a DAF is usually a simple process. I created mine online in about 15 minutes. If I had started a private foundation instead, I would’ve been lucky to get the foundation up and running in less than nine months.
What happens if I want to get rid of my DAF? I zero out the account by sending all the money to charities.
Getting rid of a private foundation is a substantial undertaking. It involves coordinating the IRS and your state’s taxing agency, Attorney General’s office, and secretary of state.
If you’re thinking of formalizing your charitable giving, let’s talk.