When you’re working on the charitable components of a client’s estate or financial plan, one of the first areas you’ll likely explore is the structure. Both private foundations and donor advised funds are useful charitable giving tools. But before you jump into one or the other for a particular client, review the similarities and differences between the two so that you can best achieve your client’s goals.  

To help you evaluate a client’s options, here are three common myths about the differences between private foundations and donor advised funds. 

Myth #1: Donor advised funds are all the same and only private foundations can be customized 

Private foundations will always differ from donor advised funds in important ways. This is not only because of their status as separate legal entities and the deductibility rules for gifts to these entities, but also because of the opportunities to customize governance. However, it is a mistake to assume that a donor advised fund is a cookie-cutter vehicle. Indeed, “donor advised fund” is simply a term used to describe the structure of a fund and its relationship with a sponsoring organization such as a community foundation. The donor advised fund vehicle itself is extremely flexible. Here’s why: 

• Immediate tax deduction: Make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. 

• Community knowledge: The North Carolina Community Foundation is deeply knowledgeable about the needs of our state and the nonprofits meeting those needs.  

• Family philanthropy: NCCF’s Development Team can work with you and your client to build a charitable giving plan that extends for multiple future generations.  

Myth #2: Deciding whether to establish a donor advised fund or a private foundation mostly depends on size 

The size of a donor advised fund, like the size of a private foundation, is unlimited. The United States’ largest private foundations are valued well into the billions of dollars. Information about private foundations, ironically, is not so private. The Internal Revenue Service provides public access to Form 990 tax returns for private foundations. That is not the case for individual donor advised funds. 

Similarly, donor advised funds are not subject to an upper limit. Although information on the asset size of individual donor advised funds is not publicly available, anecdotal information indicates that some donor-advised funds’ assets may total in the billions of dollars. 

Indeed, a donor advised fund of any size can be an effective alternative to a private foundation, thanks to fewer expenses to establish and maintain, maximum tax benefits (higher deductibility limitations and fair market valuation for contributing hard-to-value assets), no excise taxes, and confidentiality (including the ability to grant anonymously to charities). 

The net-net here is that the decision of whether to establish a donor advised fund or a private foundation – or both – is much less a function of size than it is other factors that are tied more closely to the objectives a client is trying to achieve.  

Myth #3: Donor advised funds and private foundations are mutually exclusive 

Make sure you’re aware of the benefits of using both a donor advised fund and a private foundation to accomplish clients’ charitable goals. For example: 

• Anonymity: DAFs can help meet the need for anonymity in certain grants, which is typically difficult using a private foundation on its own. 

• Favorable tax deduction: A donor advised fund can receive a client’s gifts of highly-appreciated, nonmarketable assets such as closely-held stock and real estate, and benefit from favorable tax deduction rules. 

• Integrated approach: An integrated approach can help a client balance and diversify investment and distribution strategies to ensure their giving to important causes remains steady even in market downturns. 

For many private foundations, the day-to-day management and cost of administration is taking away from the focus on supporting nonprofits. Many private foundations are transitioning to DAFs favoring their simplicity and lower administrative burdens. 

Along these lines, some families find that the tax rules related to investments, distributions, and “self-dealing” have become harder to navigate and are perhaps even preventing the family from maximizing tax benefits of charitable giving. Finally, the administrative load of managing a private foundation sometimes becomes overwhelming, especially if the family members who handled these functions initially have retired, passed away, or simply become busy with other projects. 

The bottom line here is that we encourage you to reach out to the team at NCCF anytime you are evaluating how to structure a charitable giving plan to achieve both your client’s charitable goals and financial goals. Our team is here to help. In many cases, our tools and services are a great fit for your client’s needs. If not, we will point you in the right direction. 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.