The author of this article considers the benefits, features and potential pitfalls involved in different structures of philanthropy, in a US context.

This publication continues to examine the pros and cons of different ways to “do philanthropy” in terms of structures, such as private foundations and donor-advised funds (DAFs). These entities exist for slightly different reasons. Arguably, they aren’t at odds, but run alongside each other. 

This news service knows that philanthropy isn’t a “niche” area in private banking and wealth management – it has gone beyond that to be even a core offering. 

The article comes from Ron Ransom, who is chief executive of American Endowment Foundation, a US sponsor of DAFs. Ransom has worked in the industry for more than three decades. Prior to AEF, he was group head of ESG and chief business development officer at Envestnet; he has also served in senior roles at UBS, Bank of America and Nationwide Financial.

The editors are pleased to share these insights; the usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com if you wish to respond.

When families consider their options for charitable giving, they often evaluate donor-advised funds and private foundations based on multiple factors to determine which option best suits their charitable giving goals. Here are some of the considerations when evaluating and comparing these two charitable vehicles.

Donor-advised funds (DAFs):
1. Simplicity and convenience: Donor-advised funds offer simplicity and convenience.  
The donor and financial advisor have advisory privileges and can recommend grants and investments. Then, setting up and managing a DAF is straightforward, as administrative tasks such as paperwork, investments, and grants are handled by the fund sponsor or provider. This allows people to avoid the complexity and expense of more complicated giving vehicles.

2. Immediate tax benefits: Compared with private foundations, contributions to DAFs are deductible at a higher percentage of Adjusted Gross Income (AGI). This provides significant tax advantages, especially for donations of cash. Donations of appreciated assets such as securities, real estate, and other non-cash assets, are also deductible at a higher percentage of AGI.

3. Privacy: Donors can choose to remain anonymous when making grants through a DAF, appealing to those who prefer privacy in their charitable giving.

4. Investment options: DAFs often offer a range of investment options for donor contributions, potentially increasing the charitable funds over time.

5. Generational giving: Initiate legacy conversations and engage the next generation in philanthropy while also funding future giving.  

6. Minimum contributions: Some DAFs have low minimum contribution requirements, increasing accessibility for smaller donors.

7. Fees: Administrative fees for DAFs are generally lower than for comparably sized private foundations.

Private foundations:
1. Greater control: Private foundations offer donors direct control over investment strategies, grant-making decisions, and the overall charitable mission.

2. Public recognition: Private foundations can provide public recognition and prestige, which may be important for donors seeking to establish a lasting philanthropic legacy.

3. Start-up time and costs: Foundations can take several days, weeks or months to create and come with legal and accounting fees that are typically substantial. 

4. Complexity and administration: Foundations require more administrative oversight, including annual board meetings and filing the annual 990PF tax return, which can be time-consuming and costly. Additionally, grants are itemized in the tax return providing full transparency to the supported charities and causes.

5. Initial funding requirement: Establishing a private foundation typically requires a substantial initial endowment, which may be prohibitive for smaller donors.

6. Tax considerations: While donations to private foundations are tax-deductible, the tax benefits are lower than those of DAFs and may involve more complex tax reporting requirements.

7. Required distributions: The Internal Revenue Service (IRS) requires private foundations to distribute 5 per cent of their asset value annually. There is no IRS mandated distribution requirement for DAFs; however, DAF sponsors may require periodic distributions based on their grant-making policies.

Trade-offs:
Electing to establish a DAF or private foundation often boils down to several key considerations.
• Philanthropic goals: Choosing between DAFs and private foundations hinges on whether donors prioritize control and flexibility (foundations) or convenience and simplicity (DAFs) in achieving their charitable objectives.
• Tax implications: While contributions to either of these charitable vehicles provide immediate tax advantages, the tax-deductibility of contributions are generally greater with DAFs.
• Cost and transparency: Depending on their financial capacity and the scale of their charitable giving, donors should evaluate the initial costs, ongoing fees, privacy and reporting requirements of both DAFs and private foundations.

In summary, the choice between donor-advised funds and private foundations depends on factors such as control, complexity, tax implications, family involvement, and the desire to leave a lasting philanthropic legacy. Families should carefully consider their options and select the charitable giving vehicle that best aligns with their specific charitable goals and financial circumstances.