It used to be that your only choices were private foundations and trusts. Now DAFs have made the scene.
When most people think of charitable giving, they usually think of individual donations — giving money directly to a nonprofit organization. One shortcoming of this approach, sometimes called checkbook charity, is that it can be difficult to document and tedious to organize for tax purposes. It may also result in giving that’s more haphazard than you’d like.
There are other more structured ways to give, some of which require a great amount of your time and energy — and some of which are as simple as naming a charity as a beneficiary of your will. But there is a great range in between, a range into which the donor advised fund falls.
Of all the philanthropic tools, private foundations are those most often compared to donor advised funds. They remain the traditional choice for donors making a significant financial commitment to charitable causes. An important similarity between DAFs and private foundations is that gifts are irrevocable. The donor does not receive any assets or income back from the charitable organization at any time — and neither do the donor’s heirs or successors.
But for those who might have considered creating their own foundations, DAFs are gaining newfound attention because of their advantages, especially the increased tax benefits, the elimination of extensive paperwork, startup costs and maintenance fees, and greater flexibility in giving.
Tax issues are often paramount in the decision to choose a DAF. For starters, the tax deduction limit for cash donations is up to 50% of your adjusted gross income (AGI), whereas the limit is only 30% of AGI for gifts to foundations. For gifts of securities to a donor advised fund, the deduction is up to 30% of AGI, whereas for private foundations it is only 20% of AGI. Additionally, unlike private foundations, DAFs are exempt from excise taxes on investment income.
DAF vs Private Foundation
The ease of setting up your donor advised fund, and the absence of startup costs, are other elements to bear in mind. The startup costs for establishing a private foundation can be quite extensive, somewhere in the area of $30,000. Normally, the setup process takes as long as several months — due in part to the paperwork that’s necessary.
Privacy is also a factor to consider. On many levels, being a donor-adviser gives you a much greater degree of privacy. A private foundation must file public forms about every aspect of itself, from assets, to completed grants, to staff. Not so with a donor advised fund — through which you can make gifts anonymously or in someone else’s name.
Flexibility in giving
With a donor advised fund, you may also contribute closely held stock, if your parent charity is willing to accept it. And while there are restrictions on tax-deductible gifts that others can give to your foundation, no such limits exist on tax-deductible gifts to a DAF. Finally, foundations have an annual required payout of 5% of the year’s income, whereas the great majority of DAFs have no such requirement.
|Private Foundations||Donor Advised Funds|
|Tax deductions up to 30% of AGI||Tax deductions up to 50% of AGI|
|Setup costs and ongoing management fees||No setup costs and minimal annual fees|
|Extensive paperwork and annual filing||Minimal, streamlined paperwork|
|Excise taxes paid on investment income||No excise taxes, and no required payouts|
|All financial details must be on public record||Anonymous gifts an option|
The advantages of DAFs
When compared to other charitable giving tools, DAFs boast a number of important advantages.
- No startup costs
- Greater tax advantages
- Easier recordkeeping
- No 5% distribution requirement in most cases
- Choice of anonymity or recognition
- Due diligence done by parent charity
- Guidance and support
Other giving choices
Private foundations and DAFs are not, of course, the only choices out there. Here are a few other ways to give:
Charitable remainder trust (CRT). The donor or other designated beneficiaries receive a fixed income or a percentage of the value of the trust’s assets either for a set time period or for life. When the trust ends, one or more charities chosen by the donor receive the remaining assets. Income tax deductions, deferred capital gains taxes, and reduced estate tax liability are all advantages of a CRT.
Charitable gift annuity. The donor gives a gift of cash or assets to a charity in exchange for lifelong income for the donor or other beneficiaries. Upon the beneficiary’s death, the charity receives the remainder of the assets. The donor benefits from an income tax deduction, prorated capital gains taxes on some gifts, and reduced estate tax liability.
Charitable lead trust (CLT). A donor’s assets are placed in trust and income is paid to a charity for a set term. At the end of the trust, the remainder of the assets are returned to the donor or the donor’s heirs. Gift, estate, and generation-skipping tax advantages may all be donor benefits.
Pooled income fund. Multiple donors give irrevocable gifts to a trust established by a charity. The combined gifts are invested, and donors receive proportional income distributions. When a donor dies, that portion of the fund goes to the charity. A portion of the contribution is eligible for income, gift, and estate tax deductions, and donors can avoid capital gains taxes on a gift of appreciated assets.
Donor Advised Fund vs Private Foundation by Inna Rosputnia
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