Charitable giving is an essential component of financial and estate planning for individuals wishing to make a positive impact on society, leave a legacy, and transfer family values from one generation to the next.
While direct giving and other charitable contribution strategies can help clients support their favorite causes and optimize their estate plan, Donor-Advised Funds (DAF) and private foundations have emerged as two popular and preferred vehicles used by many successful individuals and families to manage philanthropic activities. Despite similarities, there are key differences between these two options which are essential to understand to help you decide the right path forward for you and your family.
MAI can help you simplify the complexities of giving, compare the key characteristics of DAFs and private foundations, and make an informed decision that aligns with your philanthropic goals.
A Donor-Advised Fund is a charitable vehicle that allows individuals to make a tax-deductible donation to a public charity – usually a community foundation or the charitable arm of a financial institution. The funds in your DAF can be invested and grow tax-free. The donor recommends grants from the fund to charitable organizations, allowing them to support charities of their choice in a flexible and customized manner.
Key characteristics that make DAFs an attractive vehicle for many families include:
DAFs are easy to set up and require minimal ongoing administration – allowing donors to make one contribution and recommend grants to various charities.
Donors can recommend grants to charities as frequently or infrequently as desired – and donations can be made anonymously, giving the donor greater privacy.
Contributions to DAFs are tax-deductible in the year they are made, providing donors with an immediate reduction in their tax bill – and funds grow tax-free.
A private foundation is a non-profit charitable organization that is established and controlled by the donor. The foundation must follow IRS regulations to maintain its nonprofit status and receive a tax exemption. Unlike a DAF which must be made to a public or private charity, private foundations have complete control over their donations and can be used to establish scholarships or donate to individuals. However, donations made by private foundations cannot be made anonymously.
Key benefits to private foundations include:
Donors have complete control over their giving and can direct donations to establish scholarships or support individuals or charities.
Private foundations can be a powerful tool for creating a legacy and supporting philanthropic efforts in perpetuity.
Donors can receive a tax deduction from their contributions and ongoing tax benefits from the foundation’s investment income.
Choosing between a Donor-Advised Fund and a private foundation can be a difficult decision – and largely depends on your personal values, financial situation and goals, and philanthropic ambitions.
On the one hand Donor-Advised Funds are a popular option for donors as they are easier and less expensive to set up than private foundations and require less ongoing administration management. On the other hand, for donors with significant wealth who want complete control, a private foundation may be the best choice.
Regardless of your preferred path, both are powerful, tax-effective tools for charitable giving – allowing you to give back to society, leave a legacy, and transfer your family values to the next generation.
MAI is a fiduciary who can help you better understand the differences between Donor-Advised Funds and private foundations to design a charitable giving strategy that is right for you and your family.
If you have any questions or concerns regarding which charitable giving strategy will work best for you, MAI is here to help you navigate your unique situation.
Source: Ivan & Daugustinis Estate and Tax Attorneys – information updated as of January 24, 2024. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.