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Private Foundations vs. Donor Advised Funds: Which is Right for You?

Private Foundations vs. Donor Advised Funds: Which is Right for You?

February 05, 2024

Are you interested in making a charitable donation, either right now or in the future? People who have wealth to share with the charities they love often come across many ways they can give but are unsure which is best for them. Private foundations and donor-advised funds are both great ways to include charitable giving in your estate planning, but you need to know the major differences to choose which is right for you.  

If you are unsure which is the best move for you, here is what you need to know about private foundations vs. donor-advised funds. 

Private Foundations vs. Donor-Advised Funds

The basic premise of private foundations and donor-advised funds is the same: it permits you to make charitable contributions to charities that truly matter while minimizing your tax liability. However, there are a handful of notable differences between the two types of charitable giving. 

A private foundation is great for anyone who wants to make sure they can customize their giving and maintain control over their investment. Under a private foundation, you can donate to private charities – something that is not permitted with a donor-advised fund. They have their own legal documentation and a governing body that manages your money. In essence, you are forming your own charitable foundation for the purposes of giving money away.  

A donor-advised fund is similar but also has a few key differences. In essence, you are giving your money to a managed fund that makes donations only to 501(c)(3) non-profits. You can make requests for the money contained within to be donated to charity, but the board ultimately makes the final decision on whether this will be permitted. 

What to Know About Donor-Advised Funds

A donor-advised fund can be an impactful way to donate money to charity, but there are a few things you should be aware of. First, it does cut down on your flexibility to use the funds as you see fit once they have been donated to the DAF. Instead of telling your financial advisor where to send the funds, you must make a request to the board for their approval. 

Another important component of a donor-advised fund is privacy. Some people do not want other people to know what or how much they donate to charity. Under the umbrella of a donor-advised fund, they can give anonymously.  

Furthermore, a donor-advised fund is great for anyone who wants flexibility. You do not have to make donations every year or at any sort of regular interval. They also allow you to minimize your taxes with a tax deduction for your contributions and cut out estate taxes on the balance of this donor-advised fund. 

What to Know About Private Foundations 

Private foundations function slightly differently from donor-advised funds. While a DAF holds your donation and then distributes it to 501(c)(3) nonprofits, a private foundation forms its very own 501(c)(3) charity that allows you to control your investments while making donations to whichever charities you select in a time frame that works for you. You even get to choose your own board members. 

Many people like the idea of a private foundation because it permits them to be a lot more hands-on with their charitable giving. You can appoint family members to the board, involving them in the annual meeting and minutes. For those who are concerned with the legacy they leave behind, this is a great way to demonstrate philanthropic endeavors to children or even grandchildren. 

Keep in mind that private foundations are reported and are public knowledge in the annual report for the charity. If you were hoping for anonymity, then you may want to go with a donor-advised fund. 

Foundation vs. DAF: Which is Better for You?  

Both donor-advised funds and private foundations are excellent ways to pass down your wealth to charities that matter to you. Think about how hands-on you want to be with your giving and how anonymous you want to be. 

Many people like a DAF because it has less stringent guidelines on how and when you must give your assets to charity and allows you to make anonymous donations. The initial required investment into a DAF is relatively low compared to private foundations. 

On the other hand, a private foundation requires larger donations, usually in the ballpark of seven figures or more. However, you get a lot more freedom in where donations go and can elect your own board so that family and loved ones can be involved in charitable giving. 

Charitable Remainder Trusts

Of course, there are other types of charitable giving you may consider if neither of these is right for you. For example, charitable remainder trusts (CRTs) are a great way to leave a financial legacy for your loved ones and engage in charitable giving at the same time. They provide a source of income for your beneficiaries with 10% of the initial balance donated to a charity of your choosing at the end of the trust term.

If you like the idea of a donor-advised fund and a charitable remainder trust, they are not mutually exclusive. You can name a donor-advised fund as the charitable remainder trust charity 

The benefit of this is that you do not have to name a specific charity upfront when forming your CRT, which cannot be changed in the future. A DAF as the charitable beneficiary allows you to select a charity doing great work right now or well into the future. All you have to do is make a recommendation for the grants. 

Many people choose to start with a DAF if they will be giving lower sums of money to charity. However, you might choose a charitable remainder trust vs. a DAF if you will be giving more away or want to secure regular supplemental income for yourself or a beneficiary. 

Set Up Your Charitable Giving with Magellan 

When it comes to leaving behind an impact on the causes you care about, don’t leave your financial legacy to chance. Magellan offers many services you need to help create a a firm financial future including estate, financial, legal, and tax planning services. We can help you establish a charitable remainder trust in-house because we are your one-stop shop for all things CRT-related. 

If you have questions about how to make the most of your charitable giving, contact us today to learn more about how we can help. 

This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.

Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.

Charitable Remainder Trusts are used to develop a vehicle for donations to a favorite charity, which also allows for the reduction of income taxes through a charitable deduction and favorable tax treatment at the date of the gift by non-recognition of built-in capital gains. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.