Two models for intelligent giving

Donor-advised fund or private foundation? Here's a quick comparison

30 Jun 2016

Many families give to charity, but most feel they could be doing more to maximize the impact of their gifts. In fact, only 20% of respondents to a 2014 UBS Investor Watch survey felt that their philanthropy was highly effective.

One way to improve charitable giving is to formalize the process in line with your needs. “Charitable-giving vehicles help you align your giving with your long-term investment strategy,” says Michael Crook, Head of Portfolio & Planning Research at UBS.
 

Key takeaways

  • Only 20% of those surveyed by UBS felt their charity was effective.
  • Formalizing your charity process can help.
  • Donor-advised funds offer ease of set up and privacy.
  • Private foundations offer flexibility and the possibility of long-term family legacy.
  • Your Financial Advisor can help you determine which option might work better for you.

Defining two options

Two of the most popular charitable-giving vehicles are donor-advised funds (DAFs) and private foundations.

  • DAFs are charitable giving accounts established with and managed by public charities. Donors can receive a tax deduction for their contributions to the account and then recommend grants they wish to make with those funds.
  • Private foundations are nonprofit corporations or charitable trusts typically established with funding from one family. The foundation must apply for tax-exempt status and manage its own legal and governance responsibilities. It then enjoys full control over investing and grant-making decisions.

Both vehicles provide tax incentives and structure that can help you manage the giving process. There are benefits and potential drawbacks to each.

In the table below, we provide an overview of the key features and important differences between the two.

 

 

Donor-advised funds

Donor-advised funds

Private foundations

Private foundations

 

Starting up

Donor-advised funds

You make an irrevocable contribution to a special investment account from which charitable contributions can then be made.

 

Private foundations

You provide all funding to establish a trust or nonprofit corporation.

 

Tax deductibility of contributions

Donor-advised funds

Cash: up to 50% of donor’s adjusted gross income (AGI)
Publicly traded securities: up to 30% of donor’s AGI
Real estate: up to 30% of donor’s AGI

Private foundations

Cash: up to 30% of donor’s AGI
Publicly traded securities: up to 20% of donor’s AGI
Real estate: cost basis up to 20% of donor’s AGI

 

Staffing

Donor-advised funds

Sponsoring organization’s responsibility, paid for by account holders’ fee

Private foundations

You must hire staff to handle all administrative, investing and grant-making tasks, or outsource these duties.

 

Minimum payout

Donor-advised funds

No minimum annual payout to a charity is required, but most DAFs require $250 every two to three years.

Private foundations

5% of the average value of the previous year’s investment assets must be donated.

 

Grant-making

Donor-advised funds

You make grant recommendations that are usually, but not required to be, followed by the DAF organization, although recipients are limited to qualified 501(c)(3) public charities.

Private foundations

You, as a trustee of the foundation, have final say over grant recipients and more flexibility to give to individuals and for-profit entities for charitable purposes.

 

Investment management

Donor-advised funds

You can recommend investments, or choose from plan options offered by account manager.

Private foundations

You, with assistance from foundation management or Financial Advisors, are responsible for all investment decisions.

 

Transparency

Donor-advised funds

Option of being anonymous to the public charity, creating a greater degree of privacy.

Private foundations

Gifts from private foundations are filed in publicly available tax forms and identified by name. No option to remain anonymous.


For a detailed discussion on DAFs and private foundations, see the full Your Wealth & Life (PDF, 1 MB) report on charitable giving. And talk with your Financial Advisor to see how you can find a way to give that’s best suited to your goals.