The most common method of fulfilling one's philanthropic wishes is to provide a monetary gift of cash or appreciated securities directly to a charitable organization. In return, the donor is entitled to a tax deduction for the value of the asset upon receipt by the charity. However, there are two other increasingly popular options for charitable giving: donor-advised funds (DAFs) and private foundations. The most suitable option depends entirely on the donor’s objectives.
A DAF is a philanthropic account established at a public charity. It allows a donor to make a charitable contribution, receive an immediate tax deduction, and then direct donations to the donor’s charities of choice over time. DAFs are provided by national sponsoring organizations, which are often associated with investment firms, such as Schwab Charitable, or through a local community foundation. The sponsoring organization provides back-office support to donors, so there are generally no costs to establish an account, and no annual tax filings are required. Thus, DAFs are easy to set up and extremely cost-effective to establish and maintain.
A private foundation is an independent legal entity that must be approved by the Internal Revenue Service as a 501(c)(3) organization. The chief factors that distinguish a private foundation from a public charity are the revenue sources and level of financial support. A public charity generally receives its funding from the general public or from a government entity. Private foundations, on the other hand, typically receive their support from a limited number of sources: individuals, a family or a business.
According to the Foundation Center, there were over 86,000 foundations registered in the United States in 2014—almost half of which were created by private individuals and families. A common reason cited for establishing a private foundation is the creation of a legacy and the flexibility to control decisions. Because it’s private, the foundation can do exactly what the founders and directors want, within the guidelines of state and federal laws.
Some additional characteristics of private foundations and donor-advised funds are in the chart at the right.
The rules governing donor-advised funds and private foundations can be complicated. In choosing the right giving vehicle for your philanthropic mission, it is important to first establish your charitable goals, and let those goals guide you to the vehicle that represents the best fit. With so many factors to consider, donors would be wise to seek the advice of their tax, legal or financial advisors before making their final decision. iBi
Patrick J. Smarjesse, CEBS is vice president at David Vaughan Investments, Inc. For more information, visit DVIinc.com.