Donor-advised funds or private foundations: Which suits your wishes?
Your philanthropic efforts may be enhanced when paired with the appropriate strategy. Both donor-advised funds and private foundations offer many different benefits, but which is a good match for your goals and family’s legacy?
When laying out philanthropic goals, it’s important to understand that charitable strategies vary widely. A structured charitable giving approach integrated with a personal wealth management strategy empowers families to enhance their legacy. Two of the more widely used charitable giving vehicles that offer tax benefits are donor-advised funds (DAF) and private foundations. Choosing the strategy that best suits your wishes may lead to long-term benefits, but how do they differ?
Charitable giving strategies
What is a donor-advised fund?
A donor-advised fund is a popular charitable vehicle that can be established with a community foundation, certain financial services providers, or other charitable organizations. It’s easy to create and cost-effectively manage with few administrative burdens. Annual distributions are not required, and funds can be invested for long-term objectives.
The donor receives an income tax deduction in the year of contribution to the fund. Additionally, grants can be made anonymously or publicly, depending upon the donor’s wishes.
DAF assets were $159.83 billion in 2020, a nearly 10% increase from $145.49 billion in 2019, with the number of DAF exceeding 1 million†.
What is a private foundation?
A private foundation is a type of charitable organization typically established by an individual, family or corporation to support charitable activities. That alone introduces complexity, but also flexibility. The founding individual, family or small group of donors have complete control over investment management and grant distribution. A donor can/may receive an income tax deduction for a contribution to a private foundation.
In addition to the steps necessary to create the foundation, there are statutory compliance reporting requirements and required annual distributions. Another significant difference is that private foundations’ grant activities are public record.
"These two options have their unique benefits, and their burdens are not insurmountable, but choosing the best strategy will require thoughtful consideration of all the details."
Stephanie Kormanec, CEPA®
Wealth Strategist, Huntington Private Bank®
Donor-advised funds vs. private foundations
|
Donor-Advised Fund |
Private Foundation |
| What |
Simple giving vehicle established with community
foundations, certain financial service providers, or other charitable organizations.
|
Tax-exempt private organizations generally created and funded by an individual or a small group of donors, often a family that can target their vision. |
| Why |
Easy to create and operate, with minimal operating costs and administrative responsibilities. |
Create multigenerational charitable organization; engage family members in all aspects of the entity. |
| Grant Giving |
Sponsor-approved charitable organizations handling most of the work. Donor can also provide grant recommendations but is subject to approval of the donor-advised fund sponsor. |
Donor has full control over how much and to whom a grant is given. |
| Required Annual Distributions |
None for donor. Grants can be distributed over time; undistributed funds are invested. |
Minimum 5% of the net investment assets. |
| Fund Investment |
Sponsor-approved investment strategy; some
organizations allow Huntington to manage the funds.
|
Donor has ultimate decision on where the funds are invested. |
| Privacy |
Grant can be made anonymously to maintain privacy or publicly if desired. |
Grant activities are of public record. |
| Reporting Requirements |
None for the donor, thus minimal tax and reporting ‘hassle.’ |
Statutory compliance requirements; annual tax returns must be filed. |
| Tax Deduction/Taxes |
Income tax deduction for contributions (five-year rule); excise taxes may be applicable on non-qualifying distributions, prohibited investments and excess business holdings. |
Income tax deduction for contributions (five-year rule); excise taxes applicable on net investment income; can also apply on self-dealing, taxation on jeopardy investments, and excess business holdings.
|
| Charitable Deduction Limits |
50% of adjusted gross income (AGI) for many assets; 60% of AGI if cash is used; 30% of AGI if long-term appreciated property is used |
30% of AGI for many assets, including cash; 20% of AGI if long-term appreciated property is used |
| Ideal for |
New philanthropists and self-directed donors who
value flexibility, convenience, ease of operation and
low cost.
|
Due to higher cost, administrative responsibilities and compliance requirements recommended for gifts in excess of $2 million.
|
Why it matters: Finding the right structure for your situation
Selecting an appropriate giving vehicle depends on many factors: tax structure, income needs, type of asset being donated, desire to control and monitor, family culture, and philanthropic intentions. To learn more, please contact your Huntington Private Bank team to see how we can help or find a Huntington Private Bank office near you.
† National Philanthropic Trust. 2023.
Charitable Giving Statistics. Accessed May 10, 2023.
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