Choosing between a private foundation and a donor advised fund (DAF) can be confusing and challenging for charitably minded donors, but DAFs offer cost savings, convenience, and tax benefits.
A DAF is a tool used by individuals and companies to make donations to their favorite charity or charities. Donors retain the right to advise on investment and distribution from the fund, and they may designate another person to have advisory rights.
A private foundation is a charitable organization established by an individual, family, or corporation. It’s overseen by a board of directors responsible for receiving contributions, managing assets, making grants, and filing tax returns.
Private foundations have the most assets under management in the U.S. ($1 trillion) compared to DAFs ($229 billion), but DAFs are becoming increasingly more popular. There are 1.95 million DAFs in America, while there are only around 150,000 private foundations.
So, why should you consider starting a DAF as opposed to a private foundation?
Not so private
The word “private” is a misnomer. All private foundations, whether operating or non-operating, must submit IRS Form 990-PF annually, releasing information about trustees, grant applicants, recipients, as well as grant purposes and amounts.
A DAF is the best choice for privacy. It has no annual IRS filing requirements and helps retain privacy better than a private foundation. A DAF can be entirely anonymous, even to the IRS, including the owner’s name and grant recipients.
Simplicity
Setting up and maintaining a DAF is much simpler than a private foundation. A DAF can be opened in one day with an online application through WatersEdge. If you prefer an in-person process, it may take longer, but meeting a WatersEdge representative adds a personal touch.
Private foundations are time-consuming due to paperwork requirements, including an application filed with the IRS to be classified as a tax-exempt organization, which can take up to a year to review and approve, and the annual filing of the previously mentioned Form 990.
DAFs offer several benefits:
- Donors can open a DAF today, fund it today, and may immediately take a charitable contribution deduction in the year the DAF is funded, regardless of when the assets are distributed to another charity.
- Donors can send grants by notifying a WatersEdge team member or with the click of a button through our online portal.
- Donors can set up recurring grant schedules or be involved as much or as little as they want for each grant distribution.
Tax Advantages
The tax advantages of a DAF are worth exploring. Because a gift to a DAF is to a public charity, the donor may deduct a larger portion of the donor’s Adjusted Gross Income than the donor may deduct for gifts to private foundations.
When you establish a DAF, your funds are immediately invested and grow tax-free. This allows you to maximize your grants from a donor advised fund. DAFs also streamline the giving process and benefit charities when you want.
Investment income in a private foundation is subject to an annual 1.39% excise tax, and private foundations must distribute 5% of their assets annually, while DAFs have no minimum annual distribution. This means private foundations reduce your gift before it even leaves their hands, especially considering larger administrative fees and overhead costs. DAFs, on the other hand, can multiply your gift from the start.
The DAF Migration
Many private foundations are dissolving and converting to DAFs. The IRS reported that 1,939 foundations dissolved in 2021, with 5% of those converting to DAFs. These foundations were on average 11 times larger than the typical dissolving foundation, reducing their annual overhead costs and eliminating annual tax filings.
Charitable families who work with WatersEdge use DAFs to accomplish their charitable goals without the restrictions, maintenance requirements, and expenses of a private foundation. Donor advised funds provide flexibility and can include the donor’s family members in charitable giving during life and after their passing at a fraction of the cost of setting up a private foundation. These benefits accomplish the main goal of a private foundation: to support your charitable giving throughout future generations.
Have questions about setting up a donor advised fund through WatersEdge? Visit our website at WatersEdge.com/DAF to learn more or email us at give@WatersEdge.com.
