Private foundation vs. DAF: Are you driving the right giving vehicle?

The history of philanthropy tied to successful families and individuals in the United States is a long and storied one.

The country’s first private family foundation, the Russell Sage Foundation, was established in 1907. And, not to be outdone, it wasn’t long before the Carnegies and Rockefellers jumped on the trend with their own charities in 1911 and 1913.

Nearly 120 years later, private foundations still form the bedrock of a substantial portion of American giving, particularly among philanthropic families. But as these vehicles have evolved, so too has the larger landscape of giving.

Today’s charitably inclined have more options than their Gilded Age counterparts, including the popular donor advised fund (DAF). Where foundations offer robust infrastructure and investment capabilities, DAFs streamline things, offering an investment account’s growth potential, but with charitable checking account simplicity.

Determining the vehicle that’s right for you – private foundation or DAF – will depend on your giving goals.

“Do you want to give to charity, or do you want to run one? That’s the first question,” says Nicole Hisler, president of Raymond James Charitable.

Private foundations are 501(c)(3) charities, which makes them a better option for people who want total control, greater investment flexibility, and to hire professionals to advise on assets and make grants.

“If, for example, you want to start a scholarship program, evaluate applications and give money to individual recipients, you may want a private foundation,” Nicole says. “Or if you have an unusual investment idea for your charitable assets that involves alternatives that can’t be held in other charitable vehicles, that’s another reason to consider a private foundation.”

If your goals are less structured, vehicles like DAFs, which are offered through existing 501(c)(3) organizations, can help you make substantial financial impacts without the administrative lift. They can also be a powerful alternative for families who already operate private foundations but find that their individual giving goals are “growing apart.”

According to Nicole, the intentions of and dynamics between those involved in the grant decisions should be factored into the path you choose, particularly when it comes to inheritance.

“In the case of a private foundation, children or heirs are inheriting the board seats and if there’s clarity on roles and consensus on the mission, that’s great. But you can end up in situations with multiple siblings and siblings-in-law who won’t share the same giving goals or want to check in with each other in order to make a single gift.”

This, she says, is where DAFs shine. Families can open multiple DAF accounts and distribute the remaining private foundation assets between them, allowing each member to manage an account and make grants at their own discretion.

Explore establishing a foundation if you …

• Have a significant sum to invest and such robust philanthropic goals that you want to hire professionals to manage your mission.
• Are interested in more unique investment vehicles that can’t be held in other charitable accounts.
• Want to design your own grant initiatives or charitable programs and select individuals (rather than charities) as grant recipients.

Explore opening a DAF if you …

• Have big giving goals, but would prefer not to deal with administrative oversight, governance and tax filing.
• Don’t want to be obligated to make annual distributions.
• Want more privacy options – private foundations file public tax returns showing all grant activity, but grants from a DAF are only public if you want them to be.

Whichever approach makes the most sense for your family and intentions, the ultimate motivator is the same.

“Giving makes you happy,” says Nicole. “That’s the first reason anyone should want to do it. But there are ways to be strategic about it that will create greater benefits for you, your family and the causes you care about.”

Switching it up

While private foundations can be powerful and very meaningful for owners and the causes they impact, if you don’t have a clear plan for succession or find yourself cutting last-minute checks at year end, you’ve over-engineered things. “When it becomes more burden than benefit, it’s probably time to move into the simpler structure offered by vehicles like DAFs,” says Nicole.

If you’ve already established a private foundation and are interested in shifting your giving strategy, the process is simple:

1. Open an account with a donor advised fund program sponsor.

2. Follow your foundation’s grant process to approve a gift of its remaining funds to your DAF.

3. Transfer those funds, less any outstanding expenses related to the foundation – once funds are in a DAF, they can only be distributed to public charities.

4. Inform the IRS the foundation has been dissolved and complete a final tax return.

5. Begin making gifts from your DAF.

6. Pay any final expenses to dissolve the foundation.

Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a donor advised funds and private foundations for federal and state tax purposes. To learn more about the potential risks and benefits of donor advised funds, please contact us.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Raymond James does not provide tax or legal advice. Please discuss these matters with the appropriate professional.