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Non-Profit Organizations

To File or Not to File: Private Foundations vs. Donor Advised Funds

By October 20, 2017No Comments

Is This a Charity Which I See Before Me?

There has been great debate over whether or not donors desiring to make charitable contributions should choose the path of setting up a Private Foundation or a Donor Advised Fund. A Private Foundation is a legal entity typically created from a contribution by a single person or a business, and has its own appointed board of directors and trustees who manage the fund. A Donor Advised Fund is created by a single donor who can make contributions to the specified organization and provide recommendations to where the funds should go. Paying close attention to the similarities and differences between the two will be helpful when choosing which foundation or fund is right for you and your ultimate charitable giving goals.

  Private Foundation Donor Advised Fund
Creation Application to IRS Signed agreement with sponsoring organization
Costs Legal, accounting, and filing fees None
Structure Donor appoints board of directors & trustees and make final decisions together

 

Only board of directors & trustees of sponsoring organization make final decisions
Control Donor has full say on where their money goes, in what amount, and to whom Donor expresses opinions
Filing Requirement Mandatory 990-PF form to IRS None
Minimum Distribution Requirement 5% of assets paid out annually No explicit distribution requirement
Tax Deduction for Cash Contributions Limited to 30% of AGI Limited to 50% of AGI
Investment Income Excise Tax 1-2 % None

To Thine Own Private Foundation Be True

Starting a private foundation begins with submitting an application to the IRS to approve its tax-exempt status and submitting additional state applications, if necessary. The next requirement is choosing how the foundation will be constructed, which can be in the form of either a corporation or a trust. This process can take six months to a year, and include additional costs, such as: legal, accounting, and filing fees. Once created, a private foundation will file a form 990-PF to the IRS each year, making the foundation’s information public knowledge. When compared to a donor advised fund, it may seem that a private foundation has more rules and higher costs. However, the foundation’s structure and the regulations imposed within ultimately gives the donor more control over the foundation, specifically by tailoring the foundation to their wishes and giving them the freedom to make financial decisions.

Donor Advised Funds: Shall I Compare Thee to a Private Foundation?

According to Philanthropy Roundtable’s, The Almanac of American Philosophy, “Donor-advised funds now outnumber private foundations by more than two to one.” This increased popularity is due to the simplified process of creating and maintaining a donor advised fund. The creation of this fund does not require an application to the IRS, it takes less time to start the fund, and initial start-up costs are not required. After the fund is created, the donor will then sign an agreement with a sponsoring foundation that will provide coverage for the fund’s tax-exempt status. No annual form is required to be filed with the IRS and as a result, the fund’s information will remain private. Since a donor advised fund lacks most of the structure and regulations that a private foundation has, the donor is not given as much as a say on where his or her donations go and to whom they will be given to. This ultimately shifts control from the donor to the sponsoring organization.

All the World’s a Stage, and All Charities are Merely Players

Control is an important aspect when choosing whether to create a private foundation or a donor advised fund. The donor of a private foundation has control over where their money goes, to whom, and in what amount. A private foundation gives you the opportunity to continue to benefit the non-profit organizations of your choice while allowing you to keep your money in the family and to pass it down to future generations.

A donor advised fund is, in and of itself, a charitable organization that manages your money and decides where it goes. Donors can make irrevocable contributions to the donor advised fund at any point in time and can recommend to the sponsoring organization’s board of directors and trustees which organizations he or she would like to donate to. However, these board of directors and trustees are the ones who have complete control over the donor’s contributions and who ultimately make the fund’s final decisions.

If you have any questions please call your L&B professional at 858-558-9200.

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