Which charitable giving strategy is best for you?

Checkbook giving is a great way to get started but as your philanthropy becomes more planful and strategic, you might want to consider a Donor Advised Fund (DAF) or Private Foundation.

A Donor Advised Fund is like a charitable investment account established for the sole purpose of supporting charities. Donors establish a DAF at a public, non-profit sponsor organization and can contribute cash, stock, real estate, or other business and financial assets. The donor receives an immediate tax deduction and the assets are invested and grow tax-free. The donor has the ability to then recommend grants to non-profit organizations over an extended period of time.

Potential Benefits of a DAF

• Start-up costs are minimal
• Donor receives income tax deduction for contributions (subject to IRS limitations) but can spread out grants over time
• Donors may give anonymously as no annual tax filings are required
• No distribution requirements, so Donor has full control over when grants are made

Potential Drawbacks of a DAF

• A DAF is a giving account within a sponsor organization, so Donor recommends how funds are invested and granted, but the organization must approve
• All gifts must be made to a 501(c)(3) organization, so gifts to individuals are not allowed
• Typically can’t be used for administrative, event or programmatic activities

A Private Foundation is an independent non-profit entity formed solely for charitable purposes. Typically, a family, individual or corporation is the source of funding for a private foundation and like a DAF, a private foundation can accept cash, stock, real estate, or other business and financial assets. Similar to any other non-profit organization, a private foundation is required to have a governing board and file for tax-exempt status with the IRS.

Potential Benefits of a Private Foundation

• Full control over how funds are invested
• Grantmaking decisions are fully controlled by the Foundation and private foundations are generally permitted to make a grant to an individual for a charitable purpose
• Can pay staff and administrative expenses from the Foundation
• Donor receives income tax deduction for contributions, subject to IRS limitations
• Creates a legacy for future generations to become involved in philanthropy if Donor so chooses

Potential Drawbacks of a Private Foundation

• Administrative costs and regulatory filings can be burdensome and board members are responsible for ensuring that financial and administrative functions are managed effectively
• Allowable Income Tax Deduction is less than a DAF or outright gift to charity
• Must annually distribute at least 5% of net investment assets
• Due to annual tax filing requirements, Private Foundations are unable to make anonymous gifts

There is not a right or wrong answer to which is a better giving vehicle – it very much depends on each donor’s unique situation and giving priorities. There can also be a benefit to utilizing both a Private Foundation and Donor Advised Fund.

If you’re interested in exploring what makes sense for you, please contact an 1834 Wealth Advisor.

Citations: Time Magazine Being Generous Really Does Make You Happier, and Nature Communications A Neural Link between generosity and happiness