Donor Advised Fund Vs. Private Foundation, Explained

Donor Advised Fund Vs. Private Foundation, Explained

October 22, 2021

One of the most meaningful aspects of building wealth is the ability to donate to charitable causes close to your heart. It’s important to understand which charitable giving options make the most sense for you—today and as part of your legacy plan, as well as from a tax perspective. In this blog post, we’ll explore the difference between a Donor Advised Fund vs. Private Foundation, and the pros and cons of each one.

Are you seeking advice on charitable giving and tax planning? Our team includes Certified Public Accountants with strong tax expertise. Schedule a call with us today.

What is a Donor Advised Fund vs. Private Foundation?

A Donor Advised Fund is a charitable account that you as the donor open in your name. The funds you put into this account are held in custody by a non-profit organization with the purpose of gifting to 501(c)(3) charities at your discretion.

A Private Foundation is a non-profit organization that serves a specific cause (or multiple causes) chosen by the founder(s) and often gives grants to other non-profits but may not necessarily be a public charity.

The major difference between a Private Foundation versus Donor Advised Fund is that the former is a tax-exempt organization. Alternatively, a Donor Advised Fund is a charitable fund you create with the purpose of gifting to charities over time. Anyone can create a Donor Advised Fund with as little as $5,000; however, your initial investment can run anywhere from $1 million to $10 million to start a private foundation.

Donor Advised Fund Vs. Private Foundation: Pros And Cons

Both Donor Advised Funds and Private Foundations can reduce the size of your taxable estate at death, if that’s a concern for you. However, Donor Advised Funds offer clear advantages for the majority of Americans.

Donor Advised Fund: Pros And Cons

Donor Advised Funds are less expensive to run than Private Foundations and involve fewer administrative duties. For example, you don’t need to file a separate tax return for your Donor Advised Fund. You need less capital to establish these funds, and they don’t require you to give any of the money you contribute to a specific charity right away. You can take as long as you’d like to decide where you’ll donate the money while can grow tax-free in the fund.

The main disadvantages of Donor Advised Funds are that they can usually only accept cash, stocks, and bonds as gifts; they can only donate to registered 501(c)(3)s.

Private Foundation: Pros And Cons

A private foundation enables you to establish a legacy and engage the next generation of your family in charitable giving. Private Foundations allow you to support non-501(c)(3) operations such as scholarship programs, and they can usually accept other assets besides cash, stocks, and bonds. Some well-known private foundations include the Bill & Melinda Gates Foundation, Ford Foundation, Lilly Endowment, and Bloomberg Philanthropies.

The biggest drawback of a Private Foundation versus Donor Advised Fund is that the former requires a large amount of startup capital. In addition, foundations can take months to set up, and management fees can run as much as three times the cost of Donor Advised Funds.

There are more tax requirements associated with Private Foundations, and granting rules eliminate privacy if the grants you give out are above a certain amount. In addition, granting is controlled by the foundation’s board, unlike a Donor Advised Fund, which allows you alone to decide on the charities you support.

Pro Tip: If your family has a substantial amount of wealth as well as common charitable interests, it may make sense for you to start a private foundation. This will enable you to give a large sum of your wealth to charity instead of including it in your taxable estate at death.

When should you consider starting a Donor Advised Fund?

We’ve now covered the difference between a Donor Advised Fund vs. Private Foundation and discussed the pros and cons. Since the latter is the best option for most people, here are four instances in which you might consider starting a Donor Advised Fund if:

  • you have charitable intent—don’t give your assets away for the tax break if your heart isn’t in the right place.
  • you’ve sold your business or received a large company bonus.
  • you’ve retired and now have a low income.
  • you own a stock fund with a high embedded capital gain in a non-retirement account.

Bay Point Wealth can help you achieve your charitable goals.

At Bay Point Wealth, we coordinate financial and tax planning based on your personal situation, enabling us to guide your charitable decisions at the right time and in the right way. And, we’ll always make sure you’re donating your money in the most tax-efficient way possible. Interested in learning more? Schedule a call with us today.