Private foundation, donor advised fund or both: how to decide

At some point, people who are inclined to charity might find that writing checks here and there to various nonprofits is no longer enough.

For those who want a more permanent way to help the greater good in their lifetime, and possibly beyond, options include either a private foundation or a donor advised fund. While they are similar, there are some differences that can help you determine whether one or the other (or maybe both) is right for you.

“These are two devices that allow you to donate money now and distribute it over time,” said certified financial planner Mitchell Kraus, co-founder of Capital Intelligence Associates in Santa Monica, Calif.

“The biggest difference is that a donor-advised fund is more of a simplistic solution… but doesn’t allow as much flexibility,” Kraus said.

Here are some tips to help you decide.

Generally speaking, they’re easy to set up and maintain: you fund your account and get a tax deduction, then you can decide over time when and how much to give to charity.

These funds are sponsored either by a community foundation or other group (i.e. hospital or church) or by a national non-profit organization which may be affiliated with a financial company like Fidelity Investments or Vanguard . Some funds may be more restrictive as to where your grants go.

“Say he’s sponsored by a religious organization – he may have charities that he won’t grant,” said CFP Howard Hook, senior and senior heritage advisor for EKS Associates in Princeton, New Jersey.

“Just make sure in advance that they’ll accept any grants you recommend,” Hook said.

You can get a tax deduction for amounts donated worth up to 60% of your adjusted gross income, or AGI, to a donor advised fund. For valued assets, the deduction limit is 30%. If you exceed these donation limits, you can defer excess deductions for up to five more years.

You should also be aware that a temporary rule (for 2020 and 2021) allowing charitable cash contributions of up to 100% of your AGI does not extend to money you put into a fund. advised by donors, Hook said.

These funds may or may not have a minimum amount that you need to set one up, although they usually all have an annual cost to you. For example, at Fidelity Charitable – one of the biggest sponsors of these funds – there is no minimum and the cost is around 1% of your annual balance. This includes administrative costs and investment costs, and is deducted from your account.

You can also donate assets that you have held for more than a year – for example, stocks or real estate – to the donor advised fund and generally get a tax deduction for the value of the asset. active.

“When you donate a highly valued property, you are essentially avoiding paying the capital gains tax that you would have had if you had sold the asset,” said David Mendels, CFP and Director of Planning at Creative Financial Concepts in New York.

In addition, if you wish, you can make anonymous donations from your account. And, there is currently no timeline for the distribution of the money you contribute. (This aspect of donor-advised funds has come under fire from critics who argue that individuals make contributions and get the tax deduction but don’t necessarily give grants in a timely manner.)

In general, the creation of a private foundation involves more procedures and costs. This can make it less attractive to people with more limited resources.

For example, you could spend between $ 4,500 for a service specializing in foundation administration and up to $ 25,000 for private attorneys handling the process, according to the American Endowment Foundation.

“In general, I don’t take seriously having a conversation with a client about a foundation until they have about $ 2-3 million to donate,” said Kraus at Capital. Intelligence Associates. “You could end up spending more on accountants and lawyers than on the causes you care about.”

In addition to the ongoing administrative fees, there are tax filing requirements that don’t come with donor-advised funds. And, generally, 5% of the assets must be distributed annually and there may be an excise tax of 1.39% on the net investment income.

The tax deduction for contributions to your foundation is lower than for funds advised by donors: limited to 30% of the AGI for cash and 20% for publicly traded securities. (Although you can carry over excess amounts for up to five years.)

Nonetheless, “some people are very convinced that they can run a foundation,” Hook said at EKS Associates.

This is partly due to the flexibility offered by private foundations as to what causes you want to support.

“You have more control because you can basically give to whoever you want,” Hook said.

You can also choose who you want to sit on your board of directors and make decisions about charitable activities.

Depending on the type of foundation, you can donate to existing public charities, award international grants, award scholarships, or even donate funds directly to individuals for disaster relief and hardship assistance. , according to Foundation Source. Some private foundations also create their own programs to work, although most do not.

“For someone who wants full control, or who has been an entrepreneur and likes to build something from scratch, a private foundation can be attractive,” Kraus said.

Some people may decide that it makes sense for them to create both a foundation and a donor advised fund. One of the reasons is confidentiality.

“Sometimes a person wants to publicize a donation from their foundation, but they can also support a cause that they don’t necessarily want to know publicly,” Kraus said. “And it can be done anonymously with a fund advised by donors.”

For example, he said, a person could support a controversial cause – that is, on either side of gun rights or abortion rights – and would prefer to keep this fact out of public view.