As I mentioned in our May 2018 newsletter, the passage of the Tax Cuts and Jobs Act of 2018 altered or eliminated the deductibility of many taxpayers’ favorite deductions, including charitable giving. But for many, especially thriving retirees and other wealthy Americans, giving to a cherished and worthy cause isn’t just about the tax benefits; it’s about the importance of the organization to the donor’s core values. So, while many taxpayers may begin utilizing some different strategies to accomplish their philanthropic goals, giving to charity is likely to continue its importance.
Some individuals, especially those with significant means, may wonder whether it is more advantageous to set up a private foundation to carry out their philanthropic wishes or make use of a donor-advised fund (DAF) to channel their gifts. Both alternatives have advantages and disadvantages, so let’s look at some quick comparisons.
Pros and Cons of a Private Foundation
The principle advantage of a private foundation is the greater control it affords the donor. A private, 501(c)(3) foundation can make gifts to not only IRS-qualified charities but also to individuals (such as student scholarships, for example) or for other charitable efforts (such as the establishment of an institute or other nonprofit organization). Foundations are also flexible with regard to their investment options and holdings.
However, private foundations require complex legal work for their establishment, and the reporting requirements, annual distribution levels, and administrative/organizational constraints are extensive. Ironically, private foundations, despite their name, are actually less private, due to the ongoing reports required, including annual federal and state tax returns.
Pro and Cons of a Donor-Advised Fund
DAFs, by contrast, are much simpler for donors to utilize. The only requirement from the donor, after making the donations to the fund, is to make periodic gifting recommendations. The transactions can be completely private, and there are no reporting, administrative, or other requirements for the donor.
Some DAFs provide gifts to specific charities, while others will distribute donations to any qualified charity chosen by the donor. Unlike private foundations, however, DAFs may only provide gifts to IRS-qualified charities. Like private foundations, DAFs can accept donations of cash, appreciated stock, and real estate, though some DAFs have limitations.
Which One Should You Choose?
If you are considering the establishment of a private foundation as a means of furthering your family’s philanthropic legacy, or if you are wondering about using a DAF to funnel gifts to an organization you care about, I can help you decide which alternative is right for your situation. In consultation with your tax and legal advisors, I can also assist with evaluating which assets should be considered for gifting. You have important goals for your charitable giving; let me help you find the best ways to reach them.
Stay Diversified, Stay YOUR Course!