Comparison of Private Foundation and Donor Advised Fund

05 November 2020 Legal News: Family Offices Publication
Authors: Jason J. Kohout
  Private Foundation  Donor Advised Fund 
Formation  Requires formation of a new corporation or trust; must apply for IRS exempt status.  Simple application and donor advised fund agreement with sponsoring organization. 
Responsibilities 

Directors and officers have fiduciary responsibilities to manage assets, keep records, prepare IRS tax returns, select charities, verify tax-exempt status of charitable recipients, make and administer grants. May delegate some activities to professional advisors.

Private foundation, donors, and officers and directors subject to self-dealing rules regarding transactions with the private foundation. 

Donors are only required to make grant decisions; donors may provide direction for investing funds (investment options depend on specific donor advised fund).

Donors and family members subject to certain restrictions regarding the donor advised fund. 

Tax Return/Privacy  Required. Form 990-PF must be filed annually and is made public; donors and grant recipients are made public.  Not required. Information is on sponsoring organization’s tax return, but is not identified with donor.  Contribution information is generally anonymous, even to recipient organizations, if preferred.  
Charitable Contribution Deduction 

For publicly-traded stock, donor receives charitable deduction equal to fair market value (limited in certain cases where donor or donor’s family owns a significant proportion of total shares).

For contribution of closely-held interests or real estate, charitable income tax deduction limited to basis.

May claim charitable income tax deduction of appreciated long-term capital gain property at FMV, but deduction is limited to 20% of donor’s AGI. Can opt to take deduction equal to basis; deduction is limited to 30% of donor’s AGI. Excess may be carried forward for five years.

Deduction for cash contribution limited to 30% of AGI with same 5 year carryforward.  

For publicly-traded stock, donor receives charitable deduction equal to fair market value.

For closely-held interests and real estate, charitable deduction generally equal to fair market value.

May claim charitable income tax deduction of appreciated long-term capital gain property at FMV, but deduction is limited to 30% of donor’s AGI. Can opt to take deduction equal to basis; deduction is limited to 50% of donor’s AGI. Excess may be carried forward for five years.

Deduction for cash contribution limited to 60% of AGI with same 5 year carryforward.  

Income Tax  1.39% annual tax on net investment income  Not subject to tax. 
Limits on Grant-making  Can award scholarships and prizes directly (after IRS approval). Can make “program related investments” where the private foundation could receive a return from investment in non-profit activity.  Distributions limited to section 501(c)(3) organizations; may make grants to organizations to fund scholarships and prizes. Can make investments in program related investments. 
Benefits to Donors  Funds cannot be used to make contributions where the donor receives a quid pro quo benefit, such as an event tickets or auction items
Pledges  Funds cannot be used to fulfill donor’s individual pledge.   Funds can be used to fulfill donor’s individual pledge if the DAF sponsoring organization does not reference the existence of the charitable pledge.   
Payments to Family Members for Involvement  Family members may serve as directors and officers; directors and officers may receive reasonable compensation for foundation work.  Family members may serve as advisors. Family members may not receive compensation from donor advised fund. 
Investments  Wide variety of investments  Typically, donor has access to a limited number of investments, although sponsoring organizations will make arrangements for larger funds. 
Required Grant-making  Required to make grants equal to 5% of the foundation’s assets annually.  No distribution requirement. Sponsoring organization may require certain distributions over time. 
Legal Control  Donor can retain legal control of private foundation. Control of the organization is vested in directors or trustees appointed by the donor.  Donor does not have legal control, but may make recommendations about investments and grants.  Sponsoring organization almost certainly follow these recommendations unless (i) the proposed grantee is not a proper charity or (ii) the proposed grantee is outside the scope of the donor advised fund. 
Grant-making after Donor's Passing  Directors and trustees left in place after donor’s passing generally control the distribution of assets (subject to any legally binding restrictions left by donor).  Family members (or others) may be designated as successor advisors. Sponsoring organization may limit grants to those made in accordance with donor’s overall wishes. 

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