Private Foundations and Donor Advised Funds: 5 Key Comparisons
What are the key differences between donor advised funds and private foundations?
Today, there are 86,516 private foundations in the country containing $855.81 billion in assets and making $49 billion in grants.
By comparison, there are five times as many donor advised funds—463,622 with $110 billion in assets and $19 billion in grants, according to the 2018 National Philanthropic Trust Donor Advised Fund Report.
Why donor advised funds are popular
Donor advised funds are simple to set up. They’re usually online and simple to manage—just like a bank account.
By contrast, private foundations require a filing with the IRS to obtain tax-exempt status, and the filing of annual tax returns.
One of the key misnomers: private foundations are not private. The tax returns of private foundations are publicly available on websites like Guidestar.
Because donor advised funds have no such filing, donors can give anonymously if they choose.
- Greater Tax Deductions
Under the new tax law, donors may deduct up to 60% of their income using a donor advised fund. Donors can only deduct 30% of their income using a private foundation.
- Fewer Unsolicited Requests
Because private foundations are a matter of public record, savvy grant-seekers will pull the tax return of private foundations as a means of making a request.
On the other hand, because a donor advised fund has no tax return, grant-seekers must go through the sponsoring organization, which means the requests are dramatically curtailed.
- Complex Gift Capability
A 1998 law made it possible for public charities, including donor advised funds, to receive closely held stock.
Donor advised fund groups like The Signatry have developed unique expertise in receiving these kinds of gifts on behalf of individual donors seeking maximum deductions.
Private foundations have lower deductions and self-dealing rules which make these kinds of donations less attractive.
When private foundations make sense
What’s the No. 1 reason I still see families opt for a private foundation?
In a private foundation, they may desire to hire a family member. Ask whether with compensation restrictions that is the best way to go.
Nonetheless if the desire is to hire a family member to run the foundation then, given enough assets, the private foundation may be the better option.
We expect donor advised funds to continue their rapid growth.