If you are considering establishing a private foundation to carry out your charitable interests, you may want to consider establishing a donor advised fund at Community Foundation of Grundy County instead. Donor advised funds offer several advantages over private foundations.
How Donor Advised Funds Work
Donor advised funds are component funds of Community Foundation of Grundy County. They are generally permanent endowment funds with a percentage of the fund used each year for charitable purposes. If the donor wishes, the fund can be set up to spend some or all of the principal as well. Once the fund is established, the donor provides advice to the Community Foundation about where gifts from the fund should be made.
Donors who create private foundations frequently struggle with long-term governance questions. With a donor advised fund, the donor advises the Community Foundation about the distribution of grants from the fund during his or her lifetime. In addition, donors may designate their children or other trusted individuals to succeed them as donor advisors.
At the end of the donor-advising period, the remaining principal is used to create a fund to benefit an organization or cause of the original donor’s choice, or placed in the Community Foundation’s undesignated pool to be used to meet the most pressing needs of the county. The guidelines for these funds are agreed upon when the initial gift is made.
Many donors recognize that their leadership will inspire others to give. For these donors, having their gift publicly recognized adds to the value of the contribution. Other donors prefer to remain anonymous. Still others want to honor or memorialize a loved one. Donor advised funds can be created to satisfy any preference.
Donors choose the name of the fund that they establish. Grants made from a donor advised fund are identified to the recipients by the fund’s name. For existing private foundations, the change may be as simple as switching the name from “The Jones Family Foundation” to “The Jones Family Fund.
Community Foundation funds offer significant tax benefits over private foundations. For federal tax purposes, gifts to private foundations of appreciated property (other than publicly traded securities) are deductible only at the donor’s cost basis.
Gifts of appreciated property made to the Community Foundation are deductible to the donor at their current fair market value. This difference can result in substantial tax savings to the donor.
In addition, a gift to the Community Foundation will enjoy a higher limit of deductibility as a percentage of the donor’s adjusted gross income. Gifts of cash to the Community Foundation may be deducted up to 50 percent of the donor’s adjusted gross income (AGI). Generally, gifts of cash to private foundations are limited to a deduction of 30 percent of AGI.
Gifts of appreciated property to the Community Foundation are deductible up to 30 percent of AGI, while gifts to a private foundation are only deductible up to 20 percent of AGI.
Beyond the deductibility of gifts, the Internal Revenue Code assesses an excise tax on the net investment earnings of private foundations. This tax amounts to either one or two percent of net investment earnings, depending on the foundation’s distribution pattern. Community Foundation funds are not subject to the excise tax.
Private foundations are required to distribute five percent of their net investment assets each year, while community foundations are not. This means that a donor advisor and the Community Foundation can agree to “grow” a fund by reinvesting earnings in anticipation of making larger gifts.
The Internal Revenue Code also provides strict limits on the amount of stock that can be transferred to a private foundation by board members or donors. The Community Foundation is not subject to these limits. This allows donors who are major shareholders of their companies to make more tax advantageous gifts.
Beginning and operating a private foundation is an expensive and time-consuming proposition. Initial legal and accounting fees to incorporate and to seek IRS approval can easily reach $3,000. The annual accounting costs and tax filing fees are likely to be at least $1,000 to $2,000. Beyond these fees, charges paid to an investment manager can exceed one percent of the fair market value of the fund annually.
The Community Foundation charges donor advised funds a fixed administrative fee equal to 2.0 percent of the fund’s annual fair market value.
To determine the method, or mix of methods, that make the most sense for structuring a gift through Community Foundation of Grundy County, this information should be reviewed with a competent financial, tax or estate planner.
Affluent individuals who wish to make a commitment to philanthropy often consider establishing a private foundation. Actually, as the following table shows, a donor advised fund at the Community Foundation of Grundy County offers numerous benefits over a private foundation, and is easier to create.
Donor Advised Fund
None, can be established immediately
Legal fees and other start-up costs can be substantial; typically takes several weeks and often months to create
Ongoing Administrative and Management Fees:
200 basis points (2.0%)
Substantial, typically 250-400 basis points (2.5% to 4% per year)
Tax deduction limits for gifts of cash:
50% of adjusted gross income
30% of adjusted gross income
Tax deduction limits for gifts of stock or real property:
30% of adjusted gross income
20% of adjusted gross income
Valuation of gifts:
Fair market value
Fair market value for publicly traded stock, cost basis for all other gifts, including gifts of closely held stock or real property
Required Grant Distribution:
None (on donor’s timetable)
Must expend 5% of net assets value annually, regardless of how much the assets earn
None – all investment earnings grow tax free
Excise tax of 1% to 2% of net investment income annually
Names of individual donors can be kept confidential if desired and
Must file detailed and public tax returns on grants, investment fees, trustee names, staff salaries, etc.
Recommend grants to favorite charitable causes
Manage assets, keep records, select charities, administer grants, file annual state and federal tax returns, maintain board minutes, etc.
DAFs can exist in perpetuity
Foundations can exist in perpetuity