A PERFECT PAIR: DONOR-ADVISED FUNDS AND PRIVATE FOUNDATIONS
Private foundations and donor-advised funds (DAFs) are among the most popular ways to give, accounting for nearly 30% of all annual charitable contributions. Conventional wisdom says that based on the advantages of each vehicle, they appeal to different donors. For instance, private foundations, owing to their high degree of control and flexibility, are typically associated with larger-scale gifts, while donor-advised funds are thought to be better suited for smaller donors due to the relatively low costs and simple set up of DAFs.
In reality, this is not a case of "either/or." Grant-making private foundation trustees can utilize DAFs in several ways to maximize flexibility and philanthropic bandwidth. That’s why private foundation trustees need to understand how DAFs work—and how they can work for foundations. Here are some of the most common situations where a private foundation may turn to a complementary DAF:
Meeting the “5% payout rule”
Private foundations are subject to special oversight rules, including a general requirement to pay out at least 5% of assets each year for charitable grants or activities. However, there are times when foundations may find it challenging to identify sufficient, qualified grant opportunities in a timely fashion. Rather than force a premature decision to satisfy the IRS rule, a private foundation might elect to grant part or all of the annual 5% requirement to a DAF, which is not subject to this annual payout rule. By doing so, the foundation would satisfy its statutory distribution requirement in time, while giving the board time to determine thoughtfully when and where to recommend grants through the DAF.
There is nothing private about charitable grants made by foundations. By law, that information must be disclosed on IRS Form 990-PF, which can be publicly accessed. A donor to a DAF may remain anonymous to a grant recipient if they choose. A DAF sponsor, such as Fiduciary Trust Charitable, is only required to report in aggregate across all sources the amounts granted to each charity, and is not required to publicly disclose donor names.
Enabling a Trustee(s) to Split from the Foundation
While serving on a family-established private foundation board can be a rewarding and enjoyable experience, it can also become burdensome due to the administrative obligations of serving on a foundation board or even interpersonal reasons. Should a private foundation trustee prefer to end his or her trustee duties but remain involved in the charitable mission, a DAF can provide a solution. If permitted by the foundation's governing documents, the foundation's trustees can distribute a share of the foundation’s assets to a DAF that is advised solely by a resigning trustee (or another designated individual).
Converting the Foundation to a Donor-Advised Fund
Given the costs, time, and complexities of operating a private foundation, some foundations that only make grants to public charities have determined that a DAF is a better solution. In these situations, the foundations distribute their funds to a DAF that the foundation's trustees establish. In doing so, they typically eliminate the taxes, legal fees, other operating expenses, and risk associated with the foundation, while also reducing the time required of trustees. When making this transition, it is important to work with a DAF provider and legal counsel who are familiar with this process to help ensure the appropriate steps are taken.
Cultivating the Next Generation
Families often find philanthropy helps to pass values down to the next generation. Enabling members of the younger generation to recommend grants from a DAF is an excellent way to engage them in the charitable giving process, while not immediately requiring them to take on all the responsibilities of a foundation trustee. This can also help prepare the next generation for later assuming the full responsibilities of a private foundation trustee.
The Unique Benefits Fiduciary Trust Charitable Offers
In choosing a donor-advised fund sponsor, many foundation trustees find it is important to select a provider that can bring a high level of expertise, service, and customization to the table. Fiduciary Trust Charitable (FT Charitable) is an independent public charity that offers DAFs and has serving private foundation trustees as a focus area. Features that distinguish FT Charitable include:
FT Charitable's administrative services provider, Fiduciary Trust Company, has over 130 years of experience serving charitable trusts, foundations and endowments, and has in-house trust counsel with nonprofit expertise. This knowledge can be a valuable additional resource to you as you work with your own legal counsel and advisors to convert a private foundation to a DAF or otherwise utilize a DAF to enhance the operation of your foundation, and also when staying current with changes in nonprofit law.
Personal Service and Guidance
Our donors have one-on-one relationships with advisors who take the time to understand their goals, provide customized advice, and deliver flexible service. To complement this advisor relationship, we also provide access to account information online and via our mobile app.
Tailored Investment Approach
Based on understanding the goals and time horizon of the DAF and the donor’s investment preferences, a tailored investment approach is developed for each donor’s fund. Investment advisory services can be provided by Fiduciary Trust Company or another advisor selected by the donor and approved by FT Charitable.
We have a broad universe of investment options available, including individual securities, mutual funds, ETFs, and other vehicles. This is distinct from many other DAFs that have limited sets of investment options that are often proprietary.
In some situations private foundation trustees are interested in establishing DAFs with special features. We have experience customizing our DAF offerings to these donor-specific needs.
Competitive Fee Structure
FT Charitable's DAF standard administrative fees are among the lowest in the industry.
A donor-advised fund can be a valuable complement or alternative to a grant-making private foundation. Depending upon the approaches used, the benefits of DAFs can include reduced administrative costs and taxes, grant anonymity, grant flexibility, reduced time requirements, and lower trustee risk. In determining how best to use DAFs, it is important to obtain the appropriate legal counsel and DAF provider that can provide the necessary guidance and best DAF solution.
If you are interested in discussing whether a donor-advised fund can be helpful to your private foundation, please contact us.
Click here for a table that summarizes the key differences between donor-advised funds and private foundations.
The opinions expressed in this article are as of the date issued and subject to change at any time. Nothing contained herein is intended to constitute investment, legal, tax or accounting advice, and clients should discuss any proposed arrangement or transaction with their investment, legal, or tax advisers.