For many in the community, giving back is part of their DNA. We want to make sure we share our wealth and even establish a family culture of philanthropy. We find many different ways to give back — by volunteering our talent and time or through donations of money or non-cash assets.
When it comes to managing our larger financial contributions, there are several options. Two of the most common include opening a Donor Advised Fund (DAF) or establishing a private foundation (PF). Many people come to us at the Community Foundation of Anne Arundel County (CFAAC) asking, “Which is better for me?” So, let’s take a look at the differences.
A Donor Advised Fund is a giving account held at either a community foundation or financial institution to manage charitable donations. A DAF can be set up quickly and easily and can be used for giving throughout the fundholder’s lifetime and beyond.
Fund holders can grow it via a variety of investment options and make charitable grant recommendations on their timetable. They can also name successor advisers for their fund allowing their philanthropy to continue when they are no longer able to serve as the fund’s adviser.
The sponsoring organization files all tax returns for the fund and contributions provide an immediate tax benefit — up to 60% of adjusted gross income (AGI) compared to 30% of AGI for a private foundation. Fees to establish a DAF are very small versus up to $10,000-$15,000 setup costs for establishing a private foundation. Basically, Donor Advised Funds are low-cost, tax-efficient, avenues for making charitable contributions.
Private foundations are charitable organizations, usually started by a family, individual or corporation. Unlike DAFs, private foundations have their own governing body, which manages the foundation, performs administrative duties, files all required tax returns and has control over decisions regarding investments and grantmaking.
PFs must make a minimum of 5% annual distributions of their net assets or face penalties. When considering estate planning, a PF’s directors and trustees need to create a detailed succession plan that clearly outlines the organization’s future to ensure its vision and values continue.
While both DAFs and PFs can be used to contribute to charities of the donor’s choice, there are differences. For example, if you open a Donor Advised Fund at CFAAC, the staff ensures each nonprofit you’d like to support is in good standing with regulators, issues the check from your fund and confirms its distribution.
Your charitable tax deduction is based on your gift(s) to your fund at CFAAC, and documentation of your fund’s activity, including donations made to the fund and grants made through the fund, are all captured and accessible online, which simplifies record keeping for you.
There are several other administrative advantages when opening a Donor Advised Fund managed by CFAAC, including the ease of establishment and tax exempt status. When establishing a private foundation, a corporation or trust is required and you must apply for tax exempt status with the IRS, which could take up to six months to process. Also, a PF must conduct its own research into the viability of a nonprofit.
Both DAFs and PFs allow flexibility to update the philanthropic goals and strategies for grantmaking. With DAFs, changes can usually be made with a few clicks online or through conversations with the philanthropic advisors who work with donors at no cost. With PFs, making changes down the road might be a bit more complex as it might have to modify estate planning documents and pay the fees associated.
When donating cash, both DAFs and PFs can be good options depending on the situation. When it comes to donating noncash assets, a PF usually hires an expert to manage the process. Donating noncash assets to a DAF requires very little work on the fundholder’s part and the sponsoring organization does the rest.
While it’s ultimately the decision of the donor, a professional adviser can help you to make the right decision for your circumstances. If you have any questions regarding DAFs, reach out to CFAAC. We would be happy to answer your questions at 410.480.1102 or info@cfaac.org.
The Community Foundation of Anne Arundel County (CFAAC) is celebrating 25 years as a tax-exempt, 501(c)(3), publicly supported philanthropic organization with the long-term goal of building permanent funds that provide support to local nonprofit organizations through grants and special projects. Our mission is to inspire and promote giving in Anne Arundel County by connecting people who care with causes that matter. Established in 1998, CFAAC is one of the largest funders of nonprofit organizations in Anne Arundel County. CFAAC distributes $5 to $7 million annually.
