Donor-advised funds and private foundations first intersected during the Great Depression. Dating back to the 1930s, a community foundation created the first donor-advised fund. Since then, donor-advised funds have spiked in popularity because of the many beneficial tax advantages they offer.
Donor-advised funds account for 13% of donations made by individuals. Large global investment firms like Fidelity, Schwab, and Vanguard have whole departments dedicated to donor-advised funding. Fidelity Charitable receives the most donations in the U.S. today.
Private foundations also play a major role in charitable giving. Almost 120,000 foundations in the U.S. are currently holding $1.2 trillion in assets.
There are a host of nuances in the comparison between donor-advised funds vs. private foundations, and we’ve got the details to help your nonprofit board sort things out.
Tax Implications for Donor-Advised Funds vs. Private Foundations
One of the major standouts in the difference between donor-advised funds and private foundations relates to how they’re taxed. Taxpayers can deduct the fair market value (the prices a willing buyer would pay) of certain things, including donations.
For donor-advised funds, tax-deductibility typically applies to assets that have been held for over a year. The limit for tax deductions for cash is 60% of the adjusted gross income while the tax deduction limit for gifts of real property or stocks is 30%. There’s no tax deduction on investment income, and organizations can take tax deductions in the same year. Donor-advised funds are subject to an excise tax of 5% of the grant, which is imposed on the manager, officer, and directors of the sponsor that agreed to make the grant. However, the maximum tax can’t be over $10,000.
When it comes to tax management for private foundations, deductibility for privately held assets is limited to the fair market value, and the fair market value typically applies to publicly traded securities and cash that has been held for more than a year. The limit for tax deductions of gifts of stocks or real property is 20%, and there’s a deduction limit of 30% of the adjusted gross income. Private foundations are also subject to an excise tax of 1.39% of the annual net investment income. Additionally, private foundations are required to file detailed public tax returns related to staff salaries, trustee names, grants, and investment fees.
Administrative Activities and Costs Between Donor-Advised Funds and Private Foundations
The sponsoring organization takes care of all the administrative activities for donor-advised funds including managing record-keeping and tax filings.
Sponsors can set up donor-advised funds almost immediately, and there aren’t any startup costs. The operating expenses are low at .85% or less, and sponsors can tack on investment management fees. Sponsoring organizations are allowed to set amounts for minimum investments, limiting who can access them. The minimum fees may be as low as $5,000 or as high as $25,000.
With the sponsoring organization taking care of all the time-consuming details, donors gain the freedom to spend more time working on their charitable goals.
Unlike donor-advised funds, private foundation funds can’t be set up quickly. In fact, it can take anywhere from a few weeks to a few months to get one going. It also takes a good deal of time to maintain the account.
The costs for private foundations are significantly higher than with donor-advised funds, particularly with regard to the legal fees. Administrative costs are also higher than with donor-advised funds. They average around 7% every year.
Administrative costs are significantly higher with private foundations because they’re responsible for managing all the assets, keeping records, selecting charities, and administering grants. Private foundations are also responsible for filing state and federal tax returns. It’s common for private foundations to hire staff and enlist the help of outside advisors to assist with administrative tasks.
Private foundations are required to appoint a board, hold board meetings, record meeting minutes, and perform other standard board and governance duties. Such duties also add to the already high administrative expenses.
Nuances Related to Award Giving for Donor-Advised Funds and Private Foundations
Donor-advised funds and private foundations are both powerful giving vehicles. Something notable that sets donor-advised funds apart from private foundations is flexibility.
With donor-advised funds, sponsors recommend charities for sponsors to give their funds to, and donors almost always act on their recommendations.
As the name suggests, donor-advised funds give donors a good deal of flexibility. They can decide which charities to give funds to and decide when they want to make distributions. Donors also have the ability to customize charitable grants. What’s more, there are no legal requirements to distribute grants of any amount or percentage.
Something that’s attractive to a lot of donors is that donor-advised fund programs allow them to give grants anonymously if they wish. Still another advantage of donor-advised funds is that donors have the ability to pass the fund down to their heirs via their wills or estate plans.
Unlike donor-advised funds, private foundations are required to expend 5% of their net assets every year, regardless of how much the funds earn.
Donor-Advised Funds vs. Private Foundations: What’s Right for your Nonprofit?
It takes a bit of time to get up to speed on all the distinctions between donor-advised funds vs. private foundations. There are no hard and fast answers as to which program is right for your nonprofit. Your final decision should be made only after getting all the facts and gaining a complete understanding of both vehicles. To make decision-making easier, it helps to get the advice of financial advisors and charitable giving experts.
Regardless of your final decision, all nonprofits need a system to keep their activities and records organized. BoardEffect is a total board management system that incorporates every board management tool into a single, secure platform. Whether it’s scheduling a board meeting, creating board books, approving and storing board meeting minutes, or collaborating on projects, everything can happen securely using the BoardEffect platform. Each board member has their own login credentials, and they have access to the program around the clock. It’s the most effective program for nonprofits of every kind.