Choosing the Right Charitable Giving Vehicle

Philanthropists and their advisors often wrestle with their options for charitable giving vehicles. You’ve mostly heard of a donor advised fund (DAF) and a private foundation, which are the two most common. Families can choose alternatives in the form of LLCs or Trusts. More sophisticated philanthropists may utilize a variety of giving vehicles to accomplish their philanthropic, tax planning and investment goals.

Understanding Charitable Giving Vehicles

Let’s start at the beginning: According to the National Center for Family Philanthropy, giving vehicles are “the tools and entities you can establish to manage your philanthropic resources and achieve your social impact strategy. If your philanthropic purpose is the why of your philanthropy, the vehicles are the how. Your choice of vehicle should be informed by your purpose.”

Types of Charitable Giving Vehicles

Private foundations and donor advised funds are the two most commonly used vehicles in the field today.

A Private Foundation is a 501(c)(3) organization that is funded and controlled by an individual or a family. It has a defined charitable mission and makes grants to support the mission. A board governs and oversees the governance of the foundation. There are two types of private foundations: operating and nonoperating. An operating foundation administers a charitable program. A nonoperating foundation achieves its charitable mission through its grantmaking.

A Donor Advised Fund is held at a sponsoring organization that is a 501(c)(3) entity. The donor advised fund acts like an investment account with a charitable focus. When you donate your assets to a donor advised fund, you take an immediate tax benefit, it is invested for tax free growth and you can then make recommendations for grants to IRS qualified public charities.

Additional Options of Charitable Giving Vehicles

This Glossary of Charitable Giving Vehicles shared by National Philanthropic Trust is a terrific resource to better understand the charitable giving vehicle landscape. There are many options for charitable giving vehicles including the 12 shared in the Glossary. All have pros and cons, so determining which giving vehicle is best for you and your family requires research and conversations with your team of advisors.

Key Considerations Before Selecting a Charitable Giving Vehicle

As mentioned, your philanthropic purpose should determine the vehicle you choose. Another key consideration is your timeline–do you want your philanthropy to continue for multiple generations? Your time horizon should also serve as a guide for your giving vehicle selection. If you want your philanthropic support to be anonymous should help inform your vehicle selection. Finally, your resources–both financial and administrative–will be an important consideration before finalizing your selection.

Evaluating the Benefits and Drawbacks of a Donor Advised Fund + Private Foundation

While all charitable giving vehicles help support how you allocate your philanthropic contributions, they are unique in a variety of ways. We’ve outlined below several of the pros and cons of donor advised funds and private foundations.

Control + Governance

One major advantage to setting up a private foundation is that the donor and their appointed board is in control of the assets and sets the governance. The Board sets the strategy and guides the investments. Having a private foundation with a governance structure also allows the family to join in the decision making over time, whether the foundation is set up in perpetuity or a limited time horizon.

One downside to a donor advised fund is that while the donor can recommend grants and investment strategies, the ultimate decision-making is held by the sponsoring organization. And there is often a limitation on the  number of donor advisors allowed to make these recommendations, so even if the donor advisor gathers feedback from a broader group, it’s ultimately their recommendation. This may lead to less ownership and engagement if the intention is to build multi-generational family philanthropy.

Total Assets Dedicated to Philanthropy

Private foundations can house nearly any type of asset. They also have the flexibility to make Program Related Investments (PRIs) which are low- or no-interest loans to worthy causes or organizations, an alternative way to put the “other 95%” of the assets to work for social impact. Typically, a donor advised fund has somewhat limited flexibility in how it can be invested; most are invested in a variety of pooled funds. Illiquid assets can be housed in a donor advised fund, but that is rare and is a more complex arrangement between the donor and the sponsoring organization. Increasingly, both types of vehicles are exploring Socially Responsible Investing, or “SRI,” and Impact Investing, with private foundations able to create portfolios that are more fine-tuned to their mission areas and goals.

Pace of Giving

Donor advised funds currently have no distribution requirement, although there are proposed regulations being considered intended to accelerate the rate of payout. Without the pressure of a required payout, a family can move assets to their donor advised fund and take their time to build a strategy, conduct due diligence and/or find the right moment to effect the change they hope to make. A private foundation must distribute a minimum of 5% of its assets annually or suffer significant penalties from the IRS.

Administrative Costs and Burdens

One key advantage to a donor advised fund is the cost to set up and maintain the giving vehicle is typically less than a private foundation. Donor advised funds are growing in popularity due to their convenience and a lower barrier for entry ($5,000-25,000). Private foundations must file taxes annually, perform due diligence on their grant recipients, maintain a board of directors, and adhere to self-dealing laws. Families should have their eyes wide open to the work it takes to manage a private foundation at a base level.

Tax Treatments

A donor advised fund offers greater tax advantages than a private foundation overall. This is a primary reason for the donor advised fund’s popularity, especially among those in the tax planning world. Both vehicles offer an immediate tax benefit to the donor, at higher levels of AGI when gifted to a DAF. Private foundations are also taxed a 1.39% excise tax on net investment income, whereas DAFs can grow tax free.

Transparency

A private foundation has an annual tax filing that discloses asset size, grants made, board member names, and many other financial and transactional information. A donor advised fund has a greater degree of anonymity as it is housed inside of sponsoring organization. It is easier to give anonymously through a donor advised fund.

What’s the Right Answer?

Each charitable giving vehicle has its merits and considerations. Thoughtfully weighing these options before establishing the vehicle is important, as it can be difficult to reverse. For instance, funds are allowed to flow from a private foundation into a donor advised fund, but not from a donor advised fund into a private foundation. (There are a few rare exceptions.) You should track the legislative developments under the Accelerated Charitable Efforts Act and the IRS’s proposed regulations, as the changes in laws may impact your planning.

Essentially, as a philanthropist’s life cycle and interests change, so can their preference in charitable giving vehicles. If you’re considering a giving vehicle at this time, lean on your team of advisors to help you determine the best vehicle for you and your family.

Charitable Giving Vehicle FAQs

1. Who should I talk to before setting up a charitable giving vehicle?

You should consult your CPA, attorney, wealth advisor and philanthropic advisor before setting up a charitable giving vehicle. They will all have a unique view on how to best meet your goals. You should also speak with your family to better understand their level of engagement, which will determine the time horizon for your philanthropic goals.

2. What are the initial steps after setting up a charitable giving vehicle?

After consulting your advising team, you should invite family and other trusted partners to the giving table to help guide early formation of your vehicle. Establishing your philanthropic values, mission, vision, focus areas and grant making criteria will be critical for early success. Creating early governance policies and practices provides an important framework.

3. What are the tax benefits of using a donor advised fund?

The donor receives an immediate tax benefit upon donation to the sponsoring organization that houses the donor advised fund. Generally, the tax treatment for donor advised funds is slightly more advantageous than a private foundation. A donor advised fund grows tax free while a private foundation is taxed a 1.39% excise tax on net investment income.

4. What are the benefits of control and governance over the assets using a private foundation?

The family retains control over investment strategies of assets. The family has full responsibility in how grants are made, opposed to recommending grants for a donor advised fund. The family chooses the time horizon for the vehicle and can choose the private foundation to carry on in perpetuity.

About Grant Philanthropic Advisors:
We’re an independent, Charleston-based firm helping clients to focus and maximize their philanthropy—in turn, strengthening the fabric of our communities. Founded in 2019, we help donors move from responsive patterns of giving by assisting clients to identify values and become more strategic in their philanthropy. Our goal is to help donors to become more effective as change-makers. Our team has a combined 60 plus years of experience working in the field of philanthropy.

We work with foundations (large and small staff teams), donor advised fund holders, multi generational families, individuals, philanthropy supporting organizations and corporations to design philanthropic strategies. We work with philanthropies that grant $1 million to $40 million annually. Our clients span the Southeast with a concentration in Charleston, Atlanta and Charlotte.