Charitable Giving with Donor-Advised Funds and Private Foundations

The generosity of Americans is borne out by the more than $410 billion they donate annually to charitable causes and organizations. Most of those donations, about 70 percent of them, come from individual donors. People have their individual reasons for making charitable donations, but one of them might be reducing the amount of taxes payable by their estates. Donor-advised funds and private foundations offer two distinctly different methods to accomplish your charitable giving.

Private Foundations

A private foundation requires the creation of an entity that is legally recognized as being separate and apart from the person funding it. It can be created to last beyond your death, so your family and future generations may continue the charitable work of the foundation you create.

Private foundations make contributions, usually in the form of monetary grants, to other charitable organizations or to individuals for charitable purposes. Funding for a private foundation normally does not come through donations from members of the public. Instead, funding comes from the individual or family that controls and operates it.

The money or assets you contribute to your private foundation entitles you to an income tax deduction. The foundation acquires ownership and control over the assets contributed by you. You could retain sole governing power over your private foundation, or it could be governed by members of a board depending upon your wishes.

Charitable Giving with Donor-Advised Funds 

The IRS defines a donor-advised fund as an account managed and operated by an organization referred to as the “sponsoring organization.” When you make a contribution to a fund, legal ownership, and control of the money or assets transfer to the sponsoring organization. The reason it is called a “donor-advised fund” is because you have the right to advise the organization of your wishes regarding the charitable use for what you have donated.

Donor-advised funds allow you to make a contribution and receive a tax deduction for the year in which it is made. The sponsoring organization invests and manages the assets donated until such time as you decide upon the charitable cause or organization to which you want the sponsoring organization to disburse funds.

The costs associated with the creation and management of a private foundation can be avoided with a donor-advised fund. Deductions available for contributions made to a donor-advised fund can greatly reduce an individual’s adjusted gross income for the year in which the contributions are made.

Assets with a low-cost basis that have appreciated in value from when you first acquired them could subject your estate to taxation when sold. Instead of holding on to them, donating them to a donor-advised fund avoids capital gains that you or your estate might have to pay upon their sale. You not only avoid paying tax on the value appreciation, but the asset’s value is no longer a factor in the overall value of your estate.

Comparison of Private Foundations and Donor-Advised Funds

Private foundations must be set up to meet IRS and state rules and regulations requiring an initial outlay of money. There could also be administrative or management costs associated with the operation of a private foundation.

The sponsoring organization of a donor-advised fund incurs the costs of establishing the fund. You must pay management fees to the sponsoring organization for the investment services it performs.

Determining which method of charitable giving is best suited to your estate plan should begin with a consultation with an experienced estate planning attorney. The attorneys at Magee & Adler, APC use their knowledge of California and federal law to review your charitable giving and discuss options for its implementation. Call them now at 562-432-1001 to schedule an appointment.