Donating money to charities can be a great way for a family to make an impact on their community, and to create a lasting legacy. Charitable donations can also make sense as a way to eliminate tax liability.
Many times, when a family is considering a donation to charity, the donation they will fund the donation with a gift of appreciated securities – stocks or properties at a low cost basis, which would create a large tax liability if sold normally. Sometimes a family will make direct donations to a charity, whether its immediate or in the future through a charitable trust. However, sometimes a family will want to create a general purpose charitable fund to make donations to different charities across many years, potentially even generations. In these situations when flexibility and long giving lifecycles are desired, there are several vehicles a family can use. Some of the most common are the donor advised fund (DAF) and the Private Foundation.
In both a DAF and a Private Foundation, a fund is set up and invested. The investments of the fund are then used to make charitable grants to charities as the donors see fit. This allows a lot of flexibility and a long horizon for grantmaking on behalf of the donors – to different charities as their interests, objectives, or affiliations change.
There are a lot of differences between a DAF and a private foundation, and it would require some time to explain them all. However, what the differences boil down to in essence is that DAFs are set up and housed in larger charitable organizations – for example several major investment custodians will have a master charity that exists to house client DAFs. Because of this, DAFs can benefit from the larger organization’s operational structure, and efficiencies and can generally be set up cheaply and quickly. Private foundations are not part of other organizations generally require a fair amount of legal work and staffing. They are also subject to some stricter rules in terms of minimum distributions, and disclosure. Generally speaking this makes a DAF a much easier way to create a lasting philanthropic legacy.
However, there are some advantages of using a private foundation as opposed to a DAF. A private foundation, as a stand alone entity, can be run as a cohesive organization and can leverage that to negotiate more complex giving strategies than one may be able to use in a DAF. A private foundation can also make grants to certain types of entities (individuals and for-profits) that DAFs generally cannot.