Last year, a client with a private family foundation worth $3.5 million asked Schwab Charitable™ Senior Manager Mary Jovanovich to review their giving goals.
Had they been awarding scholarships to specific recipients or making loans to their preferred charities, a private foundation might have made sense for their situation. Instead, they were making annual grants of up to $250,000 to the same eight tax-exempt 501(c)(3) organizations, and this made Mary think there might be a better way.
“It’s difficult to justify the considerable administrative costs and other fees of maintaining a private foundation if you’re not going to take advantage of its unique benefits,” she says.
Enter the donor-advised fund.
The administrative fees of donor-advised funds tend to be lower than those of private foundations and that’s one reason their assets have been growing at double-digit rates since 2010. 1
“By switching to a donor-advised fund, this family saved thousands of dollars in administrative fees over the course of a year that they were then able to pass on to their charitable organizations of choice,” Mary says. This was clearly a better fit for this client’s unique needs versus donating through a private foundation.
Beyond the potential cost advantages, donor-advised funds allow donors to give anonymously with minimal effort and—in most cases—greater tax advantages than private foundations (see below). Still, both private foundations and donor-advised funds have their pros and cons.
Donor-advised funds versus private foundations
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Donor-advised fund |
Private foundation |
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Basics |
Allows donors to make charitable contributions, receive an immediate tax benefit and recommend grants over time. |
Typically created and funded by an individual, a family or a group of individuals; has its own board of directors. |
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Costs |
Startup and ongoing administrative costs can be comparatively low. |
Startup and ongoing legal and managerial costs may be significant. |
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Flexibility |
Grants are permitted to IRS-qualified public charities based in the U.S. (Some donor-advised funds, including Schwab Charitable, offer international granting.)2 |
Grants are permitted to IRS-approved, U.S.-based public charities, as well as individuals and international nongovernmental organizations if approved in advance by the IRS. |
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Privacy |
Grants can be made anonymously and names of donors can be confidential. |
Tax returns must specify grant recipients, staff salaries, trustee names and more. |
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Board of directors |
Not required. |
Required. |
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Taxes |
Deductions are limited to 60% of adjusted gross income for cash gifts and 30% for real property or stocks.* |
Deductions are limited to 30% of adjusted gross income for cash gifts and 20% for real property or stocks.* |
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Timing |
Donors can typically take their time deciding when and where to give within a certain time period. |
Foundations are required to distribute at least 5% of their assets each calendar year. |
*Real property is deductible at fair market value for donor-advised funds and at cost basis for private foundations. Deductions are for stocks held longer than one year. Consult your tax advisor for more information.
Despite their differences, donor-advised funds and private foundations can be used in tandem for a more efficient way to help maximize the impact of a client’s philanthropy.
For example, a donor can use a donor-advised fund to contribute to IRS-qualified charities while establishing a private foundation to support causes that lack tax-exempt status, such as certain international aid organizations not eligible under donor-advised fund guidelines. Private foundations can also make grants to individuals for study, travel and other purposes, provided certain IRS requirements are met.
The Schwab Charitable donor-advised-fund account
A simple way to incorporate giving into your everyday life.
A Schwab Charitable donor-advised-fund account is a tax-efficient investment solution that allows you to:
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Make a bigger impact. Your contribution will be invested for potential growth so you can maximize your giving over time.
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Be more tax-efficient. You can contribute cash, appreciated assets and investments that have been held for a year or more without paying capital-gains taxes.
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Streamline your giving: You can contribute to your account and recommend grants quickly and easily through the Schwab Charitable Client Center or Schwab Mobile app.
To learn more, visit schwab.com/charitable.
12018 Donor-Advised Fund Report, National Philanthropic Trust. | 2 Grant minimums and fees may apply. Contact Schwab Charitable Donor Relations at 800-746-6216 to learn more.