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Donor-Advised Fund, Private Foundation or Both?

Personal Finance
IRA
Charitable
Trusts
Wills
December 14, 2018

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

 

 

Donor-advised fund

Private foundation

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.

Costs

Startup and ongoing administrative costs can be comparatively low.

Startup and ongoing legal and managerial costs may be significant.

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.

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.

Board of directors

Not required.

Required.

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.*

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:

  • Make a bigger impact. Your contribution will be invested for potential growth so you can maximize your giving over time.

  • 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.

  • 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.

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Important Disclosures

The information in this presentation is not intended to be a substitute for specific individualized tax, legal or investment-planning advice. Schwab Charitable does not provide legal or tax advice. Where specific advice is necessary or appropriate, Schwab Charitable recommends consultation with a qualified CPA, tax financial planner, investment manager and/or tax advisor.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy in his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness and reliability cannot be guaranteed.

A donor’s ability to claim itemized deductions is subject to a variety of limitations depending on the donor’s specific tax situation. Consult your tax advisor for more information.

Contributions of certain real estate, private equity or other illiquid assets may be accepted via a charitable intermediary, with proceeds of your donation transferred to your donor-advised account upon liquidation. This intermediary considers donations on a case-by-case basis, and assets typically must be valued at $250,000 or more. Call Schwab Charitable for more information at 800-746-6216.

Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofit organization. Schwab Charitable Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.

Schwab Charitable Fund is recognized as a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code. Contributions made to Schwab Charitable Fund are considered an irrevocable gift and are not refundable. Please be aware that Schwab Charitable has exclusive legal control over the assets you have contributed. Although every effort has been made to ensure that the information provided is correct, Schwab Charitable cannot guarantee its accuracy. This information is not provided to the IRS.

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