Give More and Pay Less - Breaking down Private Foundations and Donor Advised Funds - HIT Investments (2024)

FAQs

Which is better, a donor-advised fund or a private foundation? ›

While a private foundation can donate to an individual facing hardship as long as the situation meets IRS restrictions, DAF donations must be made to a public or private charity. “You also have privacy if you want it with a DAF, since a DAF donation can be made anonymously," said Van Atta.

Cons of Donor Advised Funds

Reduced giving: There is no requirement for DAF fund managers to distribute their assets immediately. This means that funds donated to DAFs might not be used for charitable purposes immediately. This could lead to reduced giving impact over time.

Can a donor-advised fund give to a private foundation? In certain circ*mstances, yes. Because assets held in a donor-advised fund must be granted to a public charity, it cannot make contributions to a private nonoperating foundation. However, a donor-advised fund can make grants to private operating foundations.

They must pay out at least 5% of their assets each year – although some of that money can be used to pay for their operations or even be set aside in a donor-advised fund. Supporters of DAFs counter that the payout rate for those accounts is already much higher than the foundation floor of 5%. It hovers around 20%.

Donor-advised funds are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity. Let's take an in-depth look at how a DAF works.

Public charities generally have higher donor tax-deductible giving limits than private foundations. 16 From an individual perspective, giving to public charities is desirable due to the flexibility in making donations. This allows for the customization of tax strategies tailored to personal preference.

Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.

The Fidelity Charitable Giving Account has no minimum initial contribution requirement and one of the lowest annual fees of any donor-advised fund.

Lack of control: When you donate money, you may not have direct control over how it's used or whether it achieves the intended impact. Administrative costs: Some charities have significant overhead costs, which means a portion of your donation might go towards administrative expenses rather than the cause itself.

And while Fidelity doesn't have a minimum amount required to open a DAF account, the annual administrative fee starts at 0.60% or $100, whichever is greater, meaning that if you're just starting out with a $5,000 fund, you'll be charged $100 per year!

What is the alternative to donor-advised funds? ›

Take the pooled income fund (PIF). PIFs are essentially charitable trusts that “pool” together irrevocable gifts from one or more individuals, or a family. Like the more common charitable remainder trust (CRT), a PIF is a type of split interest trust. There's a gift to a charitable trust.

Once the account owner has passed away and can no longer “advise” how and to what amount their donor advised fund supports charities, the DAF could become an “orphaned donor advised fund.” Essentially, orphaned donor advised funds are unrestricted assets of the sponsoring charity.

Disadvantages of DAFs

8 DAFs often carry many hidden fees of which donors are unaware, similar to 401(k) plans. Critics, therefore, contend that the financial industry and its wealthy clients, rather than charities, are the real beneficiaries of DAFs.

Simply put, the Rule of Seven recommends seven contacts with a donor within one year after that person makes a gift.

This rule mandates private foundations distribute 5% of their asset value annually for charitable purposes. Over the years, private foundations have proven to be an essential source of charitable giving. In 2022, they contributed over $105 billion in charitable donations, up from nearly $103 billion in 2021.

Always pay by credit card.

Making donations via credit card offers additional layers of protection versus a debit card, which pays directly from your checking account. Never donate through wire transfer, gift cards, or crypto assets. Requests for these hard-to-trace forms of payment are a hallmark of scammers.

Take the pooled income fund (PIF). PIFs are essentially charitable trusts that “pool” together irrevocable gifts from one or more individuals, or a family. Like the more common charitable remainder trust (CRT), a PIF is a type of split interest trust. There's a gift to a charitable trust.

DAFs provide streamlined grantmaking, helping philanthropic dollars reach nonprofits quickly and efficiently. DAF sponsors handle all due diligence and reporting, simplifying organization and administration. DAFs can be used to facilitate a charitable legacy, dovetailing conveniently with estate planning.