Foundations are powerful giving vehicles but can be costly and time-consuming to maintain.
NPT can help you convert your foundation to a donor-advised fund account with less overhead, improved tax deductions and increased grant flexibility. Your foundation administrators can act as advisors and successors to the account in perpetuity. You can even keep the name of your foundation intact. Alternatively, donor-advised funds can complement your private foundations. Learn how you can use them together to maximize your tax benefits and achieve your philanthropic goals. (Jump to DAF Advantages and Limitations.)
| Donor-Advised Funds | Private Foundations | |
|---|---|---|
| Start-Up Time | Immediate | Can take several weeks or months |
| Start-Up Costs | None | Legal (and other) fees are typically substantial |
| Ongoing Administrative and Management Fees | 85 basis points (0.85%) or less, plus investment management fees | Can be in the range of 250-400 basis points (2.5% to 4% per year) |
| Tax deduction limits for gifts of cash | 60% of adjusted gross income | 30% of adjusted gross income |
| Tax deduction limits for gifts of stock or real property | 30% of adjusted gross income | 20% of adjusted gross income |
| Valuation of gifts | Fair market value | Fair market value* for publicly-traded stock, cost basis for all other gifts, including gifts of closely-held stock or real property |
| Required Grant Distribution | None | Must distribute 5% of net asset value annually |
| Excise tax on investment income | None | Excise tax on 1.39% of net investment income annually |
| Privacy | Names of individual donors are not disclosed to the public, and grants can be made anonymously | Must file informational returns, which are available to the general public, disclosing detailed information on grants, investment fees, trustee names, staff salaries, etc. |
| Administrative Responsibilities | Recommend grants to favorite charitable causes | Manage assets, keep records, select charities, administer grants, file state and federal tax returns, maintain board minutes, etc. |
DAF Advantages and Limitations
Like most other charitable giving vehicles, there are restrictions on which organizations qualify as eligible recipients for DAF grants. For example:
- Donors cannot recommend that charitable grants be made to individuals.
- Donors cannot receive any goods or services in exchange for their grant, like a ticket to a gala.
- Donors cannot recommend that grants pay tuition to private schools or colleges.
- Similar rules apply for private foundations.
Contributions to DAFs receive fair market value deductions, whereas gifts of certain assets—including closely held stock or property—receive a cost-basis deduction when contributed to a private foundation.
Investment offerings for DAFs vary widely among charitable sponsors. The assets in DAFs legally belong to the charitable sponsor, so they assume all the risk related to managing and investing the assets. This arrangement also means that donors could have less flexibility in selecting investments.
Invested DAF assets can grow tax-free, which means that over time—and with positive returns—more assets are available for charitable purposes than what was originally contributed. Assets inside DAFs in the U.S. increased by almost 11 percent from 2014 to 2015. This growth is attributable primarily to significant new contributions to DAFs (even netting out grants), but also to strong stock performance in 2015.
