Family foundations and donor advised funds: 
how to help a client decide which is best for their family

Family foundations have been a mainstay of wealthy families for generations. The first private family foundation, the Russell Sage Foundation, was established in 1907 by Margaret Sage for the “improvement of social and living conditions in the United States.” There are now more than 90,000 family foundations with assets estimated at $1 trillion.

The first donor advised funds (DAF) were created in the 1930s, though donor-advised funds were not recognized formally by the IRS until the Pension Protection Act of 2006. In the 1990s, donor advised funds began to grow in visibility and popularity, and today they are philanthropy's fastest-growing charitable vehicle. As reported by the National Philanthropic Trust in 2020, there are more than 870,000 accounts with an estimated $142 billion in assets.

A private foundation is defined as a separate, tax-exempt legal entity controlled by a set of bylaws, articles of incorporation as well as a board and is not considered to be a public charity by government standards. Yearly, 5% of the balance of the foundation assets must be awarded in grants to charities and certain individuals.

A donor advised fund is a giving account offered by a public charity, which may be connected to a community foundation, a financial institution or other charities such as the American Heart Association, that allows a donor to make contributions in exchange for an income tax deduction and the ability to request grants be made to suggested qualified charities.

Which is right for your client? 
The most important tools in deciding which is right for your client is: knowing your client and their objectives. Let’s look at the top four preferences to consider with your client: control, recognition, costs and tax benefits.

1. Control: Busy bee or behind-the-scenes management style?

Foundation — Once the foundation is established and funded, a board is elected and retains control of the assets and all awards for generations. The foundation hires its employees and manages vendors. There are tax documents that need to be completed as well as state and federal legal requirements to follow. There are professional and investment management fees involved as well as staff requirements. 

Donor advised fund — Control over the funds in a DAF is forfeited once the fund is established. The donor can still suggest grants to worthy organizations and that ability can be transferred for one or possibly two generations. No federal or state tax filings are required; nor is there a separate board or staff. Grants cannot be made to satisfy personal charitable obligations. Currently, there is no requirement for yearly grants.

2. Recognition: A caped crusader or shout-it-from-the-ramparts mission warrior? 

Private foundation
— The foundation is required to file a federal tax form 990 every year that discloses board members, contributions, assets and grantees. The 990 is available to the public and can be accessed at www.guidestar.org, among other sites.

Donor advised fund — The donor makes the contribution to the supporting organization and grants may be recommended or advised by the grantor to qualified charities anonymously or labeled with the name of the fund. (i.e. the Healthy Eating Children’s Fund) 

3. Costs: Spare-no-expense personalization or all-inclusive turnkey experience?

Private foundation — There can be significant costs to establish a foundation as well as comply with federal and state requirements. A staff may be needed to operate a foundation. Expenses related to investment management, tax reporting and compliance are involved.

Donor advised fund — The supporting organization will charge a quarterly fee from the balance of the fund to operate the DAF, which generally includes investment management, distributions to charitable organizations and statements. Usually, the donor will pay no ongoing fees out of pocket. 

4. Taxes: Shall we get down to brass “tax” and talk benefits?

Private foundation — Income tax deduction for cash contributions is generally up to 30% of the donor’s adjusted gross income (AGI); long-term securities, fair market value up to 20% off the donor’s AGI; long-term capital assets, cost basis up to 20% of the donor’s AGI. Cash contributions to private foundations are excluded from the CARES Act benefits.

Donor advised fund
— Income tax deduction for cash contributions is generally up to 60% of the donor’s AGI; long-term securities, fair market value up to 30% off the donor’s AGI; long-term capital assets, cost basis up to 30% of the donor’s AGI. Cash contributions to donor advised funds are excluded from the CARES Act benefits.

Can’t decide? Why not both?

A donor may have a private foundation and a donor advised fund that work hand in hand by making grants from the private foundation to their DAF. Though a DAF is restricted from making a grant to a private foundation and cannot convert to a private foundation, a private foundation can distribute all its assets to a DAF if the foundation board wants to close the foundation. 

No matter the decision, donors and their families will enjoy many years of funding charities that are near and dear to their heart.

To learn more about giving through donor advised funds, request a copy of the brochure “A Smarter Way to Give.”

For more personalized assistance, contact your American Heart Association Senior Advisor.

About the Author


John CullumJohn W. Cullum, CFP® 

Senior Advisor, Charitable Estate Planning
American Heart Association
846-517-2154
John.cullum@heart.org 
Heart.org/Network

 

John Cullum is a Certified Financial Planner® and a Senior Advisor with Charitable Estate Planning at the American Heart Association. He is based in Charlotte, NC, and serves the Southern states. John is a graduate of the University of South Carolina and the University of North Carolina at Chapel Hill Young Executive Institute. John has two grown sons, a 4-year-old granddaughter and is an avid gardener. As a survivor, John has personally benefited from the work of the American Heart Association.