One of the questions we get most often when talking with our clients about estate and charitable planning is whether they should create a private foundation (“foundation”) or a donor-advised fund (“DAF”).

Because private wealth advisors are trained to help their clients retain and grow as much of their clients’ wealth as possible, advisors often focus on the tax advantages of contributing to a DAF vs. a foundation and the significantly higher percentage of income that can be deducted. Advisors also will point out that once the contribution has been made, there is little to no administrative responsibility involved for the donor and that it is very easy to direct money to the donor’s favorite charities if they choose a DAF.

All of these statements are true; however, to determine the best philanthropic vehicle for you, here are some questions to consider:

1. How much control do you want to maintain over the charitable fund you create?

A DAF is created when a donor makes a gift to a sponsoring public charity (“sponsor”) in order to maintain a separately identified fund or account. While the donor retains advisory privileges with respect to the distribution of funds and the investment of assets in this account, the sponsor retains legal control of the assets. By contrast, a foundation is created when a donor makes a gift to create a tax-exempt entity with its own articles of incorporation, bylaws and board of directors. The foundation’s board, which is usually appointed by the foundation’s donor, is legally responsible for the management of the organization and distribution of grants.

2. How much of your time and financial resources do you want to dedicate to the proposed foundation or DAF?

Most DAFs can be established with a gift of $25,000 or less, depending on the sponsor’s guidelines. The sponsor assumes all management responsibilities for the fund, so the donor’s only responsibility is to recommend grants. In contrast, a foundation is an ongoing business, albeit one with a charitable purpose, with its own board of directors. The foundation must file a tax return and distribute 5% of its assets to public charities annually. Although there is no minimum contribution required, I generally recommend a minimum contribution of $500,000 or more to create a foundation due to the ongoing costs and management responsibilities involved.

3. What is your time horizon for giving and your family’s involvement in this endeavor?

A DAF and a foundation can both accommodate your philanthropic legacy in perpetuity. That said, if you want to actively involve multiple generations of your family in your philanthropy, a foundation offers a more extended and broader array of opportunities. A DAF may be preferable if you wish to distribute all of the assets to charity during your lifetime.

These are but a few of the questions you should consider when deciding how to shape your philanthropic legacy. If you are interested in a deeper exploration, let your private wealth advisor know.

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