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DAFs v. Private Foundations

I described the technical differences between donor-advised funds (DAFs) and private foundations back in June of 2007. Frankly, at the time, I saw no compelling reason seriously to consider creating a DAF.

Following the FoundationWiseSM conference, however, I’m seeing more reasons than I did back then to consider this alternative.

To recall the few reasons I mentioned back in 2007:

  • If we were in a position to donate real estate or closely-held securities, donations to and through a DAF would provide significant tax advantages over attempting to make such donations to and through a private foundation.
  • It is usually much easier to make tax-deductible grants to individuals via a DAF as compared to a private foundation.
  • If we were not making direct contributions to operating 501(c)(3) charities, we would be limited to making contributions of only 30% of our AGI to and through a private foundation, but up to 50% to and through a DAF.
  • Similarly with the 20% of AGI limitation on contributions of publicly traded securities to and through private foundations as opposed to a 30% limitation on such contributions to and through DAFs.

One of the most significant reasons for creating and contributing to a DAF–the issue of privacy–came into focus and grabbed my attention at the FoundationWiseSM conference primarily as a result of reports we heard surrounding the rather public and implicitly threatening “outing” of donors to last year’s “anti-gay marriage” Proposition 8 campaign in California . . . combined with further reports of moves on the part of GLBT advocates (and others) for something the FoundationWiseSM speakers called “greenlighting” of private foundations: legislative initiatives and policy proposals already put forward in California, Florida, Texas and Pennsylvania that would require private foundations to determine and report on the gender, sexual preferences and ethnic characteristics of their board members and grantees.

(I will confess: I’ve found it somewhat difficult to locate detailed information on the allegations made at the conference about legislative and political movements. However, I have found a few sources: The Nonprofit Law Prof Blog has a brief article from 2008 about a California initiative, AB 624, the Foundation Diversity and Transparency Act.

At this point, AB 624 has been out of committee, with no further or final action, for just shy of a year. So it appears it died. However, it is clear where some of the most politically active groups want legislation to go. (One sees just a hint of how hot this issue is when one reads a few of the posts on the National Committee for Responsive Philanthropy’s website concerning their 130-page Criteria for Philanthropy at Its Best paper. –See, for example, the March 9th and March 19th posts.)

The AB 624 proposal was supposed to apply “only” to foundations with assets of $250 million and more. But one sees the direction this movement is headed.

As American society, in general, seems to be becoming more and more fragmented and polarized; and considering how a lot of charitable work throughout history has been popular with some and very unpopular with others, the backlash–or threatened or feared backlash–experienced in the Prop 8 situation put many potential donors “on notice”: perhaps the privacy factor associated with public charities (i.e., DAFs) makes them a very attractive alternative, indeed, compared to private foundations.

If you would prefer not to be “exposed” for your political or religious preferences–of whatever type . . . or if you “simply” don’t want to be distracted by outside pressure groups to consider issues in your charitable giving that are not central to your charitable interests and intentions . . . it may, indeed, prove to be the better part of wisdom to find a public foundation whose values align with yours and establish a DAF by which, within the limits of the law, you can legitimately and without external pressure, fulfill your charitable purposes.

Some other reasons to consider a DAF rather than a private foundation?

  • Members of “Gen 2″ (Generation 2–the children of the founding donor) may be less inclined to enjoy the kind of hands on control afforded the administrator of a private foundation. So, while the founder of a legacy may actually enjoy the detailed bookkeeping and intimate involvement in operational matters that operating a private foundation may entail, the children may prefer “simply” to make decisions about where grants should go: let someone else handle the paperwork. –A DAF is the perfect solution for Gen 2 in such a situation.
  • A DAF can provide a safeguard–at least to a certain degree–against “mission creep.” In the same way that, if you are committed to a secular worldview, some community foundations will preclude donors from giving to certain Christian charities, so, if you are committed to an evangelical Christian worldview, if you donate to the National Christian Foundation, NCF bylaws will preclude future donors from directing funds within your DAF to causes deemed antithetical to a Christian value system.
  • A DAF enables you to give anonymously.

    When this aspect of DAFs was first presented to me, I had no idea how important it might be. We’re not merely talking about the privacy function I discussed above, which “protects” you from people who may have nothing to do with the transaction itself. Now we’re talking about anonymity with respect to the recipients of your gifts. And that has advantages not only in terms of the “left hand” not knowing what the “right hand” is doing (Matthew 6:3), it also means . . .

  • You don’t have to deal with all the monthly “thank you/appeal” letters from agencies you give to and to which you have absolutely no intention of giving more, no matter how much they plead.
  • Back, more, to the concept of privacy: Since other agencies aren’t able to see to whom you give, you won’t get additional appeals from other agencies who wish you would give to them, too
  • A DAF can significantly simplify your bookkeeping. Instead of a monthly receipt for every individual gift you may give, you will receive a single receipt at the end of the year with every individual gift fully documented.

I’ll stop there.

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