Donating Through a Donor-Advised Fund or Private Foundation: Which Is Better?

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There are many places to make tax-deductible charitable donations, but getting one that aligns with your intentions is not as easy. When choosing charities to donate to, make sure that the donor-advised fund or private foundation can give to the charities of your choice. If you use a religious group or some community group, they may not be willing to contribute money to some organizations that operate on different principles. Find out beforehand if your grants are acceptable to them.

In a donor-advised fund (DAF), you suggest where you want the money to go. The board must approve your request, but City National Bank says DAFs approve about 99 percent of them. Sometimes you may be permitted to use your financial advisor to make grants of your choice.

The Costs Involved

Besides choosing where to put the money, there will be considerable differences in the costs and limitations on how you can give. You will have varying fees and may be required to distribute some of the money annually—5 percent annually in a private foundation. You will also pay excise taxes of up to 2 percent of your annual income from the investment in a private foundation—but none in a DAF.

Tax Write-Off for Donations

There are limits on how much you can deduct charitable donations from your taxes. For instance, NPTrust says you can only deduct up to 30 percent of your adjusted gross income (AGI) on cash gifts when you donate to private foundations. In contrast, cash gifts given to a donor-advised fund enable you to deduct up to 60 percent of your AGI.

There are also differences when you donate real estate that you have held for long periods and private business interests. Giving to private foundations and donor-advised funds enable you to deduct your giving at fair market value (FMV). A DAF lets you deduct up to 30 percent of your AGI, but a private foundation will only let you deduct up to 20 percent of your AGI. Donating securities you have held for long periods also allows you to get tax write-offs for the same percentages described above.

Directed Giving

Although you could donate money to charity and be done with your gift-giving for the year, you probably would prefer seeing your money grow and support those causes for some time. Both private foundations and DAFs can set up accounts for ongoing growth and giving.

In order to get a tax deduction, the charitable organizations you donate to must be approved by the Internal Revenue Service as 501(c)(3)s. Also, you are not allowed to get any benefit from your donation, and it cannot ever be refunded.

Contribution Size

When you intend to make smaller donations, a DAF may be preferable. DAFs usually require at least $5,000 to get started. When choosing a private foundation, your charity gifts need $1 or $2 million to get started. You can also expect some costs for legal filing and accounting.

Giving assets other than cash or stocks would be better donated to a private foundation, especially if considerable value is involved. When you want to donate items to charity, such as valuable art collections, antique car collections, or other assets worth millions should be given to a foundation because they are better equipped to handle items of larger value.

Contributions made to a DAF are optional, allowing you to make them as often or as infrequently as you want. It is also unnecessary to make any donations until you are ready, which enables your investment to grow as long as you want before you donate. On the other hand, a private foundation must donate 5 percent of its assets every year.

Administrative Duties

Making charitable donations and having little to do afterward depends on which agency you choose. Donor-advised funds can often be managed by the organization with little input from you—but when dealing with a private foundation, you will be required to handle the record-keeping, management of the assets, reviewing grant solicitations, and tax filings. Both types can manage the assets for you, but extra costs should be expected.

It is less expensive to use a DAF than a private organization. Fees will range from about 0.85 percent for a DAF, but up to about 2.5–4.0 percent when using a private foundation.

The start-up time will also vary. A DAF can be started quickly—in a day, even—but it can take a few weeks to a couple of months to start a private foundation. Private foundations must be established as a corporation, and you must send an application to the IRS for a private foundation status.

Matters of Privacy

Private foundations, Schwab Charitable reveals, are required to publicly disclose information about contributions and grants they receive when they file their tax forms (IRS Form 990-PF).

Reduce Your Taxable Income

Donating assets to a qualified charity or religious organization enables you to deduct them immediately from your taxes. You can also donate retirement funds—including required minimum distributions (RMDs)—from an IRA or 401(k). You will not pay tax on the money contributed if it is contributed directly to the charity. If need be, Honolulu Financial Partners says you can stay in control of these funds if you should need them simply by naming the charity as your beneficiary. It enables you to donate a portion or all of it.

IRA Conversion

If you have a traditional individual retirement account (IRA) and are ready to convert it to a Roth IRA, you have to pay taxes on the converted amount. It is considered taxable income, Investopedia says. Taxes on that money will range between 10–37 percent to depending on your tax bracket.

Because of the tax liability after a conversion, Fidelity suggests eliminating the tax by making a tax-deductible donation to your favorite charity. Contribute enough to offset the taxes.

If you have questions about how a charitable contribution can best reduce your taxes, grow your investment, and enable you to give for many years, contact a financial advisor or an estate planner near you. There are various ways to donate to charity, but they can help you make the best decisions.

The Epoch Times Copyright © 2023 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.