Donor Advised Funds and why Private Foundations need them

A donor-advised fund (DAF) is a separately identified fund or account that is maintained, operated, and legally controlled by a section 501(c)(3) organization like The Stewardship Foundation. In this month’s article, we list why owners of private foundations may want to covert to DAFs with The Stewardship Foundation.

Man working in home officeReason #1. Save time and money

Private foundation owners pay for lawyers, accountants, and office supplies, but with a DAF, owners advise how the funds are used, yet avoid the administrative cost. In some cases, as much as 50%. Cutting costs makes the money go further.

Reason #2. Less hassle

DAFs relieve philanthropists of the hassles of running a foundation. No more tedious paperwork or fact checking potential recipients. For larger foundations, no hiring, firing, or worrying about staff.

Reason #3. More privacy

DAF funds are relatively anonymous because there are no requirements to disclose as much information about their charitable giving. Privacy ensures that philanthropists can support causes that operate within their personal value system, ethical standards, or call to Christian conscience. Private foundation tax forms are public information, exposing operational details and even personal information.

Reason #4. Smaller donor investment fees

Small foundations often pay relatively high fees to the firms that handle their investments. On the other hand, donor funds work with a much bigger pool of money from all the accounts we administer, so fees are lower.

Reason #5. More generous tax deductions

Donors get an immediate tax deduction when they contribute to a fund from their private foundation, but with a DAF, deductions are more generous – instead of a limit of 30% to a private foundation, donors can deduct cash contributions up to half their adjusted gross income each year. There are other tax advantages for appreciated-security donations, and investment gains are generally tax-free (no excise tax).

Reason #6. Protected legacy

DAF funds protect the original intent of the founder. After a founder’s death, family members may disagree on the direction that the private/family foundation should take. They may begin to direct funds to causes contrary to the founder’s moral or ethical values. To protect the legacy intent of the founder, the foundation’s assets can be split among several accounts at donor-advised funds, and those accounts can then be used for different purposes.

If you are interested to learn more about converting from a private/family foundation to donor advised funds, we recommend a recent Wall Street Journal article by Jillian Mincer where she raises the question whether it is time for private foundation owners to convert to donor advised funds.

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