My grandmother recently passed away and left me a sizable inheritance. She was incredibly charitable throughout her life, and I would like to honor her memory by continuing that legacy. I have been researching ways to organize my charitable giving and have been considering starting a private foundation. However, several people have suggested I look into a donor advised fund instead.
What should I consider when deciding between the two?
— Paying It Forward
Dear Forward,
First, please accept my condolences on the loss of your grandmother. It sounds like she had a profound impact on your life, and what a meaningful tribute it is to continue the charitable values she instilled in you.
This is a question I hear often from individuals and families who are experiencing a significant life event — whether it is an inheritance, the sale of a business or simply reaching a point where they want to be more intentional with their philanthropy.
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Both private foundations and donor advised funds can be excellent vehicles for charitable giving. Each allows donors to support causes they care about, involve family members in grantmaking decisions and build a philanthropic legacy that can last for generations.
The key difference is how they are structured and managed.
How private foundations work
A private foundation is its own legal entity, complete with governance requirements, annual tax filings, compliance responsibilities and ongoing administrative costs. For some families, that level of structure makes sense. For many others, however, a donor advised fund provides the same philanthropic benefits with significantly greater simplicity and flexibility.
How donor advised funds work
At Foundation For The Carolinas, a donor advised fund allows you to make a charitable contribution, receive an immediate tax deduction and recommend grants to qualified nonprofit organizations over time. You can name the fund after your grandmother, involve family members in future giving decisions and create a lasting charitable legacy, all while FFTC handles the administrative responsibilities.
Many donors are surprised to learn just how many advantages donor advised funds offer.
For example, donor advised funds can be established with as little as $10,000 and funded with a variety of assets, including cash, appreciated securities, real estate and even closely held business interests. Because the fund is housed within a public charity, donors generally receive more favorable tax deductions than they would through a private foundation.
Administrative and tax considerations
Donor advised funds also eliminate many of the administrative burdens associated with private foundations. There are no annual tax returns to file, no required audits, no excise tax on investment income and no board meetings to manage. In addition, donor advised funds are not subject to the annual 5 percent distribution requirement that private foundations must meet.
This allows donors to focus on what matters most: supporting the causes and organizations they care about.
Privacy and family legacy
Privacy can be another important consideration. While private foundations are required to disclose significant information publicly, donor advised funds offer the option to make grants anonymously and avoid many of the public reporting requirements that often result in unsolicited funding requests.
For families who wish to create a lasting charitable tradition, donor advised funds also make it easy to involve future generations. Advisors and successor advisors can be appointed to continue recommending grants and carrying forward a family’s philanthropic values long into the future.
Converting a private foundation
In fact, many private foundation trustees eventually decide to convert their foundations into donor advised funds. Common reasons include the rising costs of administration, the burden of regulatory compliance, challenges meeting annual payout requirements and a desire to spend less time managing paperwork and more time making an impact.
Choosing the right charitable vehicle
Ultimately, there is no one-size-fits-all answer. The right choice depends on your charitable goals, the assets involved and the level of administration you are willing to undertake. I always encourage donors to consult their legal, tax and financial advisors when evaluating philanthropic vehicles.
What I can say is that today’s donor advised funds offer a powerful, flexible and cost-effective way to support the causes you care about while creating a meaningful legacy for future generations.
After all, philanthropy should be about making a difference — not managing paperwork.
