By Kim Ledger, VP of Complex Assets, Ren Inc.
When it comes to philanthropy, there is an array of giving vehicles that allow donors to give more effectively and make the most of their charitable gifts. With the assistance of an experienced professional, these vehicles can optimize tax benefits, increase the impact of the donation, and allow for a generational succession of philanthropy.
Donor-advised funds (DAFs) and private foundations are the two most popular giving vehicles. This is due to the simplicity and flexibility of DAFs and the control private foundations offer donors.
Most consider either a DAF or a private foundation for their charitable giving, and while they operate differently and offer unique advantages, they can work in tandem to complement each other and provide individuals and families with better giving solutions to reach their philanthropic goals.
Below are some examples of how private foundations and donor-advised funds can work together:
1. Seed funding: A private foundation can initially establish a DAF by contributing a significant amount of capital. This "seed funding" allows the DAF to begin making grants immediately while the foundation undergoes its setup and gets tax-exempt status.
2. Grantmaking, research, and due diligence: A private foundation can make the most of a DAF's flexibility and responsiveness to identify potential grant recipients or explore new meaningful causes to support. The foundation can make recommendations to the DAF on organizations or initiatives that align with their shared philanthropic objectives.
The advantage a private foundation offers a DAF is access to the dedicated staff or advisors that private foundations often have who perform rigorous due diligence on potential grant recipients. When these two vehicles share this expertise, they can better ensure that the recommended grants are well-vetted and aligned with the donor’s impact goals.
3. Co-funding opportunities: The DAF and private foundation can collaborate on larger-scale projects by combining their resources. They can jointly fund initiatives that require substantial financial commitments maximizing the impact of their philanthropy.
Donors can also use the private foundation to distribute more in good investment years and use their DAF to support large strategic gifts in poor investment return years. They can use the DAF to receive private foundation distributions during good years or when they need to make excess distributions in those years.
It’s important to note that with this strategy donors may want to consider giving the DAF and private foundation different titles, even if it varies only slightly. (I.e., The Smith Family Foundation and the Smith Family Fund)
4. Succession planning: Private foundations can move some or all their assets to a DAF when the foundation’s founder retires or passes. This ensures the continuation of the philanthropic mission while also reducing administrative burdens and costs associated with maintaining the foundation.
A DAF can also give families a valuable educational tool that gets future generations involved in the private foundation. Donors who want to leave a philanthropic legacy can use a DAF to engage family members in the grantmaking process, teaching them about philanthropy, financial stewardship, and opportunities to discuss and share the family's values.
5. Tax advantages: Donors can optimize their tax planning strategies by using a DAF and private foundation. Contributions to a DAF provide immediate tax deductions, while a private foundation allows for ongoing tax benefits related to its charitable activities.
Another advantage of DAFs is that they give donors the option to contribute complex assets like real estate or private business interests. This allows donors more flexibility in what they give and can offer substantially better tax benefits.
It is important to note that collaboration between a DAF and a private foundation should adhere to legal and regulatory requirements. Both entities must operate independently, avoiding self-dealing and maintaining proper documentation and record-keeping.
By using the strengths of a DAF and a private foundation, each vehicle can work in harmony, combining flexibility, control, and strategic impact to support charitable causes that are most meaningful to donors and families.