When a client walks into my office wanting to start a foundation, the first question I have to answer is whether they want a private foundation or a donor advised fund. From the outside the two structures look almost identical. The tax mechanics and operating rules underneath are not, and most of the time the structure the client is actually describing is the donor advised fund.
In this week’s video, Jill Ginsberg and I work through the choice. We cover:
- Deduction percentages for cash and appreciated property under sections 170(b) and 170(e) of the Internal Revenue Code
- Why a gift of low-basis Florida real estate or a closely held business interest to a private foundation is capped at the donor’s cost basis under section 170(e)(1)(B)(ii)
- The operating apparatus of chapter 42: the 1.39 percent excise tax on net investment income under section 4940, the 5 percent payout requirement under section 4942, and the self-dealing rules under section 4941
- Form 990-PF as a public document versus sponsor-level anonymity at a donor advised fund
- Setup cost, ongoing overhead, and the corpus size where a private foundation starts to make economic sense
- What happens to each structure when the founder loses capacity
For most families the donor advised fund is the right answer. The private foundation is the right structure when the corpus is large enough to absorb the operating overhead and the donor is prepared to live under chapter 42. Otherwise the donor advised fund does almost everything the client actually wanted, with better deduction efficiency on appreciated property.
If you are deciding between the two structures, run the deduction math before picking. Call the office.