Donor advised funds
(“DAFs”) are an important feature of the philanthropic landscape.
According to a recent survey published in The
Chronicle of Philanthropy (May 27, 2004), assets of 86 of the largest
foundations that offer DAFs grew an average of 9.4% for 2002 and 2003.
Some foundations reported growth in the double digits. In the foundations
that participated in the survey, the combined assets were valued at $11.3
billion, and these foundations made grants of $2.1 billion.
Some of these foundations are operated as community foundations, under
the general auspice and control of an independent community board. Other
foundations have been established by commercial for-profit firms, most
of which manage money (e.g. Fidelity, Vanguard, Schwab).
There are over 60,000 private and independent foundations identified by
the Internal Revenue Service. The participating community and commercial
foundations reported nearly 67,000 DAFs. The size of the average DAF is
considerably smaller than most foundations, although three out of five
family foundations hold less than $1.0 million in assets (as reported
by the Council
on Foundations, 2003).
The question is when is it appropriate to utilize a DAF and when is it
appropriate to utilize a private foundation? The answer is partially dependent
upon the anticipated cumulative funding of the entity over the founder’s
lifetime and at his or her death, and partially upon the goals of the
donor, interests and dynamics of the family, and the purpose of the philanthropy.
According to the Council
on Foundations, the average funding time of a private foundation is
18 years. Many of the largest foundations started small (the David and
Lucille Packard Foundation, now over $6 billion, began with $25,000).
| Non-Tax
Considerations |
 |
|
|
|
Donor
Advised Fund |
Private
Foundation |
|
| Formation
and Organization |
|
|
Advantages
|
The
foundation is already established and tax qualified. The DAF is simple
to establish. Very little paperwork required. |
Can
be designed to fit the circumstances and interests of the founder
and family. |
|
Limitations
|
Most
DAFs have specific formats and it is hard, if not impossible, to change
the structure or organization to fit the specific interests or needs
of the founder, issue, and future generations. |
More
complicated and expensive to set up and qualify. |
|
| Size
|
|
|
Advantages
|
The
funding can be small. Some funds can be formed with $10,000. There
is no maximum. |
Can
start at any size and grow through lifetime and deathbed funding.
Most foundations take 15-20 years to fully fund. |
|
Limitations
|
At
some size, the costs of management will be similar to those of a private
foundation. |
If
the cumulative funding does not reach a minimum level to offset the
ongoing costs and burdens (which we believe is somewhere around $3.0
million), then this structure will be inefficient. |
|
| Management
and Governance |
|
|
Advantages
|
The
community foundation will have experienced and professional staff.
|
This
enterprise creates opportunities to engage and train qualified family
members in this field. Future generations have the opportunity to
take on leadership roles. |
|
Limitations
|
Depth
and breath of experience varies widely among community and commercially
sponsored foundations. |
Family
members may feel entitled, even though not qualified or experienced.
There can be competition amongst family members and it can aggravate
family rivalries. |
|
| Grantmaking
|
|
|
Advantages
|
Professional
staff can provide experience, insight, research, implementation and
follow up services. There is no legal obligation to distribute 5%
of the annual fund, but many DAFs require this. |
Much
more flexible to meet the diverse goals of the founder and future
generations, many of whom may live in other communities and parts
of the world. Structured properly, grants can be given to individuals
and non-U.S. charities. |
|
Limitations
|
The
quality and experience of the staff depends on the size, depth, and
commitment of the foundation. Some DAFs provide very little expertise
or assistance, and most do not permit grants to individuals or non-US
charities. |
Successful
grant making requires training, organization, and process. A private
foundation that does not prepare for this responsibility will likely
make poor or ineffective grants. |
|
| Legacy
|
|
|
Advantages
|
The
philanthropic legacy of a family can be perpetuated forever. |
The
philanthropic legacy of a family can be perpetuated forever. |
|
Limitations
|
The
limited duration of the advisory role of a family in most DAFs means
that the legacy is often in the hands of non-family members who have
little or no connection to the donors. |
The
legacy can last as long as the foundation lasts. But this may be left
to the decision of future generations of the donor. |
|
| Costs
|
|
|
Advantages
|
The
management costs are shared and spread amongst many donors. |
Many
families absorb these costs and can actually eliminate most. In other
cases, family members that perform real service can be compensated
fairly. |
|
Limitations
|
These
costs are beyond family control and family members will not compensated
for services they perform on behalf of the DAF. |
Some
families abuse the rules by over compensating themselves. |
|
| Investment
Responsibilities |
|
|
Advantages
|
The
combined assets of a community foundation facilitate diversification
and assures outside controls. |
Provides
maximum family control and flexibility, and gives the directors to
select amongst the best performing managers. |
|
Limitations
|
Investment
skills vary and managers may be predetermined or locked in, regardless
of their performance. Certain assets, e.g. real estate, are often
unwelcome in a DAF. |
But,
this flexibility is also vulnerable to inexperience and abuse. |
|
| Participation
and Continuity |
|
|
Advantages
|
Donor
advice permits participation by the founder and selected representatives.
|
The
foundation will remain as long as the founder wished, or until a future
board of directors determines. |
|
Limitations
|
Such
advisory role is usually limited to the first successor generation,
and then the funds resort to the general wishes of the donor, but
is not subject to further advice by the family. |
The
strength of a family foundation is the family. It is also its potential
weakness, if the family is ill-prepared or dysfunctional. A strong
board and governance structure is essential. |
|
| Tax
Considerations |
|
|
|
|
Donor
Advised Fund |
Private
Foundation |
|
| Deduction
for Cash Gift |
Limited
to 50% of the donor's contribution base (usually the adjusted gross
income). |
Limited
to 30% of the donor's contribution base (or AGI). |
| Deduction
for Gifts of Appreciated Public Securities |
Limited
to 30% of the donor's contribution base (usually the adjusted gross
income). |
Limited
to 20% of the donor's contribution base (usually the adjusted gross
income). |
| Deduction
for Gifts of Appreciated Real Estate or Closely Held Securities |
Limited
to 30% of the donor's contribution base (usually the adjusted gross
income). |
Limited
to the donor's adjusted cost basis. |
| Carry-Over
Deduction Available |
5
years |
5
years |
| Tax
on Investment Income |
None
|
2%
of the realized gain and income (but may be reduced to 1% if certain
levels of grant making are sustained). |
The Chronicle of Philanthropy: 
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