Who would win in a fight: private foundations or donor-advised funds?
Perhaps you’ve heard someone on one side of the debate or the other advocating a zero-sum answer on why one vehicle is better than the other. A friend sent me a text recently about a conversation she had with a foundation person who spent time in their chat bashing donor-advised funds.
It works the other way as well. In weaker moments, I’ve probably fallen into that trap of touting DAFs at the expense of private foundations.
Truth be told: there is not really (or at least shouldn’t be) any conflict. Both vehicles matter a great deal for the success of private philanthropy. More importantly, they can, and often do work together. Their differences augment opportunities for philanthropic engagement among donors, enabling customized approaches to giving. That flexibility should increasingly mean more giving – and that is a goal we can all agree on.
Role of Foundations
As of 2018, U.S. private foundations held more than $870 billion in assets, per the National Philanthropic Trust’s 2019 DAF Report. That’s more than seven times the $121 billion in DAF accounts. The more important metric is how much these private foundations distribute in grants, which, in 2018, was $54.03 billion.
In normal times, private foundations have a reputation for being slow and bureaucratic – though they would likely argue for adjectives such as thoughtful and intentional. In times of crisis, though, foundations can shine, as we are witnessing now.
One reason foundations are so well positioned in times of crisis comes from their reserves. The large private foundations, often with closely held boards or directed by the original wealth creator, have lots of resources to throw at a problem. We’re seeing this now with the Gates Foundation and the Chan-Zuckerberg Initiative making major gifts in support of research around a vaccine for COVID-19.
The deliberate nature of foundations is also useful. I spoke with a number of foundation executives at the start of the COVID crisis and the consensus among them was toward a “wait and see” approach in regards to major outlays. However, they all told me they would stay the course with their usual grantees. With so much other fundraising up in the air, non-profits’ ability to rely on the steady stream of foundation support really matters.
DAFs Vs. Private Foundations
Donor-advised funds and private foundations both serve as charitable vehicles, but they do so in different ways. Donors considering the best way to leverage their philanthropy shouldn’t necessarily rush into choosing one over the other.
Perhaps the biggest driver determining whether people opt for a DAF or a foundation comes down to the issue of control. A private foundation offers a donor significantly more control over the funds as long as the donor remains on the board of directors. A donor-advised fund account is as the name implies – the donor retains the ability to advise on gifts from the fund (as well as investments and other aspects of stewardship of the account) but the gift into the fund is irrevocable.
Yet what donors sacrifice in control by contributing to a donor-advised fund account, they gain in additional privacy, increased flexibility, and greater tax deductibility.
Below is a slide we share in our legacy planning presentations that compares and contrasts the two vehicles:
Ultimately, choosing one over the other comes down to which better serves your philanthropic goals. Are you giving away a few thousand dollars annually and simply need a streamlined way to manage your giving? A donor-advised fund will achieve that far more inexpensively than a private foundation. On the other hand, do you have a family you want to entrust with working together to grant a significant amount of money over the long-term? A private foundation may serve that purpose more easily.
Combining The Power of Both
The two tools do not need to be mutually exclusive, however. Certain donors may find that a donor-advised fund serves as a terrific complement to a private foundation. Here are a few ideas on ways the two could work together:
- For separating different areas of giving. It’s not uncommon for donors to have a private foundation as well as a donor-advised fund. The donor often will use the two in different ways. The foundation, for example, might be the preferred vehicle for the family’s broader priorities to support the local community, and the DAF account could be for a specific area of interest, such as policy research or education reform. The additional privacy of the donor-advised fund makes it a helpful vehicle for giving that is best kept private.
- For protecting donor intent. Just as a foundation and DAF may be used separately during one’s lifetime, the two could serve different purposes as part of a legacy plan. A donor may prefer to use his or her private foundation for giving during life, but may have concerns about whether some portion of that giving will continue upon death. Creating a plan that funds a donor-advised fund account as part of an estate plan can separate out that portion of giving into a different vehicle that can be overseen outside of the foundation structure.
- As a board-member giving tool. Some foundation offer board members a set amount of discretionary money to grant out each year. If the latitude for such giving goes beyond what the donor intent parameters of the foundation allow, then the foundation could grant that discretionary money into separate donor-advised fund accounts for each board member to donate as they please (within the DAF provider’s guidelines, of course).
There are as many strategies for giving as there are donors. The two biggest of those tools, donor-advised funds and private foundations, need not be at odds. Both serve vital roles in the community of giving. The diversity of charitable vehicles helps fuel those many strategies, allowing donors to figure out the how that will maximize the why.