Donor-advised funds offer a range of advantages. Consider the following differences between philanthropic giving by way of a donor-advised fund as opposed to setting up a private foundation:

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Feature
Private Foundation
Community Foundation Donor-Advised Fund
Control
Donor retains maximum control of board, investments, and grantmaking.
Donor provides advice to Community Foundation board on grants, resulting in practical, if not legal, control of grants. Must adhere to Foundation investment policy.
Self-dealing rules
Strict regulations prohibit most transactions between a private foundation and its donors (including related persons or corporations).
Private foundation self-dealing rules do not apply.
Tax Deductibility
(AGI = Adjusted Gross Income) Property: 20% AGI Cash: 30% AGI
Public charity deductibility – market value Property: 30% AGI Cash: 50% AGI
Excise taxes
Excise taxes (Section 4940-4945) 1%-2% of invest. income
Exempt from excise taxes
Minimum payout requirement?
Yes 5%
No
Investment Flexibility
Must divest excess business holdings (closely held stock) within five years or pay excise tax.
Foundation offers donors limited number of investment strategies.
Continuity
Can continue to future generations.
Donor may name a successor advisor(s) to his or her fund.
Administration
Burdensome administration:

  • Accounting
  • Record keeping
  • Tax return (form 990-PF)
Simple:

  • Can establish in one day
  • No separate tax returns required
Liability & Risk Insurance
Must be purchased by the private foundation.
Provided by the Community Foundation up to $10 million.
Staff
Can employ family members.
Access to Community Foundation staff (for investment, grantmaking expertise).
Start-up costs
Legal and accounting fees.
None
Converting between entities
Can convert to a supporting foundation or donor-advised fund.
Can convert to or from a supporting foundation, or from a private foundation.