What to use: Family Foundations vs. Donor Advised Funds

Many wealthy families consider creating Family Foundations (FF) to secure a legacy of giving and to perpetuate philanthropy as a family value. A common question that arises, is whether a Family Foundation is a more appropriate vehicle for multi-generational giving than a Donor Advised Fund (DAF)? I think it’s worth looking at the advantages and disadvantages of each.

Whether you create a FF or a DAF, as a donor, you receive a charitable deduction for assets contributed in the year they are given. In either vehicle, you can make unlimited contributions of other assets in the future, and assets within these structures continue to grow tax-free. There is, however, a required annual minimum distribution from a Family Foundation of 5% of the foundation’s value, while in a Donor advised fund, currently there is no mandatory annual amount that must be distributed. In a Family Foundation, you as donor, or appointed trustees, have full control over which charities (501c3 organizations) will receive gifts from the FF. With a Donor Advised Fund, you can only make recommendations to the DAF as to which organizations you would like particular amounts sent; it is not a guarantee, though most popular DAF’s distribute funds to all entities requested unless there is a conflict of interest to the DAF.

With a Family Foundation, the foundation is responsible for creating the legal entity and filing annual tax forms required. In addition, 1-2% of net investment income must be paid in taxes each year. With a Donor Advised Fund, the DAF is already established by the legal entity offering up its services, and they take care of all administrative costs and taxes. Therefore, you would want to donate a significant enough amount to a FF in order to cover the upfront costs of creating the legal structure as well as the annual administrative fees thereafter. In addition, the investments and distributions of a FF are public information whereas DAF contributions and distributions are not.

One advantage of a Family Foundation is that family members can be put on the payroll if they take an active role in the administration, distribution, or research for the foundation. Family Foundations also claim greater flexibility in the types of organizations they can support as long as they are public charities, whereas DAF’s can only make grants to other 501c3 organizations.

Overall, if one wishes to utilize the foundation to employ family members, manage their own investments, and has large sums they want to donate to an entity that will be structured to create a multi-generational legacy of giving, a Family Foundation may be ideal. If a family would prefer to remain more anonymous about their philanthropy, to not be involved in the day to day investing and administration of grants, doesn’t need a vehicle to provide income to family members themselves and doesn’t want to be forced to make annual distributions I would recommend they consider a Donor Advised Fund.

Please see the comparison chart for a quick summary of the differences. If you are interested in learning more, feel free to give us a call.

FF vs. DAF pic