Welcome to the EPAC Corner! We are pleased to bring you this content from the Estate Planning Advisory Committee (EPAC) of the DeKalb County Community Foundation. If you have any questions about the information below or the EPAC group, please contact Community Foundation Executive Director Dan Templin at 815-748-5383 or dan@dekalbccf.org. 

Debunking Three Myths 

If you’ve been involved with charitable giving for a few years, you’ve no doubt become familiar with both private foundations and Donor Advised Funds and their popularity as charitable giving tools. As is often the case with tax and estate planning-related topics, the differences between private foundations and Donor Advised Funds are sometimes the subject of confusion and misunderstanding.

As you work with your advisors to establish your immediate and long-term charitable giving plans, take a few minutes to check out how to debunk these three common myths. 

Myth #1:

Donor Advised Funds are all the same and only private foundations can be customized

Private foundations will always differ from Donor Advised Funds in important ways not only because of their status as separate legal entities and the deductibility rules for gifts to these entities, but also because of the opportunities to customize governance. But it is a mistake to think that a Donor Advised Fund is a cookie cutter vehicle. Indeed, “Donor Advised Fund” is simply a term used to specify the structure of a Fund and its relationship with a sponsoring organization such as a community foundation. The Donor Advised Fund vehicle itself is extremely flexible.

• • Donor Advised Funds are popular because they allow a donor to make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. The donor can recommend gifts to favorite charities from the Fund when the time is right.
  • The community foundation works with you and your family on a charitable giving plan that extends for multiple future generations. That is because the team at the community foundation supports your family in strategic grantmaking, family philanthropy, and opportunities to gain deep knowledge about local issues and nonprofits making a difference.

As you explore the many opportunities to deepen your work with your community foundation, consider the unique mix of flexibility and services available to you and your family when you establish a Donor Advised Fund.

Myth #2:

Deciding whether to establish a Donor Advised Fund or a private foundation mostly depends on size

The size of a Donor Advised Fund, like the size of a private foundation, is unlimited. The United States’ largest private foundations are valued well into the billions of dollars. (Information about private foundations, ironically, is not so private. The Internal Revenue Service provides public access to private foundations’ Form 990 tax returns. That is not the case for individual Donor Advised Funds.)

Similarly, Donor Advised Funds are not subject to an upper limit. Although information on the asset size of individual Donor Advised Funds is not publicly available, anecdotal information indicates that some Donor Advised Funds’ assets may total in the billions of dollars.

Indeed, a Donor Advised Funds of any size can be an effective alternative to a private foundation, thanks to fewer expenses to establish and maintain, maximum tax benefits (higher deductibility limitations and fair market valuation for contributing hard-to-value assets), no excise taxes, and confidentiality (including the ability to grant anonymously to charities).

The net-net here is that the decision whether to establish a Donor Advised Fund or a private foundation, or both, is much less of a function of size than it is other factors that are more closely tied to the objectives a donor is trying to achieve.

Myth #3:

Donor Advised Funds and private foundations are mutually exclusive

Many philanthropists and their advisors are aware of the many benefits of using both a Donor Advised Fund and a private foundation to accomplish their charitable goals. For example:

• • Donor Advised Funds can help meet the need for anonymity in certain grants, which is typically difficult using a private foundation on its own.
  • A Donor Advised Funds can receive a family’s gifts of highly-appreciated, nonmarketable assets such as closely-held stock and real estate, and benefit from favorable tax deduction rules not available for gifts to a private foundation.
  • An integrated Donor Advised Fund and private foundation approach can help a family balance and diversify its investment and distribution strategies to ensure that giving to important causes remains steady even in market downturns.

Some private foundations are even considering transferring their assets to a Donor Advised Fund at a community foundation to carry on the foundation’s mission. Terminating a private foundation and consolidating giving through a Donor Advised Funds is sometimes the best alternative for a family when the day-to-day management and administration of the private foundation has become more time-consuming than expected and is taking time and focus away from nonprofits, the community, and making grants. In addition, some families find that the tax rules related to investments, distributions, and “self-dealing” have become harder to navigate and are perhaps even preventing the family from maximizing tax benefits of charitable giving. Finally, the administrative load of managing a private foundation sometimes becomes overwhelming, especially if the family members who handled these functions initially have retired, passed away, or simply become busy with other projects.

The DeKalb County Community Foundation manages more than 50 Donor Advised Funds right here in our community. Contact Executive Director Dan Templin at 815-748-5383 or dan@dekalbccf.org with questions about or to learn more about the power and flexibility of your own named Donor Advised Fund. 

– Matthew L. Brown, local attorney and member of the DeKalb County Estate Planning Advisory Committee

Established in 2020, the DeKalb County Estate Planning Advisory Committee (EPAC) is comprised of local professionals providing estate planning services, including Attorneys, Trust Officers, CPAs, Wealth Advisors, and Insurance Agents. The purpose of the EPAC is to raise awareness and understanding of the Community Foundation as a resource for professional advisors and their clients, assist with efforts to deliver effective estate planning education to the general public, and to notify estate planning professionals on topics relevant to the intersection of estate planning and philanthropy.

Matthew L. Brown