When working on the charitable components of a client's estate or financial plan, one of the first areas you'll likely explore is the structure. Certainly, you are familiar with both private foundations and donor-advised funds as useful charitable giving tools.

Before you jump into one or the other for a particular client, though, it’s important to review the similarities and differences between the two so that you can best achieve your client’s goals. 

Here are three common myths about the differences between private foundations and donor-advised funds to help you evaluate a client’s options.

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 assume that a donor-advised fund is a cookie-cutter vehicle.

Indeed, “donor-advised fund” is simply a term used to describe the structure of a fund and its relationship with a sponsoring organization such as the Tidewater Jewish Foundation (TJF). The donor-advised fund vehicle itself is extremely flexible. Here’s why:

• Donor-advised funds are popular because they allow your client to make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. Then, your client can recommend gifts to favorite charities from the fund when the time is right. 

• A donor-advised fund at TJF is frequently a more effective choice than a donor-advised fund offered through a financial institution. That's because, at TJF, your client is part of a community of giving and has opportunities to collaborate with other donors who share similar interests. Plus, TJF is itself local and is deeply knowledgeable about the needs of our region and the nonprofits meeting those needs. 

TJF can work with you and your client to build a charitable giving plan that will extend to multiple future generations. That is because the team at TJF supports your clients in strategic grant-making, family philanthropy, and opportunities to learn about local issues and nonprofits making a difference.

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 Form 990 tax returns for private foundations. 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 billions of dollars.

Indeed, a donor-advised fund 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 of whether to establish a donor-advised fund or a private foundation–or both–is much less a function of size than other factors tied more closely to the objectives a client is trying to achieve.

Myth #3: Donor-advised funds and private foundations are mutually exclusive

Ensure you know the benefits of using both a donor-advised fund and a private foundation to accomplish clients' 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 fund can receive a client’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 client balance and diversify investment and distribution strategies to ensure that giving to important causes remains steady even in market downturns.

Some private foundations even consider transferring their assets to a donor-advised fund at TJF to carry on their mission. Terminating a private foundation and consolidating giving through a donor-advised fund is sometimes the best alternative for a client 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.

Along these lines, 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 the 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 bottom line here is that we encourage you to reach out to the TJF team anytime you evaluate how to structure a charitable giving plan to achieve both your client's charitable and financial goals. Our team is here to help. In many cases, Tidewater Jewish Foundation’s tools and services are a great fit for your client’s needs. If not, we will point you in the right direction.