Series 66: 4.1.3.2. Private Foundations Vs. Donor-Advised Funds

Taken from our Series 66 Online Guide

4.1.3.2. Private Foundations vs. Donor-Advised Funds

High-net-worth individuals and families interested in leaving a charitable legacy have two main options for making long-term, potentially multigenerational, charitable donations: private foundations and donor-advised-funds (DAFs).

Forming a private foundation begins with the creation of a new Sec. 501(c)(3) not-for-profit organization on the behalf of the individual, family, or corporation that wishes to give. It can be funded with cash, securities, real estate, land, or other tangible and intangible assets. To maintain its tax-exempt status, it must donate to activities that support the public good, such as giving to established charities or offering grants and scholarships to needy individuals.

There are two types of private foundations: operating and nonoperating. Examples of an operating foundation would be a zoo or museum, which spends most of its income on its own activities. A nonoperating foundation, which is typical of a private family charity, exists to grant money to other organizations rather than spend money on its own operations.

Due to its private ownership, the private foundation’s leadership has full control over investments, grants, and decision making. Because the private foundation must operate as an independent non-profit, virtually all operational activities, including salaries, trustee and contribution details must be publicly disclosed. Establishing a private foundation requires filing both state and federal paperwork, typically by a lawyer, and requires final approval by the IRS which may take several months to receive. Ongoing legal, financial, administrative and tax obligations will be the sole responsibility of the foundation to fulfill. It is not uncommon for the investments of larger private foundations investments to be managed by a financial advisor employed by the foundation.

When a donor makes a cash donation to a private foundation, they can deduct this amo

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