Collapsing (or Complementing) a Private FoundationSubmitted by American Endowment Foundation on January 8th, 2016
By Eric Kinaitis
Families are increasingly choosing to terminate some, or all, of their private foundations in favor of a donor advised fund (DAF). For many private foundations, the market downturn that occurred in 2008 reduced their assets to such a level that they realized maintaining their existence as a private foundation proved to be no longer efficient or prudent even in the present day.
Families terminate their private foundations into donor advised funds for a variety of reasons including:
- The private foundation is not large enough to operate efficiently. Some experts say that the minimum size of a private foundation should be between $3-5 million.
- The founders, or their children, realize that there may not be any interest in continuing the administrative “burdens” of maintaining the private foundation.
- The children who "inherit" the foundation may not share the same charitable interests and would like to broaden the scope of the family philanthropy.
- The family becomes frustrated with the minimum 5% annual distribution requirement, and paying the private foundation excise tax.
- Families are concerned to learn that there is nothing private about a private foundation.
This trend may represent an opportunity to help families struggling with private foundation issues. They can often reduce the cost and complexity associated with managing a private foundation, enhance their options for grant making and continue to work with the flexibility they have long been accustomed to by allowing their trusted financial advisor to manage the assets in their donor advised fund.
How Donor Advised Funds and Private Foundations Complement Each Other
The solution may not always be an “either/or”, but rather “both” in the right circumstances. There are certain things donors can do in a private foundation and not in a DAF, and vice versa. Having a private foundation and a donor advised fund working alongside each other may offer the best way to meet the families ever changing needs and dynamics. This can be for the increased privacy already discussed, using the DAF as a training vehicle for the next generation before turning over the reins of the main foundation, or to increase the taxable benefit of newer assets being gifted to fuel the family philanthropy. The two entities can have the same name, the same investment flexibility, the same custodial platform, and the same investment manager. The private foundation’s board of directors can serve as the advisory board for the donor advised fund as well.
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