As Baby Boomers age and retire, many older adult children must come to grips with private family foundations their parents set up decades earlier – before donor-advised funds (DAFs) were an option for family philanthropy. 

While the first DAF was technically established in 1931 as New York Community Trust, federal legislation clarifying DAF rules did not arrive until the mid-2000s with the Pension Protection Act. Families who did their estate planning in the 20th century and wanted to facilitate ongoing grantmaking were generally advised to form private family foundations. It’s still common for clients meeting with an estate planning attorney or financial advisor to open a conversation about charitable planning with: “Of course, at some point we’ll probably set up a foundation…” 

Advisors today working with their charitably inclined clients often discuss the advantages and disadvantages presented by private foundations versus DAFs.  Many clients realize that a DAF better accomplishes their goals: an account holding charitable dollars that allows them and their loved ones to engage in the rewarding work of grantmaking, leaving the ongoing administrative and legal work to the DAF administrator and dealing with fewer constraints as to required distributions and taxes. New private foundations are increasingly rare but may still be the right fit for families who are willing to bear more expense and administrative responsibility in exchange for control of their own charitable entity.  

With the right planning and consideration, conversions of private foundations to DAFs are possible – an existing private foundation from yesteryear can be terminated with the funds distributed into a new DAF(s). 

What are the most common real-life scenarios that give rise to private foundations converting to DAFs (or making a thoughtful decision not to convert)? How do advisors spot DAF conversion opportunities in the wild? We’ll take a look at four of the most common scenarios and see how advisors can help. 

Scenario 1: The Family Got Big. 

Mom and Dad formed their family foundation with their charitable priorities top of mind, assuming their descendants would share their views – and that the activity of annual grantmaking would be the glue to hold the family together. 

Decades later, the founding couple’s multiple children now have spouses, children, and even grandchildren of their own, and there may be multiple family groups with differing charitable goals stemming from their different geography, life experiences, political or religious leanings, and many more factors. There may be a desire to attach their own name to charitable gifts or involve their children in a way that that is not aligned with the private foundation’s stated purpose or mission. 

A large family group may make it difficult and administratively challenging to decide on common charitable goals. So, the founders’ increasingly large family may decide it makes more sense to terminate the foundation and split its assets among separate DAF accounts. 

Deciding Not to Convert: Some large multi-generational families who consider splitting a private foundation into smaller family-branch DAFs ultimately decide it’s more important to keep the firepower of a larger asset base and one family name. 

Scenario 2: The Family Got Small. 

The opposite size problem can lead to the same outcome of transitioning a private foundation to a DAF. Mom and Dad may have formed their private foundation in hopes of it keeping generations of their descendants working together towards charitable goals. But a family that may not have grown as expected, or even shrank, might only have one or two aging adult children left to run a foundation. The administrative responsibility and limits around existing resources may lead small families to consider converting their foundation to a DAF. 

Deciding Not to Convert: Some smaller families without a younger generation decide that when the time comes, they prefer to simply give the remaining private foundation assets to a public charity and shut it down, either later in their lives or posthumously. 

Scenario 3: Junior Retired and Doesn’t Need a Job. 

A subset of families who set up private foundations did so in part to be able to provide a legitimate paid position to one or more family members, frequently children. For many children, having a full or part-time job facilitating family philanthropy is deeply rewarding, and a foundation can benefit from having a worker who has a flexible schedule and cares personally for the mission. 

However, many of the foundations that were set up to be run by founders’ children now have an aging staffer at their helm. As these children age and enter retirement, they may have less need or desire for their paid foundation job. With no likely successor, a conversion to a DAF allows this aging next generation to maintain grantmaking while relieving them of administrative responsibilities.  

Deciding Not to Convert: A family that has valued having one of their own working for the foundation may conclude that this is an option they want to retain for the next generation of family members.  

Scenario 4: A Million Isn’t What It Used to Be. 

Private foundations that are under $10 million in size may find that the ever-increasing administrative costs are too expensive and time-consuming for a modestly sized foundation. From staff upkeep to ongoing legal and tax work, it may just not be worth the effort. A family may conclude that transitioning the foundation to a DAF will allow more dollars for charity and more free time for them.  

Deciding Not to Convert: While a DAF is usually a much lower-cost option than a private foundation, DAFs still come with administrative expenses and investment management fees. Much like the smaller family, a family with a smaller private foundation may conclude it’s more efficient to simply gift the foundation assets outright when they’re ready, rather than continuing to pay the expenses of keeping a DAF account open. 

Advisors Can Help Clients Decide Whether to Convert a Private Foundation to a DAF  

When advisors spot these scenarios, they have an opportunity to add value by guiding families through options that may bring real relief, finding a compromise by continuing the founders’ charitable intentions within a structure that works best for those living today.  

For donors and their families, comparing DAFs and private foundations can illustrate whether converting is with the effort. Some may find that while a full conversion is too complicated, establishing complementary DAFs can help them reach their goals effectively. 

If you or your client would like to discuss the possibility of transitioning a private foundation to a DAF, contact American Endowment Foundation now. 

NOTE: This article has been updated from its original version by guest columnists: Anne Gifford-Ewing and Jeffay Chang, Capital Group Private Client Services.