By Jody Dilday, Philanthropic Advisor
There are nearly 150,000 private foundations in the U.S., holding over $1 trillion in assets. So, it’s common for people to consider starting one when planning their charitable giving. You probably have clients who already have a private foundation.
But donor advised funds (DAFs) are growing fast—there are almost 2 million of them now, and they give out around $50 billion in grants each year. More and more, people are using both private foundations and DAFs. Some clients are even thinking about moving their private foundation’s assets to a DAF at the Community Foundation to make things easier while keeping the family’s mission alive.
If you’re working with clients considering this, here’s a quick guide:
1. Think About the Work Involved
Running a private foundation takes a lot of time. As future generations take over, managing it can become a burden. Many families find it takes focus away from helping nonprofits.
2. Understand the Tax Issues
Private foundations must follow strict IRS rules. Things like investments, payouts, and avoiding conflicts of interest (“self-dealing”) can get complicated. If a client wants to donate a family business, it’s usually better to use a DAF—doing it through a private foundation could lead to tax problems.
3. Get Help from the Community Foundation
We can guide you and your client through closing a private foundation and moving the assets to a DAF. First, the foundation’s board needs to approve the move and record it in meeting notes.
4. Start the Donor Advised Fund
The client can create a DAF with a name like “Smith Family Foundation Fund.” The people who advise on grants can stay the same, just like the private foundation’s board.
5. Transfer the Money
The private foundation will give most of its assets to the new DAF. Make sure enough money stays behind to pay any final bills before officially closing the foundation.
6. Finish the Process
As long as the foundation is in good standing with the state, closing it for tax reasons is simple when assets go to the Community Foundation. The foundation just needs to file a final tax return and follow any steps required by the states it’s registered in.
Whether your client is ready to make the move now or just exploring options, we’re here to help!