Conversions of Private Foundations to Donor-Advised Funds

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

For many years, donors have utilized private grant making foundations for charitable giving. Organized as either trusts or corporations, such entities have served as a means for making substantial tax deductible contributions while spreading out the actual contributions to charities over many years.

They have provided families with a structure to enable them to consolidate and organize their giving for greater impact, and often family members and advisors find this to be a very fulfilling process of charitable giving. Much of the most significant charitable impact has resulted from private foundation grant making or program related investments. Well-known names in philanthropy such as the Ford Foundation come to mind and many communities are blessed with substantial contributions from such private foundations.

Growing trend of donor-advised funds

But with this said, in recent years there is a growing trend to consider donor-advised funds as alternatives to private grant making foundations. Some of this interest no doubt resulted from concerns raised by substantial depletion of private foundation endowments after the economic collapse of 2008. Private foundation directors and trustees, seeing a depletion in their grant making capacities, were looking for ways to decrease administrative costs and increase investment returns.

For many years, private foundation directors and trustees have increasingly been concerned over the administrative burdens associated with the various federal and state rules relating to private foundations, including regulations on the types of authorized investments and the compensation that can be paid to family members who administer the private foundations.

Annual reporting, especially the federal form 990PF, has become more cumbersome and raised accounting and related fees. And such foundations need to pay investment income taxes and always be cognizant of the need to meet the annual 5% distribution requirement. Smaller foundations are especially concerned that the costs outweigh the benefits of continuing their foundations.

In recent years, donor-advised funds, sponsored by commercial entities, community trusts, charitable organizations and independent programs such as American Endowment Foundation, have provided families with an alternative structure for their charitable giving that:

  • substantially reduces administrative burdens and costs;
  • provides anonymity where preferred;
  • enables relatively turnkey processing of grantee due diligence and grant processing.

The private foundation directors and trustees can retain advisory roles over the distribution of the new donor-advised fund and can set general parameters on the types of distributions to be consistent with the private foundation's mission. The family name can still be associated with the giving if this is desired and often the investment advisors of the private foundation can continue to manage the investments of the donor-advised funds if certain minimum deposits in the new donor-advised fund are made.