When to open a donor–advised fund versus a private foundation

Though there’s been an explosion of new donor-advised fund accounts that have opened in the past decade, many attorneys, accountants and financial advisors report that some clients still come to them and say they want to create a private foundation.

Once they’ve listened to their advisors, however, far more clients open up donor–advised fund (DAF) accounts instead.

There are still some donors who should – and do – create private foundations (PFs), but the numbers indicate that fewer PFs are created today and that DAFs have become the dominant charitable vehicle. Ten years ago, there were approximately 75,000 PFs and 150,000 DAF accounts. Now, however, there are 463,000 DAFs, while PF numbers have barely increased to 82,000, according to the latest National Philanthropic Trust study.

Attorneys and advisors 10 or 20 years ago felt that clients should perhaps consider PFs if they would initially fund them with $1 million, $5 million, or $10 million. Today, however, most advisors indicate that a client shouldn’t begin to contemplate a PF unless she would fund it with at least $10 million, $20 million or $50 million. Even at those and higher levels, many (if not most) advisors still recommend creating a DAF unless there are compelling reasons for creating a PF.

Conversion to DAFs

As awareness of DAFs has increased rapidly among donors who already have PFs, many of them are closing and converting their PFs to DAFs or are establishing DAFs to complement their PFs. Donors increasingly realize, often with the help of their advisors, that they can accomplish their charitable goals through a DAF for significantly less cost and can reduce the burden, responsibility and complexity of operating the PF.

Read the full story at Wealth Management.
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