This story originally appeared in the January/February 2019 issue of Elite Traveler.
Page Snow, chief philanthropic officer at Foundation Source, explains why many are choosing to start a private foundation over a donor-advised fund.
The ability to make a difference in people’s lives through your own private foundation is considered a defining mark of achievement. Beyond the tax advantages, a private foundation serves myriad purposes for high-net-worth families while, at the same time, improving the lives of others. And, if the foundation is set up in perpetuity, it can grow to become a significant philanthropic legacy, linking the family name to good works for countless generations.
However, for high-net-worth individuals and families contemplating a charitable vehicle, the default choice is often a donor-advised fund (DAF). Despite the many benefits that private foundations offer affluent families, advisors often resist recommending them to clients because of the perceived difficulty of setting one up and managing it. Although these once may have been valid concerns, today there are firms that provide the same sort of turn-key services that previously were only available with DAFs. Thanks to advanced technology and the outsourcing of services that automate and simplify the way private foundations are operated, families can set up a foundation in a matter of days and enjoy the control and flexibility that only a private foundation can offer, without any of the traditional complexities.
Although DAFs and private foundations are both effective charitable vehicles, they offer different levels of control, authority and philanthropic versatility. Because a
private foundation is a freestanding legal entity (unlike a DAF, which is an account housed in a charity or financial institution), donors can nominate their own board members, establish their own organizational guidelines and bylaws, and act as the final authority in making their own investment and grant-making decisions.
While DAFs are often limited to making grants to public charities, the IRS gives private foundations broad latitude to give to any type of organizations, and even individuals, as long as it’s for a charitable purpose. So, if you want to give to a small, privately run orphanage in Africa that’s unknown to the IRS, you can do it. If you want to help families struggling to rebuild in the wake of a hurricane, you can put funds directly in their hands rather than making a donation to a relief agency. You can run your own charitable programs, such as a winter coat exchange or backpack lunch program. And if you want to create your own scholarship program and choose the recipients, a private foundation is your only vehicle of choice.
To advance their charitable purpose, private foundations can even function like banks or private investors to make program-related investment (PRIs) loans — loan guarantees and equity investments — which provide valuable support while creating a return on your investment, either through repayment or return on equity. If a nonprofit organization, such as a church or theater group, needed to construct a new facility, you could either lend them the funds directly or provide a loan guarantee, pledging the foundation’s credit so the nonprofit could secure a favorable rate on a bank loan. If it helps you achieve your charitable objectives, you can even invest your foundation’s grantmaking funds in a for-profit business.
Perhaps the most important advantage of a private foundation is that it is not a binding choice. If you establish a DAF and it turns out not to have been the right choice, you may be stuck with it. DAF sponsors typically have rules against gifting assets to a private foundation. However, if you establish a private foundation and your needs change or you’re undecided about your choice, you can easily convert a private foundation to a DAF.
Running your own foundation can be one of life’s most rewarding experiences. And with the advent of services that ease the administrative burdens and shoulder all the legal, accounting and compliance issues usually associated with private foundations, you can focus on the deeply satisfying part of your philanthropy — changing people’s lives for the better.
Page Snow is chief philanthropic and marketing officer at Foundation Source, a firm that provides comprehensive support services for private foundations. Contact her at email@example.com