Donor-advised funds (DAF) are public charities into which we can make a charitable gift today and disperse the funds to the causes we support in the future. Many people value the flexibility of a DAF when incorporating charitable gifting into their income-tax planning. That is because the deductible gift, subject to AGI limitations, is taken the year of the gift, not when it is dispersed. Donors can contribute cash, securities, or other property to a DAF. Remember, this is a charitable gift over which you lose control. Disbursements are technically suggestions as to which charities will receive distributions, but donors have a more than reasonable expectation that their directions will be followed.
Individuals and families choose DAFs for their low cost and flexibility. Typically, donors can name their DAF account, the advisors that they wish to use, any successors, or charitable beneficiaries. The DAF is an alternative to private foundations, which have significant start-up costs and legal fees for state and federal filings. Third-party services typically require $5,000 minimum annual administrative expenses.
Foundations are great for those families and individuals who do not mind the expense and the requirement that at least 5% of holdings are distributed to charity, regardless of market conditions or donor intent. Also, as many a politician or wealthy donor knows, private foundations are not private. Donations and investments are public records available to anyone through IRS form 990PF. Believe me, if your family values privacy, do not start a private foundation. If you do not want your family targeted by slip-and-fall attorneys, do not start a private foundation.
In either case, make sure that you prepare yourself and your family to effectively control these important social contributions. Make sure that you have a mission statement and family meetings. When it comes to private foundations, in particular, families can descend into destructive squabbles that break apart siblings and generations. As with most endeavors, how we prepare determines whether our good intentions become opportunities to build human capital or to erode it.