Benefits of a community foundation
Community foundations receive more favorable tax treatment than private foundations because they are not-for-profit publicly supported 501(c) (3) charities under the Internal Revenue Code. Community foundations receive gifts from the public and are governed by community-based volunteer boards.
A private foundation is usually established by a single individual, family or corporation and is typically funded exclusively by the founders or a small group of associates. Although some private foundations have governance structures independent from the founders, the majority are closely managed and governed by the founders and their families or close associates.
Individuals who are considering establishing a private foundation to make an impact locally may accomplish their goal in less time and with less cost with a donor-advised fund.
What is a donor-advised fund?
Individuals who are considering establishing a private foundation with the goal of making a difference in the community may accomplish their goal in less time and with less cost – while retaining advisory privileges to recommend how grants are made – through a donor advised fund through the FAV. This strategy eliminates the administrative burdens of creating and managing a private foundation (which may include hiring staff and investment managers, as well as meeting a variety of legal and reporting requirements, as described in the chart below.) Donor-advised funds (DAFs) allow donors to make a charitable contribution, receive an immediate tax benefit, and then recommend grants from the fund over time.
Not all DAFs are created equal. Donors who establish a DAF at the FAV realize the same practical, financial, and tax benefits as those who work with commercial providers like Schwab and Fidelity Charitable. You can contribute cash or appreciated non-cash assets and securities to eliminate possible capital gains taxes. The minimum required gift to establish a DAF through the FAV is smaller ($10,000) than the minimum with most commercial funds. The greatest advantage of a FAV DAF is the FAV’s deep connection with local non-profit organizations and other initiatives in the community. The FAV can provide donors a personalized approach to achieving their charitable goals with their DAFs. For details on how to establish a donor advised fund through the FAV, click here.
Advantages of creating a donor advised fund through the FAV vs. a private foundation.
| Private Foundation | Community Foundation Donor Advised Fund | |
|---|---|---|
| Start-up requirements for new charitable fund | Requires establishing a new nonprofit corporation or trust organized as a private foundation with legal and tax advice | Donor and FAV execute a simple fund agreement |
| Tax-Exempt Status | Must apply for private foundation tax-exempt status from the IRs | Shares the public charity tax exempt status as a “component” of the FAV |
| Start-up Costs | Similar to a corporate start-up, requiring substantial legal, accounting and operational cost | No cost to the donor- |
| Recommended Size | Substantial assets are required to make a private cost-effective | $10,000 minimum and donor has 3 years to contribute the minimum |
| Tax Benefits | Cash gift deduction is limited to 30% of adjusted gross income. Only the cost basis of certain types of appreciated property is deductible, and deduction is limited to 20% of adjusted gross income. | Taxpayer can deduct up to 60% of adjusted gross income for cash gifts. Full market value of gifts of appreciated property is deductible up to 30% of adjusted gross income. (Consult your tax advisor concerning alternative minimum tax implications.) |
| Annual Tax Filings and Returns (990 Report), Auditing | Private foundation must submit tax filings with required reporting schedules | No separate tax return to file, and assets are audited as part of the Foundation’s annual audit. |
| Excise Taxes | A 1-2% federal excise tax must be paid on net investment income. | No excise tax must be paid. |
| Investments | Certain types of investments are prohibited, and the Foundation may not own more than 20% equity interest in a business. A private foundation must research, secure, and carefully monitor its own investment vehicles. | Fund assets are professionally invested through the FAV’s investment program (Information on the Foundation’s investment policies, managers, consultants, fees and performance going forward is available upon request.) |
| Payout Requirements | Approximately 5% of net asset value must be paid out for charitable purposes annually. | Payouts are made in accordance with donor discretion, but FAV policy governs DAFs that have been inactive for more than ___. (The FAV’s DAF policy is available on request.) |
| Donor Control | Donor retains complete control over investments and grant-making, subject to IRS requirements | Donor makes advisory grant recommendations; final decision rests with FAV’s Board of Directors |
| Self-Dealing Rules | Strict regulations prohibit most transactions between a private foundation and its donors (including related persons or organizations) | Private foundation self-dealing rules do not apply |
| Anonymity | Names and addresses of contributors must be made available to the public. | Donors’ names are revealed only to the IRS. |
Perpetuity
| Over time, oversight will change. | Carrying out the donor’s charitable intent is an important hallmark of community foundations. DAF advisors may be appointed through a second generation. Endowed funds may continue in perpetuity. |
| Annual Costs | Depending on the costs of professional services that are secured, can be considerable | Minimal – fees can be approximated by reviewing the FAV fee schedule |
| Fiduciary Responsibility | The private foundation board has fiduciary responsibility | The FAV fulfills the fiduciary responsibility |
| Administrative Concerns (personnel, facility, grant management, liability and risk insurance) | Must establish and/or obtain these services. Any staffing must be secured with consideration of federally mandated self-dealing rules. | Services are provided by the FAV |
Interested in starting your own DAF?
Contact the foundation today. We look forward to talking with you!
