In contrast, a donor advised fund is much easier to establish. The donor contacts a sponsoring organization (which already has a 501(c)(3) designation) and completes their required paperwork to initiate the creation of their donor advised fund. Contribution can usually then be received shortly thereafter. This is normally a much more expeditious process as compared to the formation of a private foundation. A DAF may only take a day or two to create and receive contributions, verses a PF, where it may take several months to be in the same position.
Once the charitable mechanism has been established, both a PF and a DAF require ongoing administrative functions to maintain the contributed funds. There are clearly less administrative responsibilities for the donor family with the DAF, as the managing charity handles most of the administration responsibilities. Private foundations clearly have ongoing administrative tasks, including maintaining accounting records, managing investment assets, ensuring annual federal and state tax filings are made, keeping board minutes, and administering their grant programs.
With a donor advised fund, the donor typically only makes grant recommendations to the sponsoring organization, who then acts on those recommendations. The responsibility to manage the investible funds typically rests with the sponsoring organization, not the donor family.
Tax implications to donor
Donations to a private foundation or to a donor advised fund are both tax deductible. However, the resulting tax deductibility to the donor family varies between these two.
The donation of cash and publicly-traded securities results in the same tax deduction for contributions to a private foundation and a donor advised fund. The tax deduction resulting from donated cash and publicly-traded securities is their fair market value (FMV) at the date of the gift.
The tax deduction resulting from closely-held stock donated to a DAF is also its fair market value at the date of the gift. Please note that typically an appraisal of some type is required to substantiate the FMV in such situations. However, the tax deduction resulting from donated closely-held stock to most private foundations is limited to only the donor’s cost basis.