Tandem Use of Private Foundations and Donor Advised Funds
Foundation facing payout requirement
Many times a foundation, especially one newly formed, faces a mandatory payout without having fully developed its grant making criteria or philanthropic focus. In other cases, it may have developed a focus, but has not yet chosen grantees; or is waiting for an organization that it wishes to support to receive tax exemption. A private foundation can create a DAF in its own name, make a grant to the DAF to meet its required distribution, and recommend grants from the DAF when it is ready to move forward with a grantee.
Foundation interested in joint family giving or involving the next generation
A private foundation can create and make grants to a DAF to pursue activities which might not fit neatly within the foundation’s overall giving program, but for which there is significant family interest (for example, gifts to an alma mater, or a campaign at a private school attended by a family member). A DAF also can be created to be used as a “training ground” for the next generation of foundation trustees to learn about and practice charitable giving and the role of a foundation board member. It also can provide a vehicle for involving younger family members outside the umbrella of family giving.
Foundation interested in supporting a particular issue or geography
Several large, national charitable organizations have in-house DAFs that support the work of the organization and similar charitable causes. A foundation might set up a DAF at an environmental organization, for example, and allocate a portion of its grants to that particular organization, and the remainder to other environmental causes. This may make sense if a foundation has a particularly close connection to the organization and wants to benefit that organization over time. It also works if the focus (in this case, the environment) is not a core part of the foundation’s overall giving, since it allows the foundation to benefit from the expertise of the organization hosting the DAF. Similarly, a foundation may wish to create a DAF at a community foundation if they have a particular tie to a specific geographic location, to benefit from the expertise of the community foundation, and/or to target funds to a specific geography or issue on which the community foundation has deep expertise.
Donor Interested in Maximizing Charitable Deductions
If a charitably minded donor is interested in maximizing the deductibility of their contributions in any given year, the donor can make a gift first to their private foundation, and then take advantage of higher deduction limits through an additional gift to a donor advised fund. The donor not only takes full advantage of the deductions available to them, but also has additional resources from which to recommend charitable gifts.
Since the passage of the One, Big, Beautiful Bill Act (OBBBA) permanently extended the 60% adjusted gross income (AGI) limitation for cash gifts made to certain qualifying charities, this strategy could be even more desirable.
