What is the difference between a private foundation and a donor-advised fund?
At a high level, a private foundation is a stand-alone entity recognized by the IRS. Foundations are required to observe a complex array of regulations and file an annual tax return. A donor-advised fund (DAF) is an account within a public charity, such as The New York Community Trust.
How do donors use both DAFs and foundations on a practical level?
Generally speaking, both make grants to charitable organizations; however, foundations tend to be the preferred vehicle where there is a need or a desire to have an office and paid staff that manage a formal application and review process. Alternatively, The Trust, as DAF sponsor, validates the tax status and governance practices of the grantee organization and ensures that the grant check was received and cashed in a timely manner.
When might it make sense for foundation assets to be transferred to a DAF?
Institutions have life cycles, and private foundations are no exception. Perhaps there are no longer individuals or family members willing to become board members and take on management responsibilities. Perhaps the level of assets in the foundation does not justify the investment, legal, and accounting fees needed to keep it going. Or, a foundation board may look at its granting history and simply determine that its ongoing support for public charities can be more easily carried out by transferring foundation assets into a DAF through a dissolution process.