Tax efficiency is a go-to when a family has a liquidity event. There’s often a rush to set up a Private Foundation (PF) and/or a Donor Advised Fund (DAF) and park some of the capital there while the family gets up to speed on how to steward the dollars. 

Identifying a source before establishing the process can be a landmine. Fundamental questions like, “What do you want your legacy to be?” and “Who is sitting at the table making decisions?” are key to identifying sources that align with the family’s future needs. 

If you’re thinking that most people don’t ask, much less know the answers to these questions in year one, you’re right. Attorneys who take the time to help clients parse these issues add value by eliminating confusion and aiding family cohesion. 

Savvy families often have multiple sources of philanthropic capital and clearly defined uses. Mom and Dad may have a DAF for personal giving, the family may give strategically through a PF, and there may be a lead or remainder trust used for a specific time-bound portfolio of giving. There may also be endowments at hospitals and universities. 

What follows are common sources (there are others) and ways to think about what might be right for your clients. 

Private Foundations (PFs)

Private foundations, with a requirement to distribute 5% of the fair market value, are often used as legacy vehicles to maintain philanthropic capital in perpetuity. The foundation board is the fiduciary so clarity and communications about processes are critical. Tax returns and grants are public. Running costs can seem high, considering the excise tax, filings, and administration. Clients who benefit from PFs want to: 

• Engage family members across generations and sometimes across family lines
• Build generational legacy 
• Maintain fiduciary control

Donor Advised Funds (DAFs)

There are three types of DAF sponsors: Institutional, Community Foundation, and Special Interest. 

• Institutional DAFs are supported by wealth management orgs such asFidelity Charitable and Schwab, which are among the largest
• Community Foundations are regional re-grantors that have expanded their geographic scope to align with the interests of their donors
• Special Interest DAFs are found at universities, faith-based organizations, and hospitals 

The DAF sponsor is the fiduciary; the donor is an advisor in the relationship. As the fiduciary, sponsors have the right to determine if they’ll make a particular type of grant. Special Interest DAFs may aggressively solicit contributions. Understanding the communications process, the fee structure, and any specific rules for grantmaking that the sponsoring organization has, is critical to having success with a DAF.

The costs for DAFs are significantly less than those of a private foundation. There are no minimum distribution rules. The National Philanthropic Trust reported a 24% payout from DAF funds in 2023, so it’s clear that DAFs don’t have the same goal of preserving capital in perpetuity as often perceived in PFs. 

Clients who benefit from DAFs: 

• Have the option to be anonymous 
• Do not retain fiduciary control therefore have lower risk and cost
• Are backed up by diligence done by the sponsoring organization

Charitable Trusts

Lead and Remainder Trusts allow for distribution to family members and charities. Capital is released in a controlled way. They create both a cushion for individual family members and an incentive to be philanthropic. These are great tools to help stack availability of capital over time, sometimes skipping a generation. Their payout timelines provide another way to be intentional about planning.

Takeaways before setting up a source of philanthropic capital

• Gauge your client’s appetite for engagement
• Identify internal intent and who will be involved in decision-making
• Understand goals of giving to align the right source or even stack sources

You can find The National Philanthropic Trust DAF Report here.