The number of private foundations in the United States is nearing 150,000, with combined assets topping $1 trillion.
While a private foundation is a powerful and enticing giving vehicle, and you are likely to have several clients who have either established a private foundation or are considering doing so, these entities can often be cumbersome, expensive, and time-consuming to maintain. Due to the administrative constraints on private foundations, and potential tax changes ahead, donor-advised funds at Communities Foundation of Texas (CFT) are becoming an even more popular and flexible option.
Recently, the number of donor-advised funds (DAFs) has risen to nearly 2 million in total, with annual grants reaching $50 billion in some years. CFT currently has more than 900 donor-advised funds with total assets over $550 million. These statistics indicate that our community of generous givers might be considering creating a DAF in lieu of a private foundation or converting an established foundation to a DAF. CFT is here to partner with you and/or your clients in either of those situations.
Below are some suggestions to more easily navigate these conversations with your client.
“Reality check” the administrative requirements of a private foundation. Day-to-day management of a private foundation can become time-consuming, especially as the responsibilities begin to fall to second and third-generation family members. Even the first generation may find that the administrative work required might not only deviate the intended focus from the nonprofits and communities the family wishes to support, but also from making thoughtful and timely grants.
Although a private foundation may provide an opportunity for families to work as a unit on their charitable giving, it can also potentially create conflict or be difficult logistically. If family members are unable to agree or meet about the foundation’s priorities, distribution of funds, or future management, such tensions may ultimately disrupt the foundation’s operations and its ability to achieve the original charitable giving goals.
Additionally, these required responsibilities may become even more burdensome if the founding generation does not have any heirs. Decisions need to be made regarding who has control of future grant making and whether they are prepared to continue the original mission of the foundation. A DAF can help protect legacy because donors can clearly lay out the charitable goals to be accomplished.
Review the tax rules regulating private foundations. The IRS’s rules related to investments, distributions and “self-dealing” are complex. Over time, navigating complexities of tax compliance requirements may become frustrating for givers and/or clients with private foundations. For example, if an individual plans to transfer all or part of a family business, whether now or in the future, it is imperative that the benefits of establishing a DAF versus transferring the business interests to a private foundation are clearly communicated.
Work with Communities Foundation of Texas. Our team at CFT has decades of experience converting foundations to DAFs. Just recently, we worked with a professional advisor to dissolve a foundation and fund a DAF with assets totaling $23 million. We are here to support you and/or clients and ease similar transactions.
What are the steps to convert a private foundation to a DAF?
There are five essential steps to complete a private foundation to DAF conversion:
- The private foundation’s board must determine if the proposed dissolution is permissible according to the foundation’s governing documents.
- The private foundation must resolve all remaining obligations. This includes any outstanding payments such as taxes, grants or fees. Additionally, a reserve should be set aside for additional anticipated expenses.
- Work with CFT to establish a DAF. Our staff will help you craft and complete a fund agreement. The fund agreement will establish the name of the fund and outline the structure of the fund’s advisors, successor advisors, investment options, distribution plans, and legacy considerations. This structure may mirror the private foundation’s board structure. As a result, the DAF will look and operate similarly to the private foundation.
- Transfer the assets from the foundation to the newly established DAF at CFT. CFT accepts multiple types of assets including cash, stocks, real estate, and non-cash assets.
- Finalize the termination by ensuring the private foundation corporate entity is in good standing according to the laws of the state in which it was originally established. The private foundation can then file an informational tax return with the IRS for its final year.
Whether you or your client are ready to transfer a private foundation to a DAF this year or is simply evaluating options, please contact our team of experts. By partnering with CFT, we can help you and your client establish a DAF, create the best philanthropic plan for their current charitable giving needs, and establish a legacy gift that will allow them to continue providing for nonprofits in their community far into the future – and with ease and efficiency.
