For those who want to experience the joy of making a difference while retaining their ability to recommend charitable grants and leave a named legacy, a private foundation transfer to a donor advised fund at the Community Foundation could be the answer.
The chart below compares and contrasts a private foundation with the donor advised fund alternative.
Private Foundation vs. Donor Advised Fund at Community Foundation
|Donor Advised Fund at Community Foundation||Private Foundation|
|Donor Involvement||Donor names fund.|
Donor or fund advisors appointed by donor recommend charitable grants. Grants approved by Community Foundation Board. Donor can name successor advisors.
|Donor appoints board, which controls operation and grant making|
|Tax Status||Public charity - no tax on fund balance or income||Private charity - subject to annual excise tax of 1 to 2% of investment income.|
|Deductibility of Cash Gift||Up to 50% of adjusted gross income (AGI)||Up to 30% of AGI|
|Deductibility of Appreciated Stock||Fair market value, up to 30% of AGI||Fair market value, up to 30% of AGI|
|Deductibility of Real Estate or Closely Held Stock||Fair market value, up to 30% of AGI||Cost basis, up to 20% of AGI|
|Minimum contribution||$5,000 for an endowed fund|
No minimum for a non-permanent fund
|$5 million+ recommended|
|Ongoing costs||Fund is charged an administrative fee of between 0.25% and 2%, depending on fund type and size||Cost of operating could include staff, investment managers, tax consultants, etc.|
|Grant making effectiveness and support||Community Foundation staff professionally manage grants recommended by donor and share important community needs/data for consideration by donor||Donor, consultant or paid staff monitor and assess effectiveness|
|Payout requirements||None||5% of assets annually|
|Reporting requirements||Handled by the Community Foundation||Annual IRS Form 990-PF must be filed and made available to the public|
|Accountability and Liability||Donors may remain anonymous if they choose. Community Foundation is accountable for management of funds||Donors are named on the 990-PF. Board is responsible for complying with regulations.|
If you are interested in transferring your private foundation to a donor advised fund, below are the primary required steps. You are your advisors are encouraged to call us with questions.
Steps to Take
- Board Approval
Once the Community Foundation consents to accepting a transfer of your private foundation assets, your governing board can approve the transfer to a donor advised fund according to the provision of your governing documents (i.e., bylaws, articles of incorporation and/or declaration of trust) and applicable state law.
- Fund Set Up
You create a donor advised fund by completing a fund agreement (template provided by Community Foundation) in which you name the fund and name current advisors and successor advisors.
- Manage Your Liabilities
Pay private foundation’s outstanding taxes, grants, debts, etc. before transferring assets to Community Foundation. Create a reserve for any other anticipated expenses. Once assets are transferred to a donor advised fund, they can be granted to charitable projects and organizations but they cannot be used to cover the private foundation’s past expenses and obligations.
- Corporate or Trust Dissolution
Once the transfer to the community foundation is approved by the board, the fund is set up with the community foundation and liabilities managed – but before transfer of assets – if the private foundation is a nonprofit corporation then it should file a corporate dissolution with the Secretary of State or other applicable staff office depending on the state. If the private foundation is a trust, then a local court of appropriate jurisdiction should approve the dissolution of the trust and transfer to the community foundation.
- Asset Transfer
The Community Foundation is a public charity, so it can receive a donation of the private foundation’s assets by simply writing a check. The donor advised fund can also accept gifts of stock, mutual funds, personal property and more.
- Final Tax Filing
The final 990-PF is filed reporting the dissolution of the private foundation, attaching a copy of the court order (if trust) or dissolution document (if nonprofit corporation) as well as the new donor advised fund agreement with the Community Foundation. Schedule O may be used to explain the timing and other details of the dissolution and transfer.
IMPORTANT SCHOLARSHIP NOTE: If the private foundation operated a scholarship fund that it wants the Community Foundation to continue in addition to other charitable grant making, then the Community Foundation would have to separate assets transferred for the scholarship fund from assets transferred for the donor advised fund, and a separate scholarship fund agreement made. Donor advised funds cannot award scholarships.
Section 507 of the Internal Revenue Code
Section 507 permits termination of a private foundation in either trust or corporate form with distribution of its assets to a public charity. The two primary requirements for the termination of a private foundation are that the private foundation must distribute all of its net assets to one or more tax-exempt organizations and that the organization receiving the assets must have been in continuous existence for at least five years. The Kosciusko County Community Foundation fulfills both of these requirements.
This information should not be considered legal or financial advice. Please consult with your financial or tax advisor or your attorney to help you with your private foundation transfer.
For more information
Contact us at 574-267-1901. See Sample Donor Advised Fund Agreements here.