Families that use their family office to spearhead their charitable giving frequently choose either a family foundation or a donor advised fund (DAF) — though some use both.
Josh Kanter’s family started with a foundation, created back in the 1980s, before DAFs had caught on.
“Since then, we’ve also formed a DAF,” says Kanter, who is president of Chicago Financial, Inc. “Other than personal giving, those are the two formal structures we use.”
A number of factors influence these decisions, including the level of control or flexibility the family wants, how much engagement the family wants to have in the governance, and how simple they want the setup to be.
“The choice among a DAF, a private foundation, and other philanthropic structures is often shaped not only by tax implications, but also by the governance and engagement objectives of the family members,” says Christopher Dickson, national family office advisory leader for RSM US LLP.
Nancy Bruns’ family uses several different vehicles for giving.
“We have a donor advised fund at our community foundation that we use for major gifts,” says Bruns, who is chairman of the board for the John L Dickinson Family Enterprise. “We use low basis stock for annual gifts to organizations that we support regularly. This allows us to be tax efficient, and we trim positions that may be getting outside of our IPS parameters. We also give from individual companies if we feel the receiving organization is more closely aligned with the company’s mission.”
There are other tools for making charitable donations.
Some families use charitable remainder trusts and charitable lead trusts, though those are more of an estate planning tool than a strategy for giving. A few families have set up LLCs so that they have flexibility beyond donations to 501c3 charities, says Ron LaVelle, a principal with Baker Tilly’s private wealth practice. However, the most common philanthropic strategy is to use a DAF or a family foundation, or a combination of the two.
The choice between a DAF and a foundation involves a number of considerations:
* Flexibility in the type of donations.
Scott Saslow and his family established the Sunshine Foundation nearly 30 years ago, before donor-advised funds existed.
“While we might weigh the choice differently today, a private foundation remains the right structure for us, primarily because of its flexibility,” says Saslow, who is founder and CEO of ONE WORLD Investments. “The foundation allows us to deploy capital across the full spectrum of philanthropic tools — mission-related investments, program-related investments, recoverable grants and traditional grants — on our own timeline and terms. That flexibility makes the foundation a natural complement to the impact-oriented investing we do through the family office’s commercial portfolio.”
In practice, Saslow says, these two pools of capital work in concert.
“When we encounter a company with a compelling mission but one that’s too early-stage for a commercial investment, we can bridge that gap with a PRI from the foundation — with the intention of participating commercially in later rounds,” Saslow says.
* Flexibility in timing
Foundations have to give away five percent of their assets per year; a DAF offers a lot more flexibility. With a DAF, a family can make annual donations and let them compound while planning for a significant philanthropic event. This can be particularly appealing to a younger entrepreneur who is still busy building a business and doesn’t have the time or energy to decide how to deploy philanthropic capital, LaVelle says.
“They want these assets to be earmarked for philanthropy and let them compound. When the time is right and they’re ready for this, the assets are ready to deploy,” LaVelle says. “As long as you don’t want to hire third parties or family members, a DAF can be an incredible way to donate to the 501c3 universe with no friction. It also enables the philanthropic efforts to be started immediately, and then you can be thoughtful about when you want to deploy those assets.”
* Family engagement
It is common for family members to participate in family foundations, which can be a valuable engagement tool.
“A foundation is not just a giving vehicle. It’s an operating entity, something that is a living, breathing organization that is supposed to mirror the values of the family,” LaVelle says.
Foundations do present additional complexities from a compliance standpoint, Dickson says, but family members can serve as officers or directors.
“It can serve as both an impact tool and a governance and engagement tool for the family,” Dickson says.
* Simplicity and efficiency.
Depending on how it is structured, a DAF may provide fewer built-in opportunities to support overall engagement or next-generation development, Dickson says. But it is simpler than a foundation.
“DAFs are often geared toward families that prioritize simplicity, efficiency and flexibility,” Dickson says. “They can establish an account, fund it, conduct diligence and make recommendations.”
In addition, family foundations come with significant regulatory and compliance issues, and family members need to understand the legal complexities to avoid running into trouble, LaVelle says. A DAF, with its professional staff, can help a family avoid inadvertent mistakes.
“Having the DAF take on all of that operational infrastructure is really quite beneficial,” LaVelle says.
Another consideration is the depth of the research that the family will need on its contributions.
“If the contributions are going to large, well-known organizations, the staff at a donor advised fund may be able to provide all the information needed,” says Dipti Pratt, managing director of Americas at Toniic, a global community of impact investors. “But if a family wants to donate to lesser-known organizations, they may find that the dedicated staff of a family foundation will serve them better.”
In the end, many large, complex families use both a DAF and a family foundation. A hybrid model could involve putting some money into a DAF and some into a foundation and use each for the type of gift it is best suited for.
“The fun part of this is that it’s not an either/or,” LaVelle says. “You can do some sort of blend between the DAF and the foundation and get the best of both worlds.”