Orange County Business Journal

Philanthropy Brings Happiness

Generosity and philanthropy create happiness according to Harvard professor, Michael Norton. In his TedX Talk, “How to Buy Happiness”, Dr. Norton expands on the research which supports the notion that spending money on others makes people happier than spending it on themselves.  But there are a variety of best practices to do so in philanthropy.

These days, a Donor Advised Fund (DAF) has become one of the simplest and most efficient ways for affluent individuals to participate in those positive feelings that come from philanthropy. DAFs have advantages over Private Foundations (PF).

A DAF is easy and low cost to create and then “plugs into” the sponsoring organization, generally a public charity qualified under IRC Sec. 501(c)(3).  Under the rules of the DAF, the board of directors must include members of the supporting organization to provide oversight. However, the founder of the DAF may control the decisions regarding operations and donations.

With the PF, the founder has full control over the operations and donations but is subject to more heavily regulated guidelines.  A PF must file an IRS Form 990-PF every year and comply with state annual organizational filing requirements, which includes a list of assets, contributors, and grantees. With a DAF, there are no state or federal annual filing requirements, and donors can retain their anonymity.

The rules require the PF to make an annual distribution of at least 5% of the previous year’s net assets. There is no minimum distribution required of DAFs.

Just about any type of asset class may be contributed to the PF and the DAF, such as cash and cash equivalents, publicly traded securities, and mutual funds. Non-liquid assets like art, antiques, and real property are generally not allowed to be received by the DAF. While any type of asset can be liquidated before deposit into a DAF, this may incur fees and taxable gains.

Both PF and DAF contributions escape estate and gift tax as both are exempt as charitable donations. There are income tax differences though. The income tax deduction limit for securities held for more than 12 months to a PF is 20%, and to a DAF, it’s 30%, with the same respective limits on other kinds of donated property. The total annual contribution limit to a PF is 30% of a donor’s adjusted gross income (AGI), while it is 60% for a DAF.  If the charitable deductions exceed these annual limits, the deductions may be carried over for 5 years.

Affluent families and successful business owners are increasingly becoming “happier” by getting more involved with philanthropy.  The DAF is the more favored medium due to the requirement that donations do not have to be made annually, there is flexibility and low cost in formation and operations, and the donor can remain private.

We are pleased to offer you a complimentary consultation to learn more about DAF and PF.

Posted in Client Alert, Orange County Business Journal.