Do you really need a private foundation?
Private foundations are often set up by individuals, families or corporations to disburse large donations to charitable causes.
While private foundations offer privacy and autonomy, experts say that, in many cases, they are actually unnecessary and more trouble than they're worth.
"People often get caught up in more complex vehicles because they hear about them and believe they need some complexities," said Stephen Aucamp of Convergent Wealth Advisors. In many cases, the associated administrative costs "don't justify the existence."
According to Aucamp, unless you're funding it with $5 million or more, you don't need a private foundation.
However, judging by the statistics, not everyone thinks so.
As of 2010, there were just fewer than 89,000 private foundations in the U.S. that had filed with the IRS in the previous two years. Of that group, more than 55,000 had total assets of less than $1 million.
Donald Tharp, certified financial planner and president of Hudson Financial Advisors, agrees that private foundations aren't always the way to go.
"Running a private foundation is not easy," he said. "People who have smaller private foundations tell us that it takes the joy out of giving [since] it is basically running another business."
In addition to higher administrative fees, there is a lot of management involved with private foundations, and they are subject to tough tax laws and regulations.
In many instances, Tharp said, the better alternative is a donor-advised fund, which acts as a middleman between you and the charitable organizations to which you want to donate.
With donor-advised funds, you make a donation to the fund and then advise it on how to distribute your money. The funds themselves are recognized as 501(c)(3) charitable organizations—their charitable purpose being to administer donations to other charities—so you get a tax deduction when you donate to the fund. But you also have the ability to take your time in determining how and when to disperse your money.
Donor-advised funds are more limiting than private foundations; for example, you can't donate illiquid assets. However, because they are easier to start up, the fees are significantly fewer, and the fund is responsible for the administrative hassles, they may be a better fit for many donors.—J.W.