A private foundation is usually established by a wealthy family or individual through a big initial gift. Foundations decide how to invest their assets, usually with the help of an advisor, and have more flexibility than donor-advised funds in terms of grant making. They can, for instance, provide college scholarships or aid to families in need as a result of a natural disaster, as long as they follow IRS guidelines.
Given the high start-up and administrative costs associated with private foundations, they make sense only for philanthropists who are "well entrenched in the top 1 percent," said Mallouk at Creative Planning. "The millionaire next door," he explained, "typically goes the donor-advised fund route."
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For some philanthropists, one of the biggest drawbacks to private foundations is that they aren't exactly private. Information about their activities is readily available online, and some people would rather make grants anonymously, said Mallouk. Others are put off by the fact that private foundations must give away at least 5 percent of their assets annually, regardless of their investment returns in a given year or whether they have decided which causes to support.
"A lot of people don't like the private foundation, because it is, ironically, not that private," explained Mallouk. "If, for instance, you give a million dollars to the Boys & Girls Clubs of America through a private foundation, don't be surprised if the Girl Scouts are then calling you to ask for a donation."