From private foundation to donor-advised fund: What’s involved in making the move?

The popularity of donor-advised funds has everyone talking, including families who already have a private family foundation. Which structure is right for your client right now? And what does it take to transfer a private foundation into a donor-advised fund? We can help with that!

How to Transfer a Private Foundation

With the total number of foundations in the United States nearing 120,000 (and combined assets for all types of foundations now reaching over $1 trillion) your clients may be asking you about establishing a private foundation to support their family’s charitable giving activities.

At the same time, the growth in donor-advised funds as a popular tool for managing charitable gifts has caused many philanthropists to consider the benefits of using both a donor-advised fund and a private foundation. But some of your clients with private foundations may find they are too much work. They may be considering transferring the foundation’s assets to a donor-advised fund at the Community Foundation to better carry out the family foundation’s mission. 

What are the most important points to cover with your clients who are considering moving from a private foundation to a donor-advised fund at the Community Foundation as their primary philanthropic structure? Here are three factors a client should consider: 

• Whether the day-to-day management and administration of the private foundation has become more time-consuming than expected and is taking the family’s focus away from nonprofits, the community, and making grants.
• Whether the tax rules related to investments, distributions, and “self-dealing” have become harder to navigate and are perhaps even preventing the family from maximizing tax benefits of charitable giving.
• Whether the family feels hampered by a lack of connection to reliable information about which nonprofits’ programs most align with their charitable giving goals and struggle with how to evaluate nonprofits applying for the foundation’s grants. 

In many cases, where one or more of these factors applies, a donor-advised fund at the Community Foundation can reduce administrative headaches, avoid tax pitfalls, and open up a host of resources to help the family work effectively with nonprofits to achieve impact. 

If transferring a private foundation to a donor-advised fund at the Community Foundation is the right move for your client, we’re happy to help. We can walk you through the steps involved, which include:

• The board of the private foundation approves the termination and captures that approval in meeting minutes or a consent of directors. (The foundation will need to be sure it pays all of its liabilities and expenses before accounts are closed.) 
• Your client will establish a donor-advised fund at the Community Foundation so that the structure for selection and succession of fund advisors (who will handle grantmaking) mirrors the foundation’s board of directors structure. The client can select a name for the donor-advised fund so that it matches as closely as possible the name of the private foundation. This ensures continuity and a smooth transition for both family members and nonprofit grantees. 
• The private foundation will distribute (grant) its net assets to the Community Foundation to be added to the newly-established donor-advised fund. 
• As long as the private foundation corporate entity is in good standing according to state laws, the foundation’s termination for tax purposes will be automatic and smooth because, as required by the IRS, the Community Foundation is an organization in good standing that has been in continuous existence for more than five years. The private foundation will then simply file an informational tax return with the IRS for its final year (even if it is a short tax year).
• The last step is for the private foundation to take any steps required for termination under the laws of any and all states in which it was registered, especially if the private foundation was organized in corporate form. 

As always, the Community Foundation for Greater Atlanta is here to help you serve your clients by using the right charitable structure at the right time to meet their philanthropic goals. For more information, please contact Alison O’Carroll, director and philanthropic counsel, at 404.333.0421 or aocarroll@cfgreateratlanta.org.