A recent article in the New York Times succinctly captures the spirit of a growing body of opinion that donor-advised funds (DAFs) are oversold as vehicles for charitable giving. As the argument goes: too much money is growing within DAFs and is not being efficiently deployed toward the social and charitable goals for which it was intended. (In some situations, donors have claimed that DAF assets were used inconsistently with the donor’s wishes.)

In a nutshell, DAFs offer a “Goldilocks” vehicle for charitable giving: a mechanism for gifts large enough to substantiate donor use restrictions, but not so large as to warrant the creation of a private foundation. Like a private foundation, however, DAFs allow donors to obtain a tax deduction immediately upon the decision to make the gift, even if the precise charitable recipient has not yet been identified or fully vetted.

Private foundations offer donors ultimate control over their gifts, but they have historically been expensive to establish and maintain. However, the IRS recently changed the 501(c)(3) application process, and many private foundations may experience a substantial reduction in the cost and complexity of formation. This year, the IRS created a short-form 501(c)(3) application that can be used by many would-be private foundations. This short-form is 3 pages (rather than 28) and the filing cost is $400 (rather than $800). Furthermore, changes to the ongoing reporting requirements have reduced the cost of maintaining a private foundation, and some industry professionals have reduced their recommended minimum donation threshold to $50,000 for private foundations.

In short, individuals who have given or considered giving to DAFs may want to consider forming a private foundation, even if previously discouraged by cost and complexity.

CIRCULAR 230 DISCLAIMER: To ensure compliance with requirements imposed by the IRS, please be informed that any tax advice contained herein was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding any tax-related penalties under federal, state or local tax law or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.