Greater Good for our Community: Private Foundations vs. Donor Advised Funds
As a nonprofit-organization and tax attorney, Trever K. Asam says it feels wonderful to use his skills for the greater good. “Hawaiʻi is blessed with so many nonprofit entities that do so much for our community,” he says. “It’s a privilege to work with those organizations.”
Now a partner at the Cades Schutte law firm, Asam previously taught geography and history in D.C. public schools through Teach for America, before starting his legal career. That experience helped inspire his choice to work with the charitable sector as an attorney, he says.
In particular, helping nonprofits and charitable foundations navigate tax issues is an area in which small changes can have a big impact, he notes. “A small structural tweak might allow a program to go forward where it was otherwise stalled by tax uncertainty,” he says. “It’s incredibly rewarding to be a part of those moments.”
Asam brings that expertise to bear when advising clients who want to give back by establishing private foundations. “I usually come in to create the foundation, setting it up as a nonprofit corporation, and then applying for a tax exemption using IRS form 1023 so the foundation can be recognized as tax-exempt and the donors can receive tax deductions for giving money to it,” he explains.
But, while a private foundation might make sense for some donors, it may not always be the best option. Asam advises some clients to consider a donor-advised fund instead.
A private foundation and a donor-advised fund accomplish similar goals—in both cases, the donor contributes money, the entity invests the funds, and the donor selects charities or causes to receive distributions. The key difference is in how the vehicles are structured.
“A private foundation is a standalone 501(c)(3) with its own board of directors, whereas a donor-advised fund is a program run through a larger organization such as the Hawaiʻi Community Foundation,” he says. That means a private foundation comes with more control, but also significantly more paperwork and costs.
“People think that private foundations are easy, but that’s wrong,” he says. “There’s a lot involved in running one, essentially like running another company.”
Private foundations are also constrained by different rules. Asam had one client who wanted to donate a significant amount of his family’s business to charity. However, because regulations prohibit private foundations from holding more than a certain percentage of a closely held company, he would have had to liquidate his shares in order to donate them. With Asam’s help, he fulfilled his original goal by giving the shares to a donor-advised fund.
Who should consider creating a private foundation? Asam says the largest donations—generally $3 million and up—have enough capital that handling administrative burdens internally makes sense. For everyone else, it’s probably not the best choice.
“A lot of people want to give to charity and have charitable intentions, but they get bogged down in all the rules that come with private foundations,” he says. “I think people often forget that donor-advised funds are an easy alternative.”
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