February 27, 2025

Less Hassle, Similar Benefits: Using Donor Advised Funds as Succession Plans for Private Foundations

In last month’s blog post, we shared some factors advisors should consider in helping their clients choose between a donor advised fund or a private foundation. But what if your client already has a private foundation that no longer meets their goals?

Your client may want to pass the baton from private foundation to donor advised fund.

We often have conversations with advisors whose clients are looking for a succession plan for their private foundation. In some cases, the private foundation has given away a substantial amount of its assets and is paying significant legal and accounting expenses to maintain relatively modest holdings. In other cases, second- and third-generation family members are managing the private foundation and are overwhelmed by the amount of work it requires.

In situations like these, transferring the private foundation’s assets to a donor advised fund can provide several benefits. Once a donor advised fund is established, the donor or their designated advisors (which can include family members) may continue to recommend grants without taking on the operational and regulatory responsibilities associated with administrating them.

Additionally, donor advised funds allow the donor to involve children, grandchildren or other family members in the decision-making process, providing them with an opportunity to learn about philanthropy, help direct distributions, and continue the donor’s charitable legacy. This fosters a sense of responsibility and connection to their family’s charitable goals, ensuring that their values and philanthropic mission continue across generations.

Helping clients navigate the transition process

If your client is interested in transferring the assets of their private foundation to a donor advised fund, they need to understand the steps required to do so. It is also critical that their legal and tax advisors are brought into the conversation prior to the transfer. Failure to take the correct actions in the correct order can have significant legal and tax consequences.

While the process for transferring assets from a private foundation to a donor advised fund varies by jurisdiction, it typically works as follows:

• The private foundation’s governing body approves transfer of the assets to a donor advised fund, followed by dissolution of the foundation. The process for receiving this approval depends on how the foundation is structured. If the foundation is structured as a nonprofit corporation, the approval and dissolution process is usually governed by its articles of incorporation or bylaws. If the foundation is structured as a trust, the terms of the trust typically outline the process for approval and dissolution.
• The private foundation’s governing body selects a donor advised fund sponsor and establishes a donor advised fund that aligns with the foundation’s giving priorities. This includes naming the person or people who will be advising current distributions from the fund, and the person or people who will be responsible for directing the fund’s distributions in the future.
• The private foundation’s governing body pays any outstanding pledges, attorney and accounting fees, and other administrative and operational expenses.
• Once any final pledges and expenses have been paid, the private foundation’s governing body transfers the foundation’s remaining assets to the donor advised fund.
• The private foundation then files its final Form 990-PF, as well as any required state filings related to its dissolution.

Finding the right donor advised fund sponsor for your client

Not all donor advised fund sponsors administer funds the same way. To ensure that your client’s donor advised fund continues to achieve their goals, make sure they select a donor advised fund sponsor that aligns with their values and giving goals. For example:

It is important to do your due dilligence when helping a client find the right fund sponsor for them.

• If your client is interested in supporting nonprofit organizations in a specific geographic area, ask potential donor advised fund sponsors whether they have experience working in that area.
• If it is important to your client that the fees paid for administration of their donor advised fund benefit stay in a particular community, ask potential donor advised fund sponsors what their fees support and where those fees are used.
• If your client wants their donor advised fund to be advised by the next generation, ask potential donor advised fund sponsors whether they offer that option. (Some donor advised fund sponsors will only do so if the assets in the fund exceed a certain minimum.)

Wondering whether it is time for your client to make the transition?

If you or your clients have additional questions about transitioning their private foundations to donor advised funds, we would be happy to help! Alison Helland, Director of Donor and Advisor Engagement, can assist you or refer you to another member of our Donor Engagement team to serve as a resource for your specific situation. You can reach Alison via email at ahelland@madisongives.org or via phone at 608-446-5937.

Please note that this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.