“Control, Impact, Ego.” How Wealthy Donors Make the Choice Between Foundation and DAF

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A couple of weeks ago, my colleague Sue-Lynn Moses and I crunched Candid data from 2017 to 2019 to get a better idea of how living donors move money through their private foundations. Reviewing the list of the 25 largest foundations in terms of funding disbursed during that period, I noticed that only three of them — the Sergey Brin Family Foundation, the Chan Zuckerberg Initiative Foundation and the Blavatnik Family Foundation — were formed after 2011.

That shift at the top reflects larger changes throughout the sector. In the decade that followed 2011, the National Philanthropic Trust found that the percentage of U.S. charitable giving going to donor-advised funds (DAFs) increased from 4% to 22%, eclipsing giving to private foundations (at 15%) for the first time ever. DAFs are inexpensive to set up, do not require donors to disburse 5% annually — or ever, for that matter, despite conferring an immediate tax deduction — and current rules mandate almost no public reporting from DAFs comparable to what private foundations must provide. All of this is much to the dismay of those advocating for greater transparency and payout in the sector, but it’s the law of the land, at least for now.

Even with all the leniency DAFs offer, and their rise in popularity, some wealthy donors still go the foundation route. That’s not even to mention LLCs or hybrid giving vehicles, in which assets slosh from one legal bucket to another. So why would a mega donor decide to establish a private foundation, or a DAF, or something else entirely? In an effort to get into the mind of the mega donor (just for a minute), I posed this question to financial consultant and accredited investment fiduciary analyst Allan Henriques.

“The primary drivers are going to be the degree of control, the degree they want to personally impact the gift, and last but not least, their ego — or, to put it in a nicer way, their personal connection and recognition for the gift,” he said. “If they want a high degree of control, impact and personal recognition, and plan to make gifts in the $10 million range, they’re probably going to lean toward a private foundation. Otherwise, if we’re looking at lesser degrees of those factors and smaller gift amounts, they’ll likely opt for a DAF.”

While there are certainly exceptions, and new ultra-wealthy donors like MacKenzie Scott who are rewriting the philanthropy rulebook all the time, I found his control/impact/ego rubric compelling.

Henriques practiced law for 10 years with a focus on estate planning before running his own financial services company and advisory firm. Since selling that firm seven years ago, he’s spent his time consulting with nonprofits on their financial and investment strategies. Given that he’s devoted most of his professional career to helping clients plan for the future, Henriques told me the first question he’d ask an affluent individual who came to him for advice on setting up a giving strategy would be, “What is it that you’re trying to accomplish? And then we would try to look at that in a long-term time horizon.”

Responding to “sudden wealth events”

Let’s imagine a 29-year-old who experienced what Silicon Valley wealth advisors call a “sudden wealth event” after selling their startup to Google. “The first thing I would do is ask them about their objectives,” Henriques said. More often than not, the objective would be reducing their tax liability. In such an instance, the individual would sock their money into a donor-advised fund (DAF) and take the immediate tax benefit without having to put that money in the hands of working charities.

Or consider a similar tech entrepreneur whose company went public. Suddenly, this individual’s paper wealth is $200 million in the form of company stock. Henriques cited several conversations where such a newly wealthy individual has told him, “I just want to maintain what I’m doing and I don’t want to sell.”

Like the suddenly wealthy entrepreneur who sold to Google, the individual running a public company lacks the time and wherewithal to develop a fleshed-out giving strategy, much less set up a private foundation with its associated costs and tax requirements. They simply aren’t thinking about control, impact or ego, so they take the path of least charitable resistance by contributing money to a DAF for tax-related purposes. (Silicon Valley wealth managers call this tendency to postpone strategic giving until some point in the indeterminate future, “the Pause.”)

But the pause doesn’t last forever, and most recently minted millionaires lose interest in living conditions similar to the shared house of the overworked techies in HBO’s “Silicon Valley.” “As time goes by, they’ll say, ‘I want a better car, I want a house, I want to get something for my mom,” Henriques said. “At least from my experience, that initial mindset of, ‘I just want to keep doing what I was doing’ doesn’t last very long, although sometimes, it goes in fits and spurts.”

The big question is whether a larger charitable footprint will factor into an individual’s changing calculus. If so, Henriques would ask the individual about their personal situation and how much money they would need to sustain their current lifestyle. “Then,” Henriques said, “we’d back into some numbers and carve out an asset base that would support that lifestyle.”

Older, wiser and richer

Let’s jump ahead in time. The tech entrepreneur whose company went public is now 51.8 years old. I picked that age because of the top 25 private foundations created by living donors in our analysis, that was the average age when the donor established his or her giving vehicle.

The donor is now a billionaire, and in many cases, most of that wealth is tied up in company stock. To sustain their lavish lifestyle, the individual will get a loan with a “certain amount of the stock being the collateral,” Henriques said. “They’ll pay a nominal interest that will be more than made up as the value of the stock increases.” The individual will also continue to pour money into their DAF as instructed by their accountants. “In my experience, the motivation for doing something rather than nothing is to save on taxes,” Henriques said.

This individual is older, wiser and exponentially richer than their 29-year-old self. Should they start a private foundation? Henriques reiterated that this thought process hinges on the individual’s objectives.

“Do they want to be known as a major philanthropic player? Or do they have other things that they want to spend their time and energy on, and let somebody else manage or direct the charity aspects of things?” This is where the “control/impact/ego” decision framework comes into sharper focus.

An individual who wishes to exert maximal control over their giving will likely opt for a private foundation. The donor can identify funding areas, hire staff and set up an office, all while adhering to IRS regulations stipulating they move 5% of assets annually to charitable organizations — which can include their own DAFs, by the way — or on qualified expenses. They can see that they generate maximal impact by asking grantees to report performance metrics or award restricted project grants aligned to their interests. And they can satisfy their ego, or personal connection to their giving, by having more direct involvement and public awareness.

Elaborating on the latter variable, Henriques told me that individuals who start private foundations, however humble they may profess to be, tend to think, “‘Hey, I did something nobody else can do, or very few other people can do, and I want control because I’ll do better than anybody else.’ That’s been my experience, and I only use the word ‘ego’ because I can’t think of a better word.”

Considering the trade-offs

Donors will seed their foundations with an endowment gift or, as is more commonly the case with the mega donors in our Candid data set, adopt a “pay-as-you-go” model, making annual income contributions to bankroll grantmaking operations while keeping a relatively low asset base. Again, the amount of the contribution is frequently driven by the donor’s desire to reduce tax liability — the more the individual owes, the more they will donate and disburse.

Billionaire hedge fund manager Stanley Druckenmiller laid out the logic of the pay-as-you-go system in a conversation with my colleague Michael Kavate in March. “If I have a big year, we put a lot in,” he said. “If I don’t make enough money to cover expenses, we don’t put a lot in that year. There’s no systematic plan. I hope we put a lot into the foundation, because it means I made a lot of money and been a success. Much more importantly, we’ll get the joy of hopefully funding successful outcomes.” Readers may note that Drunkenmiller’s mention of “outcomes” corroborates Henriques’ premise that donors giving through private foundations put a premium on measuring impact.

Individuals with no interest in setting up a foundation, giving a minimum amount to charities every year, and reporting grantees to the IRS will more than likely channel their giving through DAFs. Henriques said he has met donors who told him, “I’ve got $50 million and I want to find organizations doing good things, but I ultimately trust their [DAF manager’s] judgment to come to me with ideas, because I don’t have the time and energy it takes to do all that stuff myself.’”

The trade-off here is less control, a reduced ability to dictate and measure outcomes, and an understanding that the community foundation or a financial services firm housing the account is the legal donor and public face that’s attached to the gift. “Again, it all comes back to what the donor is trying to accomplish,” Henriques said. “It’s not cheap to set up a private foundation, and unless control, impact and ego are really important for the donor, they’ll probably just use a DAF.”

The mind of the mega donor can be a perplexing one, but hopefully, this brief tour sheds a little light on their motives and the many ways philanthropy can help the wealthy meet their financial goals. Whether you approve of them, well, that’s another story.