Two of the most common giving options for wealthy families are donor-advised funds (DAFs) and private foundations. Both involve an initial contribution of assets followed by future grants to support meaningful work. Both offer a current income tax deduction, the ability to bypass capital gains tax on gifts of appreciated property, tax-free growth of assets inside the vehicle, and exemption from gift and estate taxes.
Helping your donors navigate between the two choices requires a firm understanding of each giving vehicle, along with a comprehensive awareness of the donor’s larger philanthropic objectives. In general, a DAF is preferable for donors who want something less involved, plan to fund it with less money (perhaps as little as $5,000 or less, depending on the sponsor), or want to make grants anonymously. A private foundation makes sense for those who plan to dedicate more money (typically $1 million or more), want more control, and prioritize customized giving (and are willing to be more involved).
The following chart outlines the distinctions between each manner of giving.
| Donor-Advised Funds | Private Foundations | |
| What it is | DAFs are accounts established at public charities to support charitable giving. Donors irrevocably contribute assets to the DAF, qualify for an immediate income tax deduction, and then recommend grants to qualified charities later, when the time is right. | Private foundations are types of charitable organizations created by an individual, family, or corporation. They provide complete control over investments and grantmaking decisions but come with greater costs and necessary involvement. |
| Startup | Quick and easy. The donor simply completes the necessary paperwork and makes a contribution to the DAF. Most accounts can be established in a matter of days. | Time-consuming. The donor must file governing documents with the state and the IRS. This also requires legal and accounting costs that don’t apply to DAFs. |
| Administrative responsibilities | In exchange for minimal administrative and management fees, the sponsoring organization administers the account. The donor gives up control of the funds in exchange for the elimination of administrative burdens. | The donor is responsible for significant administrative duties, including managing assets, administering grants, filing state and federal tax records, and hiring staff—all of which result in higher costs than a DAF. |
| Tax considerations | • 60% of AGI deduction for cash donations. • 30% of AGI deduction for long-term appreciated assets. • No excise tax. | • 30% of AGI deduction for cash donations. • 20% of AGI deduction for long-term appreciated assets. • 1.39% excise tax on net investment income. |
| Grantmaking | Donors are generally not required to make grants (although each sponsoring organization has its own rules). The donor can recommend grants, but the DAF has the final say (although the sponsor will accept and act on donor recommendations in most cases). Grants can only be made to qualified charitable organizations. | Donors must meet IRS distribution requirements by making grants of at least 5% of the net asset value annually (based on the previous year’s assets). Noncompliance results in a tax penalty. The donor has full control and can provide support in many ways, including grants to qualified charities, other private foundations, individuals, and specific projects. |
| Privacy | Grants can be made anonymously. | All contributions and grants are public record. |
| Family philanthropy and legacy building | Yes, more informally. Donors can involve children in grant discussions and decisions. Some sponsoring organizations also allow donors to name their children as successors to the DAF. | Yes—this is a good vehicle for long-term legacy building and complex grantmaking. Donors and other family members can sit on the foundation’s board and decide how to distribute assets in alignment with the foundation’s mission. The board votes on successor directors or officers. |
Key Questions for Donors
Based on the comparison chart, then, you can ask the following questions to help donors navigate their decision:
1. How much capital do you plan to commit to charitable giving?
2. What level of control or flexibility are you looking for?
3. Is the size of the tax deduction important?
4. Do you want to make a difference by giving money to sources other than qualified charities?
5. Do you want to keep your giving private?
6. How do you envision any involvement of children or other family members?
DAFs and private foundations both have the potential to be effective, rewarding, and fulfilling. They are powerful tools for making a significant charitable impact, each with its own list of pros and cons. You can provide great value by assisting donors as they determine which one aligns best with their philanthropic goals.
