Donor-Advised Funds vs. Private Foundations for Charitable Giving: What Is Right for You?

At a glance:

• The main takeaway: Highly affluent individuals and families who are passionate about pursuing philanthropic endeavors have several tax-efficient and cost-effective choices when it comes to vehicles for their contributions.
• Impact on your charitable goals: In this article, we compare the differences between donor-advised funds (DAFs) and private foundations and when it makes sense for individuals and families to choose one vehicle over the other.
• Next steps: Aprio specializes in helping individuals and families define their philanthropic goals and wealth objectives and choose the appropriate vehicle to make their charitable ambitions a reality.

Schedule a consultation today to learn more

The full story:

Charitably-minded individuals and families with significant wealth have several strategies and vehicles at their disposal for achieving their philanthropic goals. Two of the most popular options among this cohort are donor-advised funds (DAFs) and private foundations. Both options offer unique benefits and responsibilities, depending on the level of control, involvement, and tax advantages you’re seeking.

Generally speaking, DAFs provide a more straightforward, flexible way to contribute to charitable causes, while private foundations offer greater autonomy and the ability to directly manage grants and assets.

Understanding the differences between these two approaches can help individuals and families choose the best vehicle for fulfilling their long-term charitable vision. In this article, we compare DAFs vs. private foundations and offer insight on how to choose the vehicle that works best for your situation.

What is a donor-advised fund (DAF)?

A DAF is a charitable giving account that individuals and families can set up with a sponsor, usually a charitable organization.

DAFs typically take two forms: either your charity of choice will have its own DAF, or you can contribute to a DAF managed by a larger institution. With a DAF, the assets you contribute are invested and can grow tax-free. Individuals and families who contribute to existing DAFs must instruct their advisors on how and where they would like their funds distributed. Contributions to DAFs can only be made to organizations with 501(c)(3) status, as designated by the IRS. There is no statutory minimum contribution but many providers require $25,000.

What is a private foundation?

Unlike a DAF, a private foundation operates independently as its own entity. When an individual or a family decides to establish a private foundation, they also assume the responsibility of determining the foundation’s organizational framework, which functions much like its own business. The framework must include a board of appointed directors and legal documentation that governs the foundation’s operations.

Once an individual or family has established the foundation’s framework, they will be responsible for handling the grant-making process and administrative duties necessary to keep operations running smoothly — including hiring personnel, selecting investment managers, and meeting reporting obligations.

Running a private foundation demands more time and involvement compared to DAFs, where the sponsoring organization handles most administrative and governance tasks.

Key differences between DAFs and private foundations

Vehicle	Deductions & Taxes on Earnings	Distribution Requirements	Investment Options	Reporting & Recordkeeping
Donor-Advised Fund	For cash contributions: Limit is 60% of adjusted gross income (AGI) For securities: Limit is 30% of AGI Growth on investments is 100% tax-free	Do not have mandatory annual distribution requirements, however many DAFs must issue at least one grant periodically to remain active	Set by the DAF sponsor	Performed by the DAF sponsor; currently no annual reporting requirements for donors
Private Foundation	Lower tax deductions are available for contributions For cash donations: Limit is 30% of AGI For securities: Limit is 20% of AGI (only a cost-basis deduction applies to assets that are not publicly traded)	The IRS requires ~5% of foundations’ assets to be distributed annually	Universal and broad flexibility with investment selection	IRS mandates that foundations file the annual 990-PF

When does it make sense to choose a DAF vs. a private foundation? The decision depends on a wide range of factors, but the most important is your personal and familial philanthropic goals.

If you are looking for a giving method that is easier to set up and more hands off, then a DAF is likely the best option. As we mentioned above, administrative responsibilities sit with the DAF sponsor, who also handles the distribution of your assets to charities so your involvement is minimal.

Conversely, if you are looking to cultivate a legacy of philanthropy across multiple generations of your family, then a private foundation could be a more suitable option. Foundations often provide family members and next-generation heirs with a sense of purpose and stewardship. Many families set up foundations that provide support to specific organizations, programs, and causes aligned with their values. Moreover, foundations can provide far-reaching impact on a national or even an international level.

How having a professional advisor can help you achieve your philanthropic goals

Either way you choose to contribute wealth to charity, it is essential to work with professional financial and tax advisors who can help you fulfill your philanthropic goals in a tax-efficient, compliant manner. A professional team can provide important third-party perspective and help you develop an action plan, guided by the right vehicle to achieve your objectives. If you choose to set up a private foundation, a professional team can also provide guidance on managing administrative responsibilities, prepare and file tax returns, and assist with other required compliance duties that come with it.

If you are searching for an advisor with time-tested expertise, look no further than Aprio. Since 1952, Aprio has helped affluent individuals and families preserve, transfer, and grow generational wealth while empowering them to achieve their philanthropic goals.

If you are ready to build your philanthropic legacy and need support getting started, schedule a free consultation with our team today.

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