Charitable Trade-offs Between Donor-Advised Funds and Private Foundations

You’ve decided to increase your charitable giving. That’s great! Realize that philanthropy can take many forms. When deciding between a donor-advised fund and a private foundation, the choice that suits you best depends on what matters to you most.

By Lawson Bader

published 22 March 2022

in Features

A businessman looks out the window of a conference room overlooking a mountain. — (Image credit: Getty Images)

The global pandemic provided a greater appreciation for (and participation in) philanthropy. During the past two years, both new and longtime donors have risen to the occasion to seek ways to help others in this collective time of great need.

During 2020, the U.S. saw a 3.8% increase in overall charitable giving. Early indications are that overall charitable giving in 2021 may have far eclipsed this number, jumping 8.9%, according to a report from Blackbaud.

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New givers or those looking to expand their giving may be considering strategies to add structure to their philanthropy and grow the impact of their giving. What’s more, the United States is experiencing one of the most extensive wealth transfers in its history, as those in my parents’ generation leave money to children (or not) and to their favorite charities.

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Faced with how and to whom they should leave their money, donors may naturally wonder what kind of charitable vehicle they should use to advance their goals and legacy. Often this is a choice between two popular strategies: Start a family foundation or open a donor-advised fund (DAF).

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The choice between a foundation or DAF comes down to how donors value the unique benefits of each option. Which tool is more likely to help someone achieve his or her philanthropic goals and cement their charitable legacy?

Let’s examine some of the benefits donors might look for as they consider the trade-offs between the two charitable-giving vehicles.

Privacy

A donor-advised fund offers donors any level of privacy they wish to have from the receiving organization. This level of privacy can also change per grant, enabling the donor flexibility on when to be private or not. A DAF provider lists its grantees, but there is no disclosure from which account that grant was requested and approved. With the foundation, each gift is listed on the publicly available Internal Revenue Service (IRS) Form 990 and is tied directly to the foundation’s name – and board of directors.

The bottom line: If you want to avoid prying eyes on your giving – whatever your reason – go with a DAF.

Control

A donor or family acts as a board member for a foundation, holding complete control over investments, grant decisions, selection of additional board members and staff. With a DAF, on the other hand, your gift is an irrevocable gift to the fund provider – i.e., you cede control when you make the gift, retaining only advisory privileges. The DAF provider can – and for requests outside its boundaries will – say no to gifts.

The bottom line: For donors who prize control over all else, the foundation is the way to go.

Tax Benefits

Donors can deduct up to 60% of their AGI for cash gifts into a DAF – the same benefit as direct giving to an operating public charity. Giving to a private foundation allows only a 30% deduction. One can deduct 30% of AGI for stock gifts to a DAF. For foundation giving, that same deduction is only 20%. Foundations may face excise taxes on investment gains, not so with DAFs.

The bottom line: DAFs, then, are generally the most tax-advantaged structure.

Scope of Giving

A DAF only allows a donor to give to 501(c)(3) organizations, meaning grants can only support non-profit organizations recognized by the IRS. That is generally true for foundations too. Giving to individuals is possible through a scholarship. Foundations must give away 5% of their assets each year, while DAFs lack a legally required payout. Foundations can sponsor events or do things where some nominal family benefits result. Personal benefits related to DAF gifts are prohibited.

The bottom line: It’s a close call, but foundations have more flexibility in a couple important ways.

Family Involvement

Involving family members is possible with both tools. A foundation may offer more formal involvement via board seats or even employment. With a DAF, families may include children in decision-making or even set up subsidiary accounts to help them develop their own charitable skills.

The bottom line: It’s a toss-up.

Financial Requirements

The initial amount to open a DAF account typically ranges from $1,000 to $25,000. At DonorsTrust, for example, our initial contribution is $10,000 (or $1,000 for givers under the age of 40). A simple application is the only paperwork required. Foundations, in theory, can open at any amount, though financial experts generally suggest a minimum of $5 million to $15 million to make it worthwhile, given the startup costs, attorney fees, etc.

The bottom line: For anyone other than the truly wealthy, donor-advised funds are the obvious option.

Staff

Want a robust network of program officers? A private foundation is likely the best choice. However, finding a mission-driven or single-purpose donor-advised fund that shares your values and interests may provide you with a close approximation. Leverage the staff at the DAF provider to offer recommendations.

The bottom line: A tie.

Life of the Fund

Generally, both foundations and DAF accounts can continue perpetually. Carefully consider if this is what you want, however. Will future generations share the same commitment to your charitable priorities that you do? It may be better to establish a sunset provision, which one can do with either a DAF or private foundation.

The bottom line: Another tie.

The vehicle that best suits your needs will depend on your individual circumstances and how you weigh the trade-offs mentioned above. Do you place a premium on privacy? A DAF is likely the best bet. Is maintaining as much control as possible important to you? Then a private foundation may be the better choice.

When deciding on a charitable vehicle, the best answer is not necessarily one or the other. In fact, it could be “both.” It is not uncommon for donors to leverage the power of both vehicles, using each for different aspects of one’s giving. You are the donor, so the right approach is the one that best serves your philanthropic goals.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Lawson Bader has served as president and CEO of DonorsTrust since 2015. He has had 20 years' experience leading free-market research and advocacy groups, including the Competitive Enterprise Institute and the Mercatus Center. DonorsTrust is a community foundation safeguarding the intent of accountholders who seek to promote charities that address civic concerns, are mostly privately funded, do not increase the size and scope of government, and promote free enterprise and personal responsibility.