January 29, 2025

Donor Advised Funds vs. Private Foundations: Finding the Right Fit

Private foundations and donor advised funds can both help your clients achieve their charitable giving goals and support the causes and organizations that are most meaningful to them. However, in advising clients on which option may be the best fit for their giving, understanding the nuances of each is critical.

Man looking puzzled at a sign that points in two directions
What is a better fit for your client? A DAF or a Private Foundation?

Consider your client’s long-term giving goals

While both private foundations and donor advised funds provide clients with the opportunity for multi-generational, sustained giving, they do so in different ways. Donor advised funds allow your clients (and their successor fund advisors) to recommend fund distributions to 501(c)(3) organizations, subject to approval by the organization managing the fund (the fund sponsor). Private foundations provide your clients the opportunity to develop and implement their own charitable programming and employ staff (including family members) to manage that programming.

If your client’s long-term giving goal is to provide their family with the opportunity to make multi-generational gifts to nonprofit organizations in a simple and streamlined way, a donor advised fund may be a good fit. However, if your client is focused on committing time and resources to managing and directing giving and wants the flexibility to develop their own charitable programming, a private foundation may be a better option.

Weigh their initial gift and future giving capacity against costs

The costs of establishing and operating a private foundation can be significant. To justify these costs, private foundations may be more appropriate for clients who are planning to make a large initial donation (typically millions of dollars) or will be making a substantial ongoing giving commitment.

If your client does not have the financial capacity to support a private foundation but still wants to create a long-term vehicle for their giving, a donor advised fund may be a better option for them.

Consider the tax treatment of their gift

While your clients would be eligible to receive tax deductions for contributions to either private foundations or donor advised funds, the amounts of those deductions differ:

Man deciding between cash or stocks
There are a variety of giving options that may work for your client.
  • Donations of cash: Clients making a cash gift to a donor advised fund are generally eligible to receive a tax deduction limited to 60% of their adjusted gross income. Clients using cash to fund a private nonoperating foundation (a foundation whose primary goal is to make grants to nonprofits in lieu of developing its own programs) are generally eligible to receive a tax deduction limited to 30% of their AGI.
  • Donations of publicly traded stock: Clients donating publicly traded stock they have held for more than 12 months to a donor advised fund would typically be eligible to receive a tax deduction equal to the stock’s fair market value, capped at 30% of their AGI. Clients making the same gift to a private nonoperating foundation would typically be eligible to receive a tax deduction equal to the stock’s fair market value, capped at 20% of their AGI.
  • Donations of real estate and closely held stock: Clients donating real estate or closely held stock held for more than 12 months to a donor advised fund are eligible to receive a tax deduction equal to its fair market value, capped at 30% of their AGI. However, clients donating real estate or closely held stock to a private nonoperating foundation are typically eligible for a tax deduction limited to the lower of its cost basis or its fair market value, capped at 20% of the donor's AGI. (NOTE: This distinction is critical for clients who plan to fund their giving with substantially appreciated real estate or closely held stock, as the deduction they would receive for donating it to a private foundation could be substantially less than the deduction they would receive for donating it to a donor advised fund.)

In addition to receiving less favorable charitable deduction treatment, private foundations also are subject to additional taxes. These include a 1.39% excise tax on the foundation’s net investment income, an excise tax on self-dealing transactions, an excise tax on excess business holdings and an excise tax on the foundation’s failure to distribute income.

Determine how involved they want to be in the day-to-day operations and decision-making around their giving

If your client plans to be highly involved in the strategic planning, grantmaking, fund management and programming decisions related to their giving, they may prefer the autonomy a private foundation offers. However, if your client prefers to simply advise on where distributions from their fund should be directed, a donor advised fund may be a more attractive option.

Determine how much administrative work they are willing to do (or pay others to do)

Woman with a to do list cloud above her
Clients may want to be in full control of their private foundation or DAF.

Managing a private foundation can require a significant amount of paperwork, filings and ongoing compliance with IRS regulations. This includes preparing and filing IRS Form 990-PF annually, ensuring the foundation meets annual distribution requirements, and managing investments and staff. While some clients may not mind taking on this responsibility, others may find it daunting, and may find the cost of paying others to do this work to be cost-prohibitive.

The administrative burden associated with donor advised funds is significantly lower than that of private foundations. Because the fund sponsor handles the paperwork, compliance, and ongoing investment decisions, your clients can focus solely on their charitable giving.

Consider their desired level of privacy around their giving

For clients who place a high value on privacy, a private foundation may not be ideal. Private foundations are required to publicly disclose the names and addresses of donors who contribute $5,000 or more. On the other hand, donor advised fund sponsors are typically not required to publicly disclose donor names and addresses.

We can help you and your clients find the right fit

As you and your clients consider your options, please do not hesitate to contact us with any questions. We would be happy to help you and your clients weigh the differences to find the right fit for their giving. You also can refer to our side-by-side comparison of private foundations and donor advised funds as you evaluate the options with your clients.

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 e-mail at ahelland@madisongives.org or by 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.

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