What Is a Donor-Advised Fund and How Does It Compare to a Private Foundation?

The Short Answer

A donor-advised fund (DAF) is a charitable account held by a sponsoring public charity. You receive a tax deduction when you contribute, and you can recommend grants to qualified charities over time. A private foundation is a separate legal entity that you establish and control, with its own board, investments, and grantmaking. DAFs are generally simpler, less expensive, and offer more favorable deduction limits. Private foundations provide greater control and flexibility, including the ability to employ family members and run charitable programs, but involve more administration, excise taxes, and annual distribution requirements.

How Does a Donor-Advised Fund Work?

You contribute cash, publicly traded securities, or in some cases other assets to a DAF sponsor, such as a community foundation or a charitable organization affiliated with a financial institution. The contribution is irrevocable, and you generally receive an income tax deduction in the year of the gift. The assets can be invested and may grow tax-free, and you recommend grants to charities whenever you choose.

Because the sponsoring organization legally controls the assets, it has final approval over grants, though it typically follows donor recommendations that meet its policies.

How Does a Private Foundation Work?

A private foundation is typically established as a nonprofit corporation or trust and governed by a board, often made up of family members. The foundation manages its own investments, sets its grantmaking strategy, and may operate charitable programs directly.

Private foundations are subject to additional rules. They must generally distribute at least 5% of their net investment assets each year for charitable purposes, pay an excise tax on net investment income, file an annual Form 990-PF that is publicly available, and comply with rules prohibiting self-dealing between the foundation and its insiders. Newport’s article on when to start a family foundation explores this decision in detail.

How Do They Compare?

Control

A private foundation offers the greatest control over investments, grants, and governance. A DAF provides advisory privileges, while the sponsor retains legal control.

Cost and Administration

DAFs can often be opened quickly with relatively low minimums and modest fees, and the sponsor handles administration. Private foundations involve legal setup, accounting, tax filings, and ongoing management, which makes them more practical for larger charitable commitments.

Tax Deductions

Contributions to DAFs, which are public charities, are generally subject to more favorable income tax deduction limits than contributions to private foundations. Gifts of appreciated assets other than publicly traded stock are often deductible at fair market value when given to a DAF, but typically only at cost basis when given to a private foundation. Deduction rules are subject to change, so coordinate the details with your CPA.

Privacy

DAF grants can often be made anonymously. Private foundations must publicly disclose their grants, assets, and certain compensation on Form 990-PF.

Family Involvement

Both can engage family members. Private foundations offer formal roles on the board and the option to pay reasonable compensation for services, while many DAF sponsors allow successor advisers to continue the account across generations.

Can Families Use Both?

Yes. Some families use a private foundation as the center of their long-term philanthropy and a DAF for anonymous gifts, gifts of complex assets, or year-end giving. Others start with a DAF and later establish a foundation as their giving grows.

How Do Appreciated Assets Fit In?

Donating long-held appreciated securities directly, rather than selling them first, can avoid capital gains tax while providing a charitable deduction, subject to applicable limits. This can be especially useful for reducing a concentrated stock position. Newport has written about how to give and donate stocks and strategies for effective charitable giving.

The Takeaway

DAFs offer simplicity and tax efficiency, while private foundations offer control and a lasting institutional structure. The right choice depends on the scale of your giving, your desire for control and family involvement, and your administrative appetite. Newport’s families and foundations and endowments teams can help you evaluate the options.

This article is provided for educational purposes only and is not individualized investment, tax, or legal advice. Please consult qualified professionals about your specific circumstances and review our disclosures.