Exploring Donor Advised Funds vs Private Foundations
Donor Advised Funds (DAFs) and private foundations are the two most used giving accounts. In both cases, the transfer of assets to the philanthropic vehicle are irrevocable and considered by the IRS as a charitable gift, therefore the donor takes an immediate tax deduction that same year.
|
Feature |
Donor-Advised Fund (DAF) |
Private Foundation |
|
Initial Setup and Costs |
Relatively simple and low-cost |
Complex and expensive; legal, accounting fees |
|
Legacy |
Typically for use over 1-2 generations |
Optimally, set up to function for generations to come |
|
Control |
Donor advises on grants, but sponsoring organization has final say |
Donor has full control over grants and investments |
|
Tax Benefits (Cash Contributions) |
Higher tax deductions (60% of AGI) |
Lower tax deductions (30% of AGI) |
|
Tax Benefits (Securities/Property) |
Higher tax deductions (30% of AGI) |
Lower tax deductions (20% of AGI) |
|
Tax Deductibility (Real Estate, Closely Held Business, Appreciated Stock) |
Fair market value deduction (up to 30% of AGI for appreciated stock) |
Cost basis deduction, with more restrictions and lower limits |
|
Administrative Responsibilities |
Minimal; managed by sponsoring organization |
High; requires staffing, record-keeping, legal compliance |
|
Privacy |
Grants can be made anonymously |
Must file public tax returns (990-PF) with grants, officers, etc. |
|
Minimum Contributions/Assets |
None or low minimums |
Generally, substantial assets needed for effective operation |
|
Annual Distribution Requirement |
None |
Required to pay out at least 5% of assets annually |
|
Startup Time |
Can be set up in days |
Can take months to establish |
|
Investment Options |
Limited to choices provided by sponsoring organization |
Broad; can include direct investments, real estate, etc. |
|
Ongoing Costs |
Low; typically a percentage of assets under management |
High; administrative, legal, management fees |
|
Grantmaking Flexibility |
Limited to IRS-approved public charities |
Can make grants to a wide range of entities, including individuals and for-profit companies for charitable |
The information provided here is not intended as tax or legal advice and should not be taken as such; consult a qualified attorney or certified public accountant for professional guidance.