Donor-advised fund vs private foundation: Choosing the right giving vehicle for you

Many high-net-worth families seek our guidance on the best way to expand their charitable giving. They’ve often heard about donor-advised funds (DAFs) and are also curious about other giving vehicles, such as private foundations.

Private foundations are often seen as a tool reserved for the ultra-wealthy. While a foundation certainly needs a sizeable amount of assets to be cost-effective, the threshold is often lower than people expect.

How do we help clients decide whether to give through a DAF or set up a private foundation? The key decision factor isn’t necessarily the amount of wealth, but rather the tradeoff between flexibility and simplicity.

The basics of giving through DAFs vs. private foundations

DAFs and private foundations operate similarly: You donate assets during your lifetime or at passing, and the funds are distributed to support charitable causes. In return, you (or your estate) receive a tax deduction depending on the gift amount, type, and timing.

The difference between DAFs and private foundations lies in how each vehicle is governed and permitted to support charitable endeavors. Let’s look at both vehicles a bit closer.

Donor-advised funds (DAFs)

DAFs have gained popularity for their streamlined approach, offering a turnkey solution for philanthropy without administrative complexity. Their appeal lies in simplicity: donors make a contribution to the DAF, receive an immediate tax deduction, and can recommend grants to charities over time while remaining assets in the DAF potentially grow tax-free.

Since DAFs are administered by large sponsoring organizations, such as Charles Schwab, Fidelity, and Vanguard, many operational headaches are minimized, and there are typically no annual minimum distribution requirements and no excise taxes on investment income to track. The sponsoring organizations handle all administrative details, regulatory compliance, and due diligence on recipient organizations.

Relative to private foundations, DAFs offer higher tax deduction limits. Donors can deduct up to 60% of adjusted gross income (AGI) for cash donations and 30% for appreciated assets. Private foundations allow for 30% and 20%, respectively.

The trade-off relates to control. DAF grants must be made to 501(c)(3) organizations based in the U.S., not individual persons or foreign organizations. Also, when you contribute to a DAF, you’re technically making a donation to the sponsoring organization. The sponsor maintains legal control, so donors “recommend” where they would like their donations to go. In our years of helping clients establish DAFs, we’ve never seen a DAF sponsor decline a donor’s recommended grant.

Private foundations

For donors seeking more control and broader charitable options, establishing a private foundation is worth considering. Private foundation founders can create their own board structure and provide directives perfectly aligned with their charitable vision. They also offer more flexibility in their charitable activities; while DAFs can only contribute to 501(c)(3) organizations, foundations can implement scholarship programs, create and operate original charitable initiatives, compensate staff, and make direct expenditures toward causes. For example, a private foundation could purchase coats for another charity’s winter coat drive — something a DAF couldn’t do.

Private foundations are sometimes viewed as complex to manage, particularly when it comes to distribution rules and compliance. However, there are well-established support organizations that can take on these administrative duties, enabling donors to stay focused on their philanthropic goals.

Making your philanthropic vision a reality

There’s no one-size-fits-all answer to whether a DAF or private foundation is better for your family. Each has advantages to suit different donors’ needs and philanthropic goals.

For those primarily focused on efficient charitable giving with minimal administrative involvement, a DAF offers simplicity and favorable tax treatment. For donors seeking maximum control, broader charitable options, and a vehicle for family legacy, a private foundation offers increased flexibility despite slightly higher administrative requirements.

At Vista, we specialize in helping clients navigate these important philanthropic decisions. Contact our team today to explore which charitable vehicle best aligns with your values, goals, and overall wealth management strategy.