Comparing Private Foundations and Donor-Advised Funds: Similarities and Differences

In the United States, wealthy donors, families, and businesses most commonly organize their charitable giving through private foundations and donor-advised funds. 

A private foundation is essentially a separate charitable organization established by one or a few funders, such as a family or a company, with its own board making all decisions. 

A donor-advised fund, on the other hand, is similar to a charitable savings account maintained by a sponsoring public charity, such as a community foundation or a large investment firm. You contribute money or assets and suggest how they should be distributed.

This article from Crewe Foundation Services breaks down what they have in common, where they differ, and when one might make more sense than the other.

Let’s begin!

Key Takeaways

• Understanding the similarities between private foundations and donor-advised funds 
• Looking at the key differences among them
• Uncovering their flexibility and privacy parameters 
• Exploring how to choose between them 

Similarities Between Private Foundations and Donor-Advised Funds

These two options overlap in a lot of ways that make them appealing for serious philanthropists. First and foremost, both allow you to receive an immediate tax deduction when you contribute, even if the money sits there for years before being distributed to charities. You can avoid paying capital gains taxes by donating cash, stocks, real estate, or other appreciated assets. That’s a significant advantage for donors looking to maximize their tax returns.

Another shared benefit is the flexibility for long-term giving. Neither requires you to give everything away right away. You can let the funds grow tax-free through investments, and plan grants over time. This is perfect for addressing big, ongoing issues like education reform or medical research.

Family involvement is another common thread. In both cases, you can bring in relatives to help advise or decide on grants, and set up ways for the next generation to take over. It’s a great tool for teaching kids about giving and keeping family values alive through philanthropy.

They can also be used strategically in conjunction. A private foundation, for example, may place some funds in a donor-advised fund to make faster, more anonymous grants or to leverage the sponsor’s expertise on specific causes.

Overall, both promote thoughtful, impactful charity rather than impulsive donations, and they both qualify as tax-exempt under IRS rules, meaning no taxes on investment gains.

Interesting Facts 
PFs have lower deduction limits (e.g., 30% AGI for cash); DAFs offer higher limits (e.g., 60% AGI for cash). 

Key Differences

Despite the similarities, private foundations and donor-advised funds diverge in setup, control, costs, and rules, which can tip the scales depending on your situation.

Setup and Ease of Starting

Opening a donor-advised fund is simple. You can often do it online with a sponsoring organization, such as Fidelity Charitable or Schwab Charitable, for as little as a few thousand dollars. There is no need for lawyers or IRS applications; the sponsor’s public charity status will cover you. It can be up and running in a few days.

Private foundations are more involved. You have to create a new legal entity, draft bylaws, appoint trustees or directors, and file for tax-exempt status with the IRS using Form 1023. This can take months and cost thousands in legal fees. Minimum assets are usually higher to make it worthwhile, often a million or more.

Control and Decision-Making

With a donor-advised fund, you recommend grants and investments, but the sponsor has the final say to ensure everything complies with rules. It’s advisory, not directive, which adds a layer of oversight but means less absolute control.

Private foundations give you full rein. Your board calls all the shots on grants, investments, and even hiring staff, including family, if done right. This autonomy is appealing to donors who want complete independence, but it also entails increased responsibility for regulatory compliance.

Tax Benefits

For the majority of people, taxes favor donor-advised funds. You can deduct up to 60% of your adjusted gross income for cash gifts and 30% for appreciated property at fair market value. No annual excise taxes either.

Private foundations cap deductions at 30 percent for cash and 20 percent for appreciated assets, often at cost basis for non-publicly traded stuff. Plus, there’s a 1.39 percent excise tax on net investment income each year, which can add up.

Costs and Administration

Donor-advised funds keep it low-maintenance and affordable, with annual fees around 0.5 to 1 percent of assets covering everything from investments to grant checks. The sponsor does the heavy lifting on paperwork and compliance.

Private foundations incur higher administrative costs: 1 to 2 percent or more, plus additional fees for accounting, legal, and auditing. You might need to hire managers or outsource to a firm like Crewe Foundation Services, and handle your own filings like Form 990-PF.

Payout Rules

There is no mandatory minimum for donor-advised funds, though sponsors may encourage you to grant on occasion. This allows your funds to grow indefinitely if you want.

Private foundations must give away about 5 percent of assets yearly, calculated on a rolling average. Miss it, and penalties kick in. This ensures active giving but can be tough in down markets.

Privacy and Reporting

Donor-advised funds keep things private. Your grants and balances are not public, and you can donate anonymously through the sponsor.

Private foundations are required to make public their grants, board members, and finances through annual IRS filings. Anyone can look it up, which may result in scrutiny or requests.

Grant Flexibility

Both fund public charities easily, but private foundations can do more, like scholarships to individuals or supporting non-501(c)(3) projects with extra paperwork and oversight.

Donor-advised funds stick mostly to vetted charities, with sponsors handling checks and verification.

Investments

Donor-advised funds, similar to mutual funds or ESG portfolios, provide pre-determined investment options from the sponsor.

Private foundations let you invest however you want, including private equity or venture philanthropy, but with IRS rules against risky “jeopardy” investments.

Choosing Between Them

Go for a donor-advised fund if you want easy entry, better tax breaks, low hassle, and privacy, especially with smaller amounts or if you’re new to this. They’re perfect for busy donors or as a starter step.

If you want control, want to run large-scale programs, or want to involve your family in philanthropy, choose a private foundation instead. They are better suited to large endowments where costs are relative.

Many organizations have both a foundation for core work and a donor-advised fund for flexibility or quick grants.

Talk to a financial advisor, estate planner, or the team at Crewe Foundation to see what fits your assets, goals, and family. Either way, these tools help turn wealth into positive change that lasts.