Here, we’ll thoroughly cover where donor-advised funds and private foundations overlap and where they vary so you can make the best decision for your philanthropy.
What do donor-advised funds and private foundations have in common?
Both donor-advised funds and private foundations allow individuals to contribute, or donate, to the account or foundation. Funds are invested for charitable purposes and can then grow.
Funds can be granted out to other charitable organizations as recommended by the advisor of the DAF or by the board of directors overseeing the private foundation. Both take a variety of assets as contributions, including illiquid assets.
Both giving vehicles also allow you to give in perpetuity if you choose: advisory privileges (for DAFs) or management (for private foundations) can be passed on to the next generation or assets can be granted out to charities upon the donor’s passing.
The differences of donor-advised funds and private foundations
Donor-advised fund
A donor-advised fund (DAF) is a charitable giving account to which you can contribute assets for charitable purposes. Contributed assets are then invested and can grow tax-free while they are being granted out. When you open the account, you are established as the account’s advisor, and the account is owned and operated by a public charity that sponsors the account, such as Vanguard Charitable.
Private foundation
A private foundation is its own charitable organization rather than an account held within a charitable organization. When you open a private foundation, you will need to determine how to structure your organization. This entails forming a governing body and creating the governing legal documents that will guide your organization. Once the foundation is formed, you’ll need to then oversee the granting strategy and manage all administrative needs, such as hiring staff, bringing in investment managers, and fulfilling the mandatory reporting requirements. This makes opening and maintaining a private foundation a more time-intensive and hands-on process than a DAF, where many administrative tasks are managed by the sponsor.
Beyond the basic management of a donor-advised fund and private foundation, there are many additional differences that might make a DAF or a private foundation a better fit for you:
| Donor-advised fund | Private foundation | What this means for you |
Tax deductions | Maximum tax deduction available for gifts. Cash gift: 60% of adjusted gross income (AGI) limit; Securities: 30% of AGI limit. Additionally, take the fair market value deduction for non-publicly traded assets. | Reduced tax deduction available for gifts. Cash gift: 30% of AGI limit; Securities: 20% of AGI limit. Take the cost-basis deduction only for non-publicly traded assets. | When you contribute to a donor-advised fund, you can take a larger tax deduction than a contribution to a private foundation. |
Taxes on growth | All investment growth is tax-free. | The private foundation will pay a 1.39% excise tax on net investment income. | Charitable returns are reduced by taxes in private foundations, but not in donor-advised funds. |
Creation | Open an account in minutes and contribute to a donor-advised fund immediately. | Required to register with state and receive IRS eligibility, taking weeks to months for set-up. | Starting a private foundation is more time intensive. You can open a donor-advised fund account today and take an immediate tax deduction. See how Vanguard Charitable works to make donating to your DAF as simple as possible. |
Grantmaking recipients | Grants to nonprofits that support individuals such as scholarship funds, hardship funds, and missionary funds. All granting services and expert due diligence is provided by the sponsoring organization, such as Vanguard Charitable. | Grant to public and private charities as well as directly to individuals. All granting services are self-provisioned, with due diligence and granting performed by the personnel hired by the foundation. | Private foundations can grant to a wider variety of recipient types. However, all services need to be performed by the administrative staff hired by the organization. The sponsor of a DAF handles all requirements, meaning that you don't have to. |
Complex granting | Complex granting services offered, including grant agreements and recoverable grants. | Can perform complex grantmaking as supported by foundation staff, who must have the necessary expertise. | Both vehicles can provide complex grantmaking services, but the hiring of necessary staff with relevant expertise is required for a private foundation. |
Distribution requirements | Requirements are set forth by the account sponsor. Most individual donor-advised accounts are not subject to annual spending requirements, although many are required to make at least one grant every few years to maintain an active account. | Requirements are set forth by the IRS and must be met annually. Currently, the IRS requires roughly 5% of the foundation’s assets to be distributed annually. | Whereas private foundation distribution requirements are set forth by the IRS, requirements for DAFs are set by the DAF sponsor. |
Investments | Investment options are set by the sponsor. Vanguard Charitable offers a menu of high-quality, low-cost investment options that span asset classes and the risk spectrum, and are designed to maximize charitable giving. | Wide-ranging flexibility with investments (expertise and staff potentially required). | A private foundation has flexibility to choose its investment options, but some DAFs, including Vanguard Charitable, offer a lower-cost menu of investments. |
Reporting | Reporting and recordkeeping provided by the sponsoring organization. No annual reporting requirements for the donor. | Self-provision annual reporting requirements or hire personnel to perform. Required to file annual 990-PF. | A DAF sponsor will handle all reporting. The responsibility is on the private foundation for all reporting requirements. |
Cost | Fees vary by the sponsor and may be as low as the average all-in fee of .61% at Vanguard Charitable. | Fees can range significantly and can decrease charitable output. | Vanguard Charitable offers industry-low administrative and investment fees. |
Can private foundations and DAFs be used together?
While you may choose just one giving vehicle, it’s important to note that someone with a private foundation can open a DAF and vice versa to leverage the benefits of both options. While a DAF cannot grant to a private foundation, a private foundation can give to a DAF. This can mean greater flexibility for your overall giving.
Which is right for you: DAF or private foundation?
When choosing between a donor-advised fund and private foundation, you should first identify your philanthropic goals. Depending on your charitable giving approach, one will likely be better for you than the other. Carefully review the differences above and consider how they align with your approach to giving.
However, DAFs are easier to setup and manage as the administrative requirements are all the responsibility of the account’s sponsor. It’s also more cost-effective, meaning your donations go to charity rather than fees, payroll, and investment taxes.
If you’re looking to maximize the tax benefits of strategic charitable giving, grant with timeline and acknowledgement flexibility, and keep costs low to give more to charity without having to operate a standalone charitable organization, a donor-advised fund is likely right for you.
