Private Foundations vs. Donor Advised Funds

Did you know that 73% of affluent families with wealth under $1 million made charitable contributions during 2024? How about that 87% of households with $5 million or more had charitable giving during 2024? Regardless of where you fall on the wealth spectrum, philanthropy is a great way to give back to those in need, support initiatives that share your vision, and enjoy exclusive tax benefits.  

The two most common philanthropy avenues, private foundations and donor advised funds, each have their own unique set of rules. We'll touch on the similarities and differences to help you decide which route is best for your charitable giving and cover four ways to unlock tax efficiency through philanthropy.  

Private foundations and donor advised funds (DAFs) are two common avenues that affluent individuals use to make charitable contributions. Let's cover the fundamentals of DAFs and private foundations by outlining the key features for each method.  

DAFs are charitable accounts managed by a sponsoring organization, which is commonly a public charity that has control over the assets. Donors can recommend how the funds are used, but ultimate control is given to the sponsoring organization. Large financial institutions, like Fidelity or Schwab, can establish broad DAFs. However, you can also establish a single-issue or mission-based DAF.  

Private foundations are independent organizations with a board of directors or trustees. These individuals oversee the foundation, including how funds are invested and managed. If you want more direct control over your investments, a private foundation can be a great way to get involved by joining the board or becoming a trustee.  

DAFs have lower setup costs and no minimum asset requirements since they are maintained by a sponsoring organization. Many DAFs can be started with as little as $5,000. Expect to pay between 0.75% and 1.25% of your asset's value in administrative and investment fees.  

On the contrary, private foundations are more expensive to establish. Since private foundations are privately managed with a board or trustees, this charitable avenue is designed for high-net-worth individuals and often requires a minimum investment of $250,000. Moreover, expect to pay 1.5% or more annually in investment fees and support general operational costs, like staff wages and legal fees. Since private foundations are private, the burden of legal and filing falls on you, which can be costly in the startup phase.  

One of the disadvantages of using DAFs is that you don't have the final say in how your donations are used. While you can recommend certain grants and investments, the sponsoring organization has the final say in how donations are allocated.  

Private foundations give you ultimate control, as you are generally involved in the day-to-day decision making and allocation of investments. You have full legal control over how funds are spent, which can be great if you have a specific vision or mission for how your charitable giving is allocated.  

Another key difference between DAFs and private foundations is the tax deduction they warrant. Cash donations into a DAF have a higher deduction limit at 60% of your Adjusted Gross Income (AGI), while appreciated assets are limited to 30% of your AGI. It's also important to note that noncash contributions are subject to a 50% AGI limitation.  

Private foundation contributions are subject to a 30% AGI limit. However, there is a workaround to the lower private foundation limit for pass-through foundations. If the foundation distributes all of its contributions within two-and-a-half months from the year it received them, donors are able to deduct cash contributions up to 50% of their AGI.  

One of the advantages of using a DAF is the low administrative burden for the donor. The sponsoring organization handles all administrative tasks, from filing the necessary forms to handling the disbursement of donations. This is beneficial if you don't have the time to allocate to managing the granular details of your charitable giving.  

Private foundations are more complex, requiring a significant administrative burden. All compliance falls on the private foundation, including filing annual tax returns, scheduling board meetings, and handling donation disbursement. Due to the administrative requirements, many private foundations need to hire in-house staff, which can be costly.  

DAFs do not have an annual distribution requirement, even if there is an endeavor or cause that you would like to support. Again, control ultimately rests with the sponsoring organization, which decides when and who to distribute assets to.  

Private foundations must make an annual payout of at least 5%. This means that if the private foundation has $1,000,000 in assets, a $50,000 payout is required. However, many private foundations distribute more than this minimum requirement to unlock a higher AGI threshold.  

DAFs provide some degree of privacy, depending on the sponsoring organization used. In many cases, DAFs pool together donor money to support larger initiatives. If privacy is a concern, a DAF can be a great route. Private foundations have less privacy, as annual reports and board information are public. Individuals can easily track down donors to private foundations by looking at the board and their annual reports.  

Despite being more public, many philanthropic individuals pursue private foundations because of the legacy they can create. With careful planning and sufficient assets, a private foundation can remain active well past the founder's passing. DAFs can also remain active; however, these accounts are typically shut down after the assets run out.  

Philanthropy opens the door to new tax planning opportunities, regardless of whether you are considering a DAF or a private foundation. Let's cover four strategies to unlock tax efficiency through charitable giving.  

One way to unlock tax efficiency through philanthropy is to donate appreciated assets directly to a DAF. For one, donating assets directly can avoid capital gains tax on the appreciation. Second, you can receive a deduction for the full fair market value of the contributed assets. While the entire fair market value is eligible for a deduction, your deduction is limited to 30% of your AGI since the donation is considered noncash.  

Let's say that you donate stock worth $10,000. You've held this stock for five years, and it has appreciated $4,000 during that timeframe. If you were to sell this stock and then donate it, you would pay capital gains tax on the $4,000 appreciation amount and receive a $10,000 charitable donation deduction. However, by donating the appreciated stock directly, you bypass the capital gains tax while still receiving the $10,000 charitable donation deduction.  

This strategy works well for DAFs. Private foundations have more limitations. For publicly traded stock, your deduction is limited to 30% of your AGI. While you can still eliminate capital gains tax on your contributed property. 

Since donations to DAFs and private foundations have AGI limits, it can be beneficial to strategically time philanthropy investments. For example, you may want to open a DAF or private foundation in the same year that you sell your business or receive a substantial amount of taxable income to avoid AGI limits.  

Let's say you want to make a $250,000 cash contribution to open your DAF, which is eligible for the 60% AGI limit. You are deciding between making the contribution in 2025 or 2026. In 2025, you expect to have $350,000 of AGI. However, in 2026, you are selling part of your business and expect your AGI to be $1,000,000. In 2025, your contribution will be limited to $210,000. Making the same contribution in 2026 would not be subject to any limitation.  

While unused contributions can be carried forward for up to five years, it can be beneficial to strategically time your contributions to a DAF or private foundation. Timing is especially important if you are making contributions with a lower AGI threshold, like 30% for appreciated assets.  

Charitable contributions are deductible on Schedule A if you itemize your deductions. With the increased standard deduction, certain taxpayers no longer take itemized deductions. For the 2025 tax year, the standard deduction for single filers is $15,750 ($31,500 for married filing jointly). Many donors have no problem exceeding these thresholds, especially with mortgage interest and state taxes. However, if you have already made a large upfront donation in a prior tax year and are only making smaller, ongoing contributions, considering your total itemized deductions will be important.  

Factoring itemized deductions into your philanthropic strategy is known as bunching. Instead of giving smaller gifts each year, many people bunch contributions together every other year. For example, if you want to give $10,000 each year to a specific charity, that donation amount might preclude you from taking the deduction on Schedule A. However, if you were to give $20,000 every two years, you have a better chance of itemizing. The bunching strategy can be done with contributions to a DAF or a private foundation. Contributions are deductible in the year made, even if the funds haven't been spent.  

Qualified Charitable Distributions (QCDs) are a strategy used by individuals age 70 ½ or older that directs money directly from an IRA to a qualified charity. The distribution is excluded from taxable income and can help satisfy Required Minimum Distribution (RMD) requirements if you are over the age of 73. It's important to note that QCDs don't qualify for the charitable contribution deduction on Schedule A; however, they are tax-free distributions from your IRA up to the annual limit, which is $108,000 for 2025.  

Let's look at an example. You are considering making a $100,000 donation. However, you want the donation to go to a specific cause. Using a DAF wouldn't accomplish this, as you don't have final say over the contribution, and you aren't ready to set up a private foundation. As a result, you decide to make the contribution directly out of your IRA account.  

At the end of the year, you will receive a 1099-R that reports your IRA distribution for charitable purposes. The $100,000 distribution is tax-free, potentially saving up to $37,000 on federal taxes, depending on your bracket. However, you aren't allowed to double-dip. This means that you cannot report a $100,000 contribution on Schedule A. This can be beneficial to bypass certain AGI limits.  

Whether you are looking for a more structured way to handle your philanthropic endeavors or trying to maximize your tax savings from your donations, DAFs and private foundations are two popular investment avenues. Both DAFs and private foundations have advantages and disadvantages, making it important to choose the route that best fits your goals. For more information about how you can maximize your tax savings with charitable giving, reach out to one of our team members.