Donor Advised Fund or Private Foundation?


We have been asked over the years by philanthropically oriented clients as to whether a Donor Advised Fund (DAF) with a community foundation or a private family foundation makes the most sense for their charitable giving. The answer? It depends on a few details of how you would like your donations maintained.


DAFs and private foundations offer similar benefits:

  • The foundations facilitate organized, systematic and targeted giving;

  • Investment income held within the foundation accounts are generally exempt from taxation (exception to private foundations and the 1% to 2% excise tax – see below);

  • No capital gains are realized when appreciated property is donated to the foundation. Donors also may claim a full charitable deduction for the full market value of appreciated stock held in publicly traded companies or mutual funds;

  • Assets transferred to the foundation are not subject to estate taxes.


Let’s look at the difference between DAFs and private foundations:


Private Foundations

Private foundations are generally reserved for larger gifts of $1 million or more.


Some advantages offered by private foundations, which are not true of DAFs are:

  • Donors may make tax-deductible donations to their family foundation and still, as foundation trustees, retain control of the investment management and ultimate charitable disposition of gifts;

  • Family members and others may receive reasonable compensation from the foundation in return for services rendered;

  • Reasonable and direct costs of board meetings may be paid by the foundation to family members, employees and trustees.


Some disadvantages of private foundations, but not of DAFs, are:

  • It may take months to establish, and require larger expenses including legal and accounting fees;

  • Private foundations are subject to a 1% to 2% annual excise tax on net income, depending upon the level of grantmaking from year to year;

  • Lower deductibility caps for deductions – public charities (such as DAFs) receive a 50% deduction for cash gifts and a 30% deduction for appreciated property. Private foundations receive 30% and 20% deductions, respectively;

  • Gifts to private foundations of appreciated property are deductible on a cost basis only, while those made to DAFs are deductible at full market value;

  • Must establish a foundation board, hold board meetings, record minutes, and file state and federal tax returns;

  • Must distribute approximately 5% of the assets each year, as a federal mandate.


Donor Advised Funds (DAFs)

Some DAFs will allow for contributions as low as $5,000, but rules vary from foundation to foundation, with an average donation of $25,000.


Some advantages of creating a DAF are:

  • A donor may establish a DAF immediately at a low cost;

  • The DAF sponsor handles all the investment management, recordkeeping, tax receipting and grant administration;

  • DAF payouts are not required on an annual basis, so although a contribution is made and a charitable deduction taken, there are no requirements for paying out the assets;

  • Charitable distributions to qualified charities may be made anonymously.


Some limitations of DAFs are:

  • Gifts made to a DAF are irrevocable donations to a public charity;

  • Donors have only advisory privileges to grant the assets in their DAF, i.e., the charitable sponsor (generally the specific community foundation) has the authority to approve or deny the donor recommendations;

  • Donors cannot recommend that charitable gifts be made to individuals;

  • Donors cannot receive any goods or services in exchange for their grant, e.g., a ticket to a gala.


As you can see, there are advantages and limitations to both types of charitable funding mechanisms. The question is how much control versus how much expense a donor wishes to maintain over the assets and distributions, and the purpose of your charitable intent. In either event, the advisors at Waller Financial, the Lifestyle & Legacy℠ Company, can advise you on the right choice.