Lido Insights

5 February 2024

Giving Strategies: Donor Advised Fund or Private Foundation?

Establishing a private foundation to support causes you believe in can be exciting and rewarding. It can also be complicated. Private foundations need to meet ongoing tax filing, regulatory, and minimum annual distribution requirements that can take your focus away from your philanthropic objectives.


A Donor-Advised Fund (“DAF”) may be a simpler alternative. They are flexible charitable investment accounts that are potentially easier to set up and navigate than private foundations. Both DAFs and private foundations allow you to:


Support multiple charities: Instead of making a one-time donation, your irrevocable gift of cash and/or securities may be used to support one or more charities over an extended period.


Donate a range of assets: In addition to cash and securities, you may also donate closely held and complex assets, including certain privately held C and S corporation shares that you have held for at least a year. (IRS restrictions apply.)


Mitigate capital gains taxes: Assets, including highly appreciated assets, donated to either a DAF or a private foundation may be liquidated without incurring the capital gains taxes they


There are, however, significant differences between DAFs and private foundations, particularly regarding tax treatment, administration, and flexibility. This overview is intended to provide a framework for an in-depth exploration of your options with your tax, trust, and wealth management teams. It is not a substitute for a detailed, expert examination. With that in mind:  


Potential advantages for DAFs:


Income tax deductions:  While both DAFs and private foundations offer immediate income tax deductions, the limit is higher for DAFs. Cash donations to a DAF are eligible for a deduction of up to 60% of your adjusted gross income (30% for a private foundation) and 30% for other assets 20% for a private foundation).  Of course, IRS limits and conditions apply.


Investment income tax treatment:  There is no federal income tax for investment income within your donor-advised fund. By contrast, private foundations pay a federal excise tax of 1.39% on investment income.


Annual distributions: There are no minimum distribution requirements for DAFs. Private foundations are required to distribute at least 5% of assets annually.


Recordkeeping: Donor-advised funds are considerably simpler to maintain than a private foundation. For example, you only need to keep receipts for the fund’s charitable donations, while private trusts are required to obtain and keep acknowledgements. Private foundations also typically have more tax filings and other recordkeeping requirements.


Cost: Donor-advised funds are generally much less expensive to set up and maintain than a private foundation.


Anonymity: You may make anonymous donations to charity through a DAF if you choose. Private foundations are generally required to make public filings.


Potential advantages for private foundations:


Greater flexibility: DAFs may make distributions only to IRS-approved charities; private foundations have the potential flexibility to support individuals and organizations if they can substantiate a charitable purpose.


Growth potential: If your ambition is to grow your philanthropy into an ongoing organization with hired staff, investment managers, and an active role managing grants, sponsoring charitable events, and similar activities, private foundations are potentially structured for expansion.


Is a donor-advised fund or private foundation right for you?


The answer to that question depends on a thorough review of your objectives, financial situation, estate, tax, and legacy planning, and more. Lido can work with you to amplify the power of your giving strategy while creating tangible financial benefits for you and your family.