Philanthropy Tools and Techniques: Donor-Advised Funds vs. Private Foundations

What is the difference between a donor-advised fund and a private foundation, and which one should I use for my charitable giving?

This question comes up frequently in conversations with clients when exploring how to leverage assets in a tax efficient way to impact the causes and communities they care about. Donor-advised funds and private foundations are two popular vehicles for charitable giving. Donor-advised funds (DAFs) are charitable investment accounts used to support public charities through donor-directed grants. DAFs are one of the fastest-growing giving vehicles in the U.S. because they offer significant tax advantages and efficiency when giving to charity. When you contribute cash, securities, or other assets to a DAF, you are generally eligible for an immediate tax deduction. You can then invest those assets for tax-free growth and recommend grants to IRS-approved tax-exempt organizations.

Private foundations are charitable organizations typically established by individuals, families or corporations to support charitable activities. A board of directors or trustees oversees a foundation and is responsible for receiving charitable contributions, managing and investing charitable assets, and making grants to other charitable organizations. It is also responsible for filing tax returns and other administrative reporting requirements. Non-operating foundations are the most common type of private foundation. Family foundations typically represent the assets and interests of a single family, while an independent foundation is managed independently by the benefactor.

Generally speaking, most donors can achieve their philanthropic goals by using a DAF without the administrative burdens of a private foundation. DAFs also offer a level of anonymity and tax efficiency that private foundations do not. A family may have specific reasons to continue utilizing a private foundation, such as the desire to pay family members to serve on the Board or as staff. You can reference this chart for a side-by-side comparison of donor-advised funds and private foundations. Your financial advisor can help you determine what giving vehicle would be best for you.

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