Choosing a Giving Path for Your Family: DAF vs. Private Foundation

Pam and her family have spent decades working hard and giving back annually to local organizations. But lately, they’ve wanted to do more than write annual checks. They want to leave a legacy.

Some family members think they should establish a private foundation, but Pam heard a donor advised fund (DAF) might better fit their family’s needs and giving goals.

When families like Pam’s come to the Community Foundation for Northeast Georgia for advice, here are the questions we ask and the advice we share to help them find the best fit!

Do you want to run an organization or simply want to give?

Donor advised funds offer a greater ease of giving. 

DAFs can be opened quickly. We handle the administrative side and can also recommend reputable charities for you to consider. 

So once donors complete an application and seed their fund, they can sit back and enjoy annual tax deductions on their annual deposits (money, real estate, business sale pre LOI). Funds grow tax-free over decades, giving donors money to invest in their community’s present and future.

Private foundations, however, are a full-time commitment. 

Setting up a private foundation is a bit like opening a new business. They require months of legal work to establish, and families often hire staff or advisors to handle the administrative side and assemble a board to oversee funds and the foundation. 

However, the foundation maintains full control over grant-making decisions, whereas the sponsoring organization that holds your DAF has the final authority to accept or reject your recommendation.

Do you want to give to organizations outside 501(c)(3)s?

Private foundations offer additional giving opportunities.

Through a private foundation, you can provide scholarships or fellowships to individuals of your choosing or to grant funds to individuals or families in need. You can also grant money to some international organizations and to non-501(c)(3) entities.

Funds in your DAF can only be distributed to 501(c)(3)s.

A donor advised fundholder cannot grant money directly to individuals, and giving to international organizations requires intermediary organizations to manage international grants.

In the majority of cases, funds from your DAF can only be granted to 501(c)(3) organizations.

Which tax strategy fits your family and giving goals?

The IRS requires private foundations to meet an annual federal distribution requirement. In addition, foundations are taxed on their net investment income and realized capital gains. 

By contrast, funds in your DAF can grow tax-free, and there is currently no annual distribution requirement. This means that you can leverage tax benefits after a strong fiscal year or after you receive an inheritance by opening a DAF.

Giving isn’t one-size-fits-all. Whether you want to found your own private foundation or open a DAF, we’d love to answer any questions you have. Reach out to our Director of Development and Fundholder Relations Norma Marquez at nmarquez@cfneg.org to learn how we can help you meet your giving goals!

Resources:

Private Foundations vs Donor-Advised Funds (Foundation Source)

Donor-Advised Funds vs. Private Foundations (National Philanthropic Trust)