When an individual or family wants a more systematic and tax-efficient way to meet their charitable objectives, most will consider one of the two most common charitable vehicles: a private non-operating foundation or a donor advised fund (DAF).
While both allow donors to grant funds to charitable organizations in a tax-efficient manner, each vehicle is unique in its benefits. Below is a chart that outlines the primary differences donors often consider when choosing between the two entities. Note, not all differences are discussed.
|Private Foundation||Donor Advised Fund|
|Entity Structure||An independent legal entity set up for charitable purposes||An independent legal entity set up for charitable purposes|
|Start-up Costs||Legal and registration fees to incorporate, file for tax-exempt status, and register with state||None|
|Acceptable assets||Cash, securities, land, buildings, art, other tangible assets and some complex assets||Typically limited to cash and securities. Some sponsor organizations may allow other complex assets|
|Timing of Tax Deduction||Year of funding||Year of funding|
|Tax Deductibility||Up to 30 percent of adjusted gross income for cash gifts and up to 20 percent of adjusted gross income for long-term appreciated publicly traded assets.
For closely held-businesses and real estate, gifts may be limited to cost basis.
|Up to 60 percent of adjusted gross income for cash gifts and up to 30 percent of adjusted gross income for long-term appreciated publicly traded assets.
For closely held-businesses and real estate, deductions are for fair market value
|Annual Administration (Legal, Tax)||Must file annual tax form 990-PF and meet state requirements||None|
|Salary||Can pay a reasonable salary to trustees/family members as foundation employees||No|
|Investments||Foundation exercises full control over its investments and can choose to self-direct or hire an outside manager. A Foundation may also engage in mission-related/impact investments and hold other private and complex investments.||For smaller accounts, investments are limited to a pre-defined pool. Larger accounts can be advised by an independent advisor and may be able to access additional investments. Depending on the DAF platform, some complex investments can be held.|
|Taxation||Excise Tax – up to 2% of annual investment income||None|
|Required Distributions||The IRS requires an annual 5% distribution based on the previous year’s net assets. Grants and certain expenses qualify towards the 5%.||None. Donors choose the timing and amount of gifts. Typically, there are no distribution requirements, but the sponsoring organization may enforce a minimum.|
|Grant Recipients||501(c)(3) public charities, DAFs, and individuals (ex. for scholarships) or international organizations that meet IRS requirements||Primarily limited 501(c)(3) public charities. Also, assets contributed to a DAF are no longer legally under the control of the donor. The donor may advise on the use of those assets, but the sponsoring organization may have limitations.|
|Anonymity||No. All grants are documented and reported in the annual tax filing||Yes. Grants can be made anonymously|
|Legacy||Can be maintained in perpetuity, opportunities for Board/trustee selection and succession planning||Depends on sponsoring organization. Some DAFs have time limits.|
|Outside Funding||Can receive donations from public||Can receive donations from public|
|Conversion||A Foundation can be converted to a DAF||Contributions to a DAF are irrevocable, owned and held by the sponsoring organization|