June 3, 2024 by Interchange Capital Partners
By Ahmie Baum, CFP® CFBA
In the realm of philanthropy, individuals often find themselves at a crossroads, deciding between two key structures for managing charitable contributions: Donor-Advised Funds (DAFs) and Private Family Foundations. As a prospective donor, navigating this choice is crucial.
In this article, we delve into the distinctions between DAFs and Private Family Foundations to provide clarity and guidance.
Defining DAF vs. Private Family Foundation
Donor-advisor funds are managed by a public charity or a financial institution. Donors get immediate tax breaks on their charitable gifts.
Private family foundations are funds started by individuals or families for philanthropic efforts. Functioning as nonprofit organizations, they usually must be bankrolled by larger endowments.
Organizational Differences: Control vs. Perpetuity
Private foundations remain under the legal and financial control of the family in perpetuity. The family can appoint successors, maintaining control for unlimited generations.
Donor-advised funds (DAFs) do not allow the family legal control. Control resides with the fund’s sponsors. Successors can be appointed for one or two generations, after which the family’s philanthropic legacy ends. If no successor is appointed for the DAF, the account may revert to the control of the sponsoring agency.
Tax Implications
DAF donors receive immediate tax breaks once their donations are complete. Donated funds are managed by the sponsoring organizations, so donors can’t re-access their funds for personal matters.
In a private family foundation, donations also qualify as tax deductions. However, as private organizations, they face more limits and regulations from the IRS and must keep an annual minimum for donations to maintain their tax-exempt status.
Contribution Differences
Private foundations offer tax deductions for cash contributions up to 30% of AGI (Adjusted Gross Income) and for long-term, publicly traded appreciated securities at fair market value up to 20% of AGI. For other long-term capital assets, deductions are allowed at cost basis up to 20% of AGI.
In contrast, DAFs offer tax deductions for cash contributions up to 60% of AGI, and for long-term, publicly traded appreciated securities at fair market value up to 30% of AGI. DAFs also allow tax deductions for other long-term capital assets at fair market value up to 30% of AGI.
Grantmaking Differences
Private foundations are overseen by trustees or boards of directors, who have full control over grantmaking decisions and allow for family involvement through a collaborative board structure. They can provide scholarships and fellowships directly to individuals with IRS approval.
Donor-advised funds are managed by established financial institutions. While donors can make grant recommendations, the sponsoring organization has the authority to accept or reject them. Family members with account privileges can make grant recommendations independently, but DAFs cannot grant directly to individuals, only to organizations that administer scholarship programs.
Conflict Resolution
Conflicts rarely arise in DAFs. Asset control is commandeered by smaller bodies of fund sponsors, and donors can only work on grant decisions in an advisory capacity.
On the other hand, conflicts are more likely to arise in private family foundations. The resolution of conflicts is addressed by the governance structure or bylaws.
Operational Differences
Private foundations can run their own programs and cover related expenses (such as supplies, salary, and rent), provided these activities comply with IRS guidelines. They can also create grant agreements with grantees, setting specific terms and conditions. Additionally, private foundations must meet an annual 5% minimum distribution requirement based on the previous year’s net average assets.
In contrast, DAFs typically only issue grants to 501(c)(3) charitable organizations and do not offer the ability to create customized grant agreements. While DAFs usually have no minimum distribution requirement, this has been proposed for consideration by the U.S. legislature.
International Business
International charities are administered by the rules and regulations of the country of origin. Facing more of an uphill battle in international business, DAFs may encounter limits on international grants, mainly due to anti-terrorist regulations.
Private foundations can establish partnerships or open offices in international countries; however, they must be aware of local or provincial tax regulations and laws.
Investment/Asset Management Differences
Private foundations have total control over their investment strategies, vehicles, policies, and managers, and can hold a wide range of assets, including cash, securities, art, antiques, and real property.
DAF donors typically choose from a limited selection of mutual funds or proprietary investment options. Donor-advised funds usually accept cash equivalents, publicly traded securities, and mutual funds, while high-value non-cash assets may be accepted and liquidated prior to deposit, potentially incurring additional fees.
Legacy and Estate Planning
Planning for future generations of philanthropists in a DAF is simple by design—which means donors don’t have much control over funds that will ultimately be directed to the sponsoring organization.
Donors in a private family foundation have more of a chance to establish ongoing legacies, creating their own bylaws in matters of business structure, succession plans, and other estate-planning concerns.
Additional Concerns
DAFs and private family foundations have subtle differences in other respects, including:
Flexibility
DAFs are managed by designated parties, so donors don’t have to deal with administrative functions, giving the funds more flexibility. Private foundations can face tougher limits and rules, which compel donors to work a little harder to meet compliance.
Privacy
Donors in DAFs can make their donations privately without revealing their identities. Private foundations must make full disclosure of their operations, including exact amounts of expenses and grants.
Costs
DAFs don’t cost a lot of money since administration is handled by designated staff. Private family foundations may have more overhead and operational costs, which can cost a little more.
DAF vs. Private Family Foundation: Which Serves Your Needs?
Ultimately, your choice of a philanthropic vehicle must align with your families goals. Donor-advisor funds are often highlighted for their higher tax deduction limits, but many individuals do not reach these adjusted gross income (AGI) limits. Fortunately, excess contributions can be carried over to subsequent years. Using both private foundations and DAFs can optimize wealth management and philanthropic impact.
For those wanting to give back and impact the areas that they are passionate about, donor-advisor funds and private family foundations offer structured ways to accomplish philanthropic goals. Rather than navigating aspects of DAF vs. private family foundation on your own, Interchange Capital Partners is uniquely suited to guide your charitable efforts in ways that benefit all.
If you’re looking for a personal, trusting partnership, please take advantage of our Second Opinion Service. Contact us online, email us at team@interchangecp.com, or call our office at 412-307-4230 to schedule an introductory appointment.
About Ahmie
Ahmie E. Baum is the CEO and Founder of Interchange Capital Partners. Using a collaborative and comprehensive process developed over 44 years of working with Wall Street banks and financial services firms on behalf of families.
Interchange Capital Partners provides family office and transition strategy services for family businesses, helping families protect and grow their family capital with clarity, understanding, and action by being relevant and resourceful around their unique circumstances.
As a graduate of the University of Pittsburgh, Ahmie began his career with EF Hutton in 1979 and transitioned to UBS in 1993. Ahmie is a CERTIFIED FINANCIAL PLANNER™ (CFP®), received the Executive Certificate in Financial Planning from Duquesne University School of Leadership and Professional Advancement, and has a Certificate in Family Business Advising (CFBA) from the Family Firm Institute. He also has Certificates from The Growth Institute around Growing and Scaling Business and Cash Management. For the past 20 years, he has been involved with Strategic Coach, an international entrepreneurial training program.
When he’s not working, Ahmie enjoys spending time with his wife, Sara, their three children, and their granddaughters. He recognizes that health is wealth so he has committed to daily yoga, meditation, and plant-based eating. His other hobbies include woodturning, golf, reading, listening to music, and biking. He is active in his community and served as the Foundation Chair of the Jewish Federation Community Foundation of Greater Pittsburgh and supports various philanthropic endeavors. To learn more about Ahmie, connect with him on LinkedIn.
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