We talk with emerging and experienced philanthropists every day, and one of the most common questions we hear is: should I choose a private foundation or a donor-advised fund to formalize my giving? It’s a great question and an important one. After all, these are two of the most popular charitable vehicles—but the ways they are created and operated are very different. While there are many distinctions between the two, we’re going to highlight just a few so you can quickly get an idea which option may be best for you. And be sure to keep reading to the end to see how you can create greater philanthropic and financial synergy by leveraging both vehicles in your charitable plans.
Private Foundation and Donor-Advised Fund Definitions
A private foundation is a wholly distinct, tax-exempt legal entity governed by its own set of bylaws, articles of incorporation, etc. On the other hand, a donor-advised fund (DAF) is a giving account that is offered by and housed in a public charity, which may be connected to a community foundation, a financial institution, or a university. At the most basic level, the difference between a DAF and a private foundation is the construct, or form, in which each entity is created and operated.
Why Does This Matter?
While it may sound insignificant to choose one structure over the other, it turns out that form really does dictate function. A private foundation is a freestanding legal entity, while a DAF is an account. These two charitable vehicles offer very different levels of control, authority and philanthropic versatility.
“Private foundations typically require more involvement than DAFs, but they also provide more control over the investments and the grantmaking, which appeals to some donors, particularly those who are more entrepreneurial,” says Darren Henderson, a partner at Corient Capital Partners, who recently sat down with Foundation Source to discuss how to be most effective in helping wealthy families with charitable planning. “With a private foundation, the donor determines the governance structure and the bylaws, and it can exist in perpetuity.”
Let’s look at some examples below of the key differences between private foundations and DAFs in no particular order. (Note: DAF policies and procedures vary by the sponsoring organization and this information is based on standard common practice.)
Grantmaking, Investment Management and Contribution Differences
From engaging family in collaborative giving and the control over grantmaking decisions to excise taxes and the control over investments, there are many factors that differ between private foundations and DAFs. Checkout our complete resource to see a side-by-side comparison. The bottom line? Your choice of a philanthropic vehicle must be consistent with your financial goals. Take our quick quiz here to see which option may be right for you.
Do I Have To Choose One Or the Other?
No, and in fact, we’ve seen many donors successfully use private foundations and DAFs in combination. The advantages to using both include the potential for additional tax deductions and a full spectrum of options to amplify their philanthropic and wealth planning goals. Check out some of the benefits of using these two popular vehicles in tandem in our complete resource.
Want to Learn More About Creating a Foundation?
Check out our complete resource Frequently Asked Questions About Private Foundations.
Ready to talk to a philanthropic specialist?
Schedule a call with us here or reach us at 800-839-0054. Together, let’s #begiving.