Donor-Advised Funds vs. Private Foundations: Why a DAF Might Be the Better Choice for You

When it comes to managing your charitable giving, you have several options, with Donor-Advised Funds (DAFs) and private foundations being two of the most popular. Both offer unique advantages and can play a significant role in your philanthropic strategy, but they also come with different levels of complexity, cost, and flexibility. For many donors, especially those looking for a simpler, more efficient way to give, a Donor-Advised Fund may be the better choice. In this blog, we’ll explore the key differences between DAFs and private foundations and help you determine which option might be the best fit for your charitable goals.

Simplicity and Ease of Setup

One of the primary advantages of a Donor-Advised Fund is its simplicity and ease of setup. Establishing a DAF is a straightforward process that typically involves:

• Minimal Paperwork: Setting up a DAF usually requires filling out a simple application and making an initial contribution. In contrast, establishing a private foundation involves creating a legal entity, drafting bylaws, and obtaining IRS approval, which can be time-consuming and costly.

• Quick Start: Once your DAF is set up, you can begin recommending grants almost immediately. Private foundations, on the other hand, can take months to establish before they are operational.

• Administrative Support: DAFs are administered by sponsoring organizations, such as Until They’re All Safe, which handle all the administrative tasks, including managing assets, processing grant recommendations, and ensuring compliance with IRS regulations. Private foundations require ongoing administrative work, including record-keeping, filing annual tax returns, and managing the foundation’s activities.

Cost and Efficiency

Cost is another important factor to consider when choosing between a DAF and a private foundation. DAFs are generally more cost-effective for several reasons:

• Lower Start-Up Costs: The costs associated with setting up a DAF are minimal, typically just an initial contribution to the fund. Private foundations, however, require legal fees, filing fees, and potentially other start-up costs related to establishing a separate legal entity.

• Lower Ongoing Costs: DAFs have lower ongoing costs because the sponsoring organization handles administrative tasks. Private foundations, by contrast, may require hiring staff, legal and accounting services, and other administrative expenses, which can add up over time.

• No Excise Taxes: Private foundations are subject to an annual excise tax on their net investment income, typically around 1-2%. DAFs, however, are not subject to this tax, allowing more of your charitable dollars to go directly to the causes you care about.

Flexibility and Control

While private foundations offer more control over investments and grantmaking, DAFs provide greater flexibility and ease of use:

• Flexible Giving Options: With a DAF, you can recommend grants to a wide range of IRS-qualified public charities, both domestically and internationally. Private foundations also allow for diverse grantmaking, but they come with stricter regulations and reporting requirements, particularly when it comes to international giving.

• Anonymous Giving: If you prefer to keep your charitable giving private, DAFs offer the option to make anonymous grants. Private foundations, on the other hand, are required to file annual tax returns (Form 990-PF), which are public records and disclose all grants and expenses.

• No Minimum Distribution Requirements: Private foundations are required by law to distribute at least 5% of their net investment assets annually. DAFs have no such requirement, allowing you to let the funds grow tax-free if you prefer to delay granting for strategic reasons.

Legacy and Succession Planning

Both DAFs and private foundations offer opportunities for legacy planning, but DAFs often provide a simpler and more flexible approach:

• Succession Planning: With a DAF, you can designate successor advisors, such as your children or other family members, to continue recommending grants after your lifetime. This ensures that your philanthropic legacy is carried forward by those who share your values. Private foundations also allow for succession planning but require more formal governance structures and ongoing management.

• Involving Family: DAFs make it easy to involve family members in charitable decision-making, fostering a tradition of philanthropy across generations. Private foundations can also involve family members, but they require more formal roles and responsibilities, which may not appeal to everyone.

Choosing the Right Tool for Your Philanthropy

While both Donor-Advised Funds and private foundations have their merits, a DAF might be the better choice for those seeking simplicity, cost-effectiveness, and flexibility in their charitable giving. DAFs allow you to focus on the joy of giving without the administrative burdens, making them an excellent option for individuals and families looking to make a lasting impact.

At Until They’re All Safe, we offer a streamlined Donor-Advised Fund program that provides the flexibility and support you need to achieve your philanthropic goals. Whether you’re considering a DAF as an alternative to a private foundation or as a standalone giving vehicle, we’re here to help you make the most of your charitable efforts.

If you’re ready to explore the benefits of a Donor-Advised Fund, reach out to us today. Together, we can create a giving strategy that reflects your values and maximizes your impact.