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Donor-advised funds vs. private foundations: How to choose your giving strategy

December 12, 2024

Understanding the options when it comes to charitable giving is key to solidifying a strategy that will help you achieve your philanthropic goals.

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Perspectives Editors

J.P. Morgan Wealth Management

When building an effective giving strategy, philanthropists should consider both their charitable and personal priorities with their attorneys and trusted advisors. Two popular vehicles for giving are donor-advised funds (DAFs) and private foundation. The right tool for you will depend on a number of factors, so it’s important to understand what each offers.

A donor-advised fund is a charitable account that allows the donor, with the assets they contribute, to make grants on a flexible timetable, build a charitable legacy, enjoy immediate tax benefits and invest philanthropic funds for future grantmaking. It’s a good fit for those who seek a streamlined giving strategy with a lower donation threshold and who want a sponsoring organization to accept some control over assets and administration.

A private foundation is an independent charitable organization created and controlled by an individual, family or business. Like a donor-advised fund, a private foundation also provides an immediate tax advantage. Grants can be distributed on a flexible schedule, meaning future philanthropic funds can increase (or decrease), but rules set by Congress require that a private foundation distribute a minimum amount to charities (generally 5% of assets) annually. Private foundations can foster family involvement and allow a charitable legacy to extend beyond the donor’s lifetime, one that can last for generations. The major difference is that a private foundation has more administrative responsibilities than a donor-advised fund. A private foundation maintains its own set of bylaws and is managed by its own trustees or directors. This powerful giving vehicle is best suited for those who are making larger contributions, want more control and want to involve family in the management of philanthropic endeavors. However, it’s important to weigh those desires against the added administrative work.

Both vehicles support strategic giving, but each offers unique opportunities and benefits that can aid a philanthropist in different ways. Before establishing a strategy, you should work with your personal legal and tax advisors and consider:

Frequently asked questions	Donor-advised fund	Private foundation
Which causes would you like to support?	Allows for donations to any 501(c)(3) qualified public charity May not make grants to individuals or families	Grantmaking decisions fully controlled by the foundation Can include international organizations, direct scholarships and fellowships and for-profit endeavors
Who will be involved in the charitable gifting decisions?	Administered by a sponsoring organization; donor does not have ultimate control over the account Account privileges – which include grantmaking recommendations – available to multiple family members Can be useful when a main donor’s philanthropic pursuits may not be shared by future generations	A collaborative enterprise with paid employees and an independent board of directors (employed or volunteering) May include family, professional contracts or anyone the founder chooses to appoint Can last for successive generations and can help establish an intra-generational family legacy or can be set up for a particular period of time
How would you like your charitable donations to be acknowledged?	Anonymous grantmaking permissible	IRS form 990-PF required All grants and contributions become public record
What types of assets will be part of your charitable contribution?	Typical investments include cash equivalents, publicly-traded securities and mutual funds. Other options include unique assets such as art, antiques, real property and S-Corp stock Accounts above a certain dollar threshold may be managed by outside investment advisor	A wide universe of investment options available which may include hard-to-value assets like art, antiques or real property Can self-direct or appoint an investment advisor
How important is the tax treatment of the underlying assets to your overall charitable goals?	60% adjusted gross income (AGI) deductibility for cash contributions (potentially falling to 50% of AGI beginning in 2026) 30% AGI deductibility for publicly-traded securities, real property and privately held assets Income tax deduction generally equals fair market value of gift for cash or publicly traded securities	30% AGI deductibility for cash contributions 20% AGI deductibility for publicly-traded securities, real property and privately held assets 1.39% excise tax on annual net investment income Must file IRS Form 990-PF annually (state filing requirements may also apply)
What level of control and flexibility is important to you?	Simple to establish Account administration is offloaded onto the sponsoring organization Sponsoring organization takes responsibility for all due diligence related to grantmaking	Must file with the state, establish a corporation or trust and apply to the IRS for private foundation status Corporate-form foundation must appoint a board of directors; foundations often hire staff to run administration of the organization
How much capital can you commit to the charitable vehicle?	Minimum contribution is typically around $10,000 (no start-up costs)	Initial contribution typically starts between $1 million and $2 million Costs for legal filing and accounting incurred
Have you established a timeline for charitable giving goals?	-There is no established timeline or annual minimum for the distribution of funds Easy to accelerate giving during high-income years or via a “bunching” strategy (taxpayer groups deductions into a single year to surpass the itemization threshold In off-years (or “skip-years”) donors take the standard deduction Can hold the cache of charitable dollars, which can then be distributed to charities for years to come	The IRS requires private foundations to distribute 5% of the fair market value of their assets each year. If a private foundation fails to distribute the required 5% by the end of the subsequent fiscal year, it is subject to a 30% excise tax on the undistributed amount. If the required amount remains undistributed, the foundation may be subject to an additional excise tax of 100% of the undistributed amount
What is your vision for the succession plan?	Can name individuals and charities as successors for the account	Successors and officers confirmed only by vote of the organization’s board of directors or trustees. For family foundations, the board is typically made up of family and friends who support the mission

A donor-advised fund and private foundation can be used as complementary vehicles

There’s no such thing as a one-size-fits-all charitable strategy, which is why it could be beneficial to apply the advantages of more than one vehicle. Using the vehicles in concert with each other may be valuable under the following circumstances.

When making an anonymous donation

While donations made through a private foundation are a matter of public record, those made through a donor-advised fund are not. A donor-advised fund can be used as a complementary vehicle through which to make anonymous donations when looking to minimize solicitation from similar organizations, to avoid scrutiny or to donate to a cause that may not align with the foundation’s overall mission.

When seeking advantageous tax treatment

The charitable income tax deduction is generally preferential for a donor-advised fund over a private foundation. For cash donations, an individual can receive a deduction of up to 60% of AGI (in 2024 and 2025) when donating to a donor-advised fund, while a private foundation donor can receive a deduction of up to 30% of AGI. For appreciated securities, the deduction for a donation to a donor-advised fund is limited to 30% of AGI, 20% for private foundations.

For donations of non-publicly traded stock donations held for more than one year, the deduction for a donor-advised fund is generally the fair market value on the date of contribution. If the assets are held for a year or less, the deduction will be limited to the lesser of current fair market value or the asset's cost basis. For donations to a private foundation, the deduction is the cost basis. Any unused deductions can be carried forward for five years.

As a learning opportunity for the next generation

The management of a smaller donor-advised fund can act as a succession planning tool that gives offspring the opportunity to gain philanthropic experience before taking on a leadership position within a family foundation. To fulfill the mandatory annual distribution requirement, a donor-advised fund can act as a vehicle to receive the 5% annual distribution required for foundations. This can come in handy at the end of year if a donor has yet to make a final funding decision.

We can help

When determining the best vehicle to solve for your philanthropic goals, it is important to consider the pros and cons of each charitable vehicle and how they apply to your overall giving goals. It’s also key to understand that donor-advised funds and private foundations can be used complementarily. Consult with your personal legal and tax advisors and contact your J.P. Morgan professional to discuss which option can best meet your long-term charitable goals.

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