Donor-Advised Fund vs. Private Foundation: What’s the Difference?

Donating directly to a charitable organization might be the simplest way to give, but there are also various philanthropic vehicles available for minimizing taxes and maximizing impact. Two of the better known structures are donor-advised funds (DAF) and private foundations.

Donor-Advised Fund vs. Private Foundation

While there are 1.4 million registered public charities in the United States, less than 1% are donor-advised funds. Likewise, private foundation numbers, at around 90,000, are relatively modest. The impact of these nonprofit organizations, on the other hand, can be considerable. Here are the key differences between donor-advised funds and private foundations.

What Is a Donor-Advised Fund?

The donor-advised fund (DAF) is a tax-advantaged personal giving account established at a public nonprofit sponsor organization. The account is opened in the donor’s name and contributions are made to the organization(s) chosen by the donor. That might be a charity, but it could also be a university, religious foundation or financial institution. DAFs are enjoying unprecedented popularity with donations jumping by 27% since 2019. Giving from DAFs topped $34.67 billion in 2020, with the five largest — Fidelity, National Philanthropic Trust, Schwab, Vanguard and Silicon Valley Community — accounting for $24.5 billion alone. That said, the size of the average fund is a lot less, at around $150,000. Donors can gift cash, stock, real estate or other assets to a donor-advised fund. 

Traditionally, DAFs have been viewed as a tax-efficient way to give over a longer period of time without any annual obligation to distribute funds (thus the nickname “zombie philanthropy”), but now Groundswell is empowering corporations to unlock the advantages through our Philanthropy-as-a-Service platform. Whereas DAFs have conventionally been the preserve of the ultra-rich and brokerages, we’re offering access starting at $1 million (the lowest minimum contribution in the industry) to help employees with meaningful giving that benefits communities.  

What Is a Private Foundation? 

A private foundation, on the other hand, is a legal entity established solely for charitable purposes. Usually launched as a family or organization’s legacy initiative, the private foundation is a long-term project whose influence can spread worldwide. That’s certainly true of three of the biggest three: the Bill and Melinda Gates, Ford and Getty foundations. 

Private foundations are administered by a board of directors and can receive funds via real estate, investment assets or charitable donations. Unlike public charities, however, they usually derive their financial support from a single source, whether it’s a person, family or organization.

Key Differences Between Donor-Advised Fund vs. Private Foundation

There are a few important distinctions to note between the two, particularly when it comes to the overarching mission and vision. 

Longevity

Most donor-advised funds are intended to support charitable giving during the philanthropist’s lifetime, although some do extend to a further generation or two. One of the criticisms of DAFs is that rather than distributing donations to non-profit organizations in need, they are used by the rich to “park” private wealth in a tax deductible fund. That’s not the Groundswell approach. Our platform is designed to establish a minimum annual distribution for DAFs to bring communities to life, not mothball zombie philanthropy funds. Private foundations, by contrast, focus firmly on the future legacy, and most are established as permanent entities that will outlive the founder. 

Control

The board of directors (which can include the founder) manages a private foundation. For a DAF, the sponsor organization has control, although the donor may give their recommendation or advice on how grants are distributed.

Profile

Private foundations often celebrate a particular goal or set of values, so concealing the founder’s identity is rarely a concern. DAFs do offer confidentiality, so they are a useful vehicle for benefactors who want to support a charitable organization anonymously. 

Establishment

There is a lower barrier to entry for donor-advised funds, some of which can be set up with as little as $5,000, although upwards of $100,000 is more common. Because all legal formalities are covered by the parent organization, DAFs are relatively easy to set up. By contrast, private foundations take longer to establish, and the legal, administrative and tax affairs require professional support. Private foundations usually start with funds of $10 million or more. 

Tax Matters 

Arguably the biggest difference between the two is in terms of tax regulation. For private foundations, the IRS dictates that a 5% minimum of net investment assets must be distributed annually in the form of grants or administrative expenses. To set up a private foundation, the founder(s) must apply for recognition of exemption under Section 501(c)(3) with the IRS, and will subsequently need to file detailed tax returns on board members’ compensation, fees and grants. All are a matter of public record. 

Donor-advised funds, on the other hand, do not require any annual grants to be administered but do offer immediate tax advantages, particularly if the donor is receiving a windfall, inheritance or revenue from a business or property sale. Neither do DAF donors have to file tax returns to the IRS, not least because ultimate control of the DAF is with the sponsor nonprofit organization. 

We’re Here To Support Your Giving Efforts

Despite the “zombie” tag, DAFs are by no means evil by nature. In fact, they can be an effective way to drive meaningful giving that brings communities to life. To find out how we’re raising zombie philanthropy from the dead with an employee benefit that benefits the world, get in touch with us today. 

Night of the Living DAF: How Groundswell is Raising Zombie Philanthropy From the Dead

No one likes zombies. They’re noisy. They’re disgusting. Worst of all, they try to eat your brain.

But perhaps the spookiest thing about them? They’re mindless. Zombies are automatons who amble along without thinking. Left to their own devices, they would go on like that, mindlessly, forever. Never changing, never helping, never improving.

It is this critique of the undead that gets levelled at a form of charity dubbed zombie philanthropy. In this critique, the drivers of zombie philanthropy are Donor-Advised Funds (DAF)s. To quote The Washington Post:

This is problematic. We’re in a world where there is no time to waste. There are too many crises facing our country and global community and it serves no one to have money sitting on the sidelines. At Groundswell we’re going to change that by building a platform that will better facilitate these funds and empower donors to make an impact quickly.

WTF is a DAF and who contributes to them?!

A Donor Advised Fund allows donors to put all of their charitable dollars into one single fund, receive an immediate tax deduction, grow those assets over time, and distribute assets to nonprofits of their choice at any given time. It was established in the 1930’s to handle charitable donor-advised fund contributions on behalf of organizations, private individuals, and families. Since then, DAFs have been primarily utilized by the ultra-wealthy. According to the 2020 Donor-Advised Fund Report, grants to qualified organizations from DAF accounts totaled $27.37 billion in 2019, up 15.4% from $23.72 billion in 2018. But considering there are over $140 billion in total assets squirreled away in DAFs, $27 billion is merely a fraction of the impact potential they represent.

Why Do DAFs (Sometimes) Become Zombies?

Donor Advised Funds are popular due to their ease of use. Donors typically struggle with deciding where to direct their philanthropic contributions, especially when large sums of low-value assets are contributed. Managing several beneficiaries while meeting a deadline might be difficult. As a result, one-stop-shop giving simplifies the philanthropic process.

Why have DAFs become the target of “zombie philanthropy” accusations? The critiques typically go like this:

• Unlike with private foundations, there is no requirement for minimum distributions from Donor Advised Funds. As a result, investors routinely deposit significant amounts of equity or cash in those accounts with no need to distribute them right away. This means that a DAF’s capital can sit static for years or decades, and never actually reach a nonprofit.
• This is particularly worrisome at a time when nonprofits need funds urgently, not in a distant future.
• Some individuals use DAFs primarily for income tax reductions, balancing their tax bill with their giving, so that the upside, like capital gains, is neutralized. Others use DAFs to pass on money to their offspring, once again with minimal taxes.

With DAFs, people can sidestep learning about the best causes in place of simply dumping the money in a pot on the advice of someone else.

We recognize these critiques. Any tax instrument can be manipulated depending on a user’s intentions (we’re looking at you, Peter Thiel). However, we don’t believe DAFs are inherently evil and are instead breathing new life into the zombie philanthropy model.

Groundswell reaps the benefits of DAFs without the downsides. And we believe that this approach can be scaled to reach any prospective donor, not just the ultra-rich.

How Groundswell is Raising Zombie Philanthropy From the Dead

Groundswell is built differently.

Legacy DAF providers also happen to be massive asset managers. No wonder their platforms are designed to keep money in the DAF, and not move it out to charity. In fact, it’s in their best interest for it to play out that way.

However, Groundswell is built to move money as efficiently as possible out of the system and into the hands of charities.

The objectives of our platform are aligned directly with the goals of charities – including the goal of disbursing as much money as possible into the community. That’s probably because we were founded by a former nonprofit executive, a key difference in Groundswell vs. the competition.

We have no beef with DAFs and not every DAF fund is a zombie. The fact is, when funds are transferred to a DAF, they will eventually finance a program sponsored by the donor, though it may be slow and delayed funding means delayed impact.

As we already mentioned, we believe that Donor Advised Funds are not inherently evil – even if they are exploited by a large number of ultra-wealthy individuals and fail to generate as much good as intended. In principle, DAFs can be powerful but, like everything else, they must evolve.

That’s why Groundswell is supportive of recent talks aimed at reforming Donor Advised Funds to include, among other things, a minimum annual distribution. DAFs, built and leveraged appropriately, can bring massive efficiencies to the nonprofit sector and the giving of ordinary Americans.

So instead of allowing these legacy Donor Advised Funds to shuffle around mindlessly like zombies, let’s build an alternative like Groundswell that breathes life back into the Donor Advised Fund and democratizes philanthropy for the 99%.