For many of us in the community, giving back is part of our DNA. We want to make sure we share our wealth and even establish a family culture of philanthropy. We find many different ways to give back—by volunteering our talent and time or through donations of money or noncash assets. 

When it comes to managing our larger financial contributions, there are several options and two of the most common include opening a Donor Advised Fund (DAF) or establishing a private foundation (PF). Many people come to us at the Community Foundation of Anne Arundel County (CFAAC) asking, “which is better for me?” So, let’s take a look at the differences.

A Donor Advised Fund is a giving account held at either a community foundation or financial institution to manage charitable donations. A DAF can be set up quickly and easily and can be used for giving throughout the fundholder’s lifetime and beyond. Fund holders can grow the fund via a variety of investment options and make charitable grant recommendations on their timetable. They can also name successor advisors for their fund allowing their philanthropy to continue when they are no longer able to serve as the fund’s advisor. The sponsoring organization files all tax returns for the fund and contributions provide an immediate tax benefit—up to 60% of adjusted gross income (AGI) compared to 30% of AGI for a PF. Fees to establish a DAF are very small versus up to $10,000-$15,000 setup costs for establishing a private foundation. Basically, Donor Advised Funds are low-cost, tax-efficient, avenues for making charitable contributions.

Private foundations are charitable organizations, usually started by a family, individual or corporation. Unlike DAFs, private foundations have their own governing body, which manages the foundation, performs administrative duties, files all required tax returns and has control over decisions regarding investments and grantmaking. PFs must make a minimum of 5% annual distributions of their net assets or face penalties. When considering estate planning, a PF’s directors and trustees need to create a detailed succession plan that clearly outlines the organization’s future to ensure its vision and values continue. While both DAFs and PFs can be used to contribute to charities of the donor’s choice, there are differences. For example, if you open a DAF at CFAAC, the staff ensures each nonprofit you’d like to support is in good standing with regulators, issues the check from your fund and confirms its distribution. Your charitable tax deduction is based on your gift(s) to your fund at CFAAC, and documentation of your fund’s activity, including donations made to the fund and grants made through the fund, are all captured and accessible online, which simplifies record keeping for you. There are several other administrative advantages when opening a DAF that is managed by CFAAC, including the ease of establishment and tax exempt status. When establishing a PF, a corporation or trust is required and you must apply for tax exempt status with the IRS, which could take up to six months to process. Also, a PF must conduct its own research into the viability of a nonprofit. Read more.