At the Community Foundation of Anne Arundel County, we regularly partner with professional advisors to support their clients’ philanthropic goals. When you’re working on the charitable components of a client’s estate or financial plan, one of the first questions that often comes up is structure.

Should they establish a private foundation or open a donor advised fund (DAF)? Both tools have value, but the right choice depends on what your client wants to accomplish, how involved they want to be, and how much time they have to manage the process.

To help guide that decision, we want to address a few common myths we often hear.

Myth #1: Donor advised funds are all the same, and only private foundations can offer flexibility

Private foundations will always differ from donor advised funds in important ways, not only because of their status as separate legal entities and the deductibility rules for gifts to these entities, but also because of the opportunities to customize governance. But it would be a mistake to assume that a donor advised fund is a cookie-cutter vehicle. Indeed, “donor advised fund” is simply a term used to describe the structure of a fund and its relationship with a sponsoring organization such as a community foundation. The donor advised fund vehicle itself is extremely flexible. Here’s why:

• Your client can make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction, and then recommend gifts to their favorite charities over time. 
• A DAF at CFAAC connects donors to a community of giving. We help clients discover opportunities to collaborate with others and support nonprofits that align with their values. Plus, the Community Foundation staff is local and is deeply knowledgeable about the needs of our region and the nonprofits meeting those needs. 
• Our team provides personalized support for long-term planning, including family philanthropy, multi-generational giving, and opportunities to learn about local issues and nonprofits making a difference. 

Myth #2: Deciding whether to establish a donor advised fund or a private foundation mostly depends on asset size

This is a common assumption—but asset size isn’t the deciding factor when choosing between a donor advised fund and a private foundation.

The size of a donor advised fund, just like a private foundation, is unlimited. Some of the United States’ largest private foundations (here’s a list) hold assets in the billions. And despite the name, private foundations aren’t all that private. The IRS makes Form 990 tax returns for private foundations publicly available. That’s not the case for individual donor advised funds, which offer more confidentiality.

Similarly, donor advised funds aren’t subject to any upper asset limit. While specific fund sizes aren’t typically disclosed, anecdotal information suggests that some DAFs also hold assets well into the billions.

At CFAAC, we’ve seen firsthand how a donor advised fund—regardless of asset size—can be a highly effective alternative to a private foundation. DAFs are often simpler to manage, offer greater tax advantages (like higher deductibility limits and fair market valuation for complex assets), have no excise taxes, and allow for anonymous giving if desired.

The net-net here is that the decision of whether to establish a DAF or a private foundation–or both–is much less a function of asset size than it is a matter of your client’s goals, preferences, and vision for giving. And we’re here to help you explore which structure best supports that vision.

 Myth #3: Donor advised funds and private foundations are mutually exclusive

It’s a common misconception that your client has to choose between a donor advised fund and a private foundation. In fact, using both can be a powerful strategy for achieving long-term charitable goals.

There are several benefits to combining these tools, and more and more families are embracing this dual approach. Here’s one example of how that might look in practice (CNBC):

• Donor advised funds can help meet the need for anonymity in certain grants, which typically is harder to do through a private foundation.
• A donor advised fund can also accept highly appreciated, non-marketable assets like closely held stock or real estate and offer more favorable tax deduction rules than a private foundation.
• Using both vehicles together can help clients diversify their investment and distribution strategies, ensuring that their giving remains steady—even in times of market uncertainty.

At CFAAC, we’ve seen private foundations consider transferring their assets to a donor advised fund at the community foundation to continue their mission while easing the burden of administration. For some families, this step makes sense when the day-to-day management of the foundation starts taking too much time and energy away from the work they really care about—supporting nonprofits and giving back to their community.

Others find that the rules around investments, distributions, and “self-dealing” have become more complex and, in some cases, may even limit the full tax benefits of their charitable giving. And of course, life changes. The family members who originally managed the foundation may have retired, passed on, or taken on new priorities, leaving the administrative load to fewer shoulders.

The bottom line here is that we encourage you to reach out to the team at the community foundation anytime you are evaluating how to structure a charitable giving plan to achieve both your client’s charitable goals and financial goals. We’re here to help think through what’s possible and provide guidance that reflects both financial strategy and community impact.

In many cases, the Community Foundation’s tools and services are a great fit for your client’s needs. And if it’s not, we’ll be happy to point you toward a solution that is.

Check out our quick reference guide on the differences between a DAF and a private foundation, or contact us at info@cfaac.org or 410.280.1102 to talk it through. We’d love to support you and your clients in building a giving strategy that works—for them and for the causes they care about.