Choosing the right charitable giving strategy helps donors achieve their philanthropic intent, mitigate taxes, and support legacy planning and family engagement.
With investor generosity soaring for decades, charitable giving by Americans has grown sevenfold since the mid-20th century, according to Philanthropy Roundtable. In fact, data from the Indiana University Indianapolis Lilly Family School of Philanthropy shows that charitable giving totaled more than $557 billion in 2023.
While donors have several options, we at Caprock often focus on two approaches most popular with the high- and ultra-high-net-worth individuals and families we work with: donor-advised funds (DAFs) and private foundations. These options provide differing structures, regulations, and tax treatments, each with its own set of unique advantages and limitations.
A Straightforward Way to Give Back: How Donor-Advised Funds Work
DAFs, in short, are giving accounts that are offered by and housed in a public charity such as a community foundation, financial institution, or university. They are tax-advantaged philanthropic vehicles that allow donors to make charitable donations, receive a tax deduction, and then recommend grants from the sponsor over time.
This works by contributing assets, like stocks or cash, to the DAF. There, those assets can grow tax-free until the donor decides how and when funds are granted to a philanthropic organization of their choosing. That organization often has the final say over how those funds are used.
As the name DAF implies, donors can only advise the charitable sponsor on how their assets should be distributed. The charitable sponsor has the authority to approve or deny those recommendations.
While they may limit some control over your charitable giving, DAFs are relatively inexpensive, simple to set up, and are a great way to help donors centralize their charitable giving and reduce their taxable income.
What is a Private Foundation?
Private foundations, on the other hand, are stand-alone, tax-exempt legal entities generally established by an individual, family, or corporation that are governed by their own set of bylaws and articles of incorporation, making them more complex.
More Control and More Complexity
Unlike a DAF, a private foundation is its own separate entity that can be staffed with family or anyone of your choosing.
Though private foundations offer a greater level of control over charitable giving while still offering tax benefits, the drawbacks include higher operating costs and administrative burdens.
They also have lower tax deduction limitations on gifts. Whereas DAFs offer deductions of up to 60% of adjusted gross income (AGI), foundations are limited to 30%.
Private foundations are also subject to more stringent tax laws, regulations, and requirements than a DAF, but allow for the ability to make grants to entities that are not 501(c)(3) public charities, such as other foundations, needy individuals, and scholarship programs, to name a few.
Though establishing a foundation comes with more complexity, it is a great way to maintain control over your charitable giving and keep your family engaged.
Comparison of Donor Advised Funds (DAF) vs. Private Foundations
| Donor-Advised Fund | Private Foundation | |
|---|---|---|
| Description | Giving account offered by and housed in a public charity, often connected to a community foundation, financial institution, or university | A wholly distinct, tax-exempt legal entity governed by its own set of bylaws, articles of incorporation, etc. |
| Giving Options | Limited to the sponsoring organization’s platform of 501(c)(3) charities | Flexible |
| Investment Control | Limited to sponsoring organization’s platform of offerings | Maintains full control over investment strategy, allocations, and manager selection |
| Investment Control | Can recommend grants and investments, but the sponsor has legal authority | Maintains full control over grant decisions and investments |
| Administrative Responsibilities | Maintains full control over grant decisions and investments | Board meetings, maintain minutes, hire staff (optional), maintain records, select charities, administer grants, file tax returns |
| Tax Deduction Limits – Cash Gifts | 60% of adjusted gross income (AGI) | 30% of AGI |
Securing Guidance and Support in the Decision
Choosing the right philanthropic vehicle is as important as the cause you donate to, and the decision should be made with a dedicated wealth advisor who is aligned with your vision. It depends on several factors, including your charitable goals, financial situation, desired level of control, and available resources.
At Caprock, we have extensive experience in helping high-net-worth individuals and families navigate the charitable decision tree. We are extremely thoughtful and have a tried-and-true process for selecting the charitable vehicle that aligns with your philanthropic objectives.
Contact Caprock. We can support your charitable giving goals.
The Caprock Group, LLC (“Caprock”) is an SEC Registered Investment Advisor. This communication is not an offer or solicitation with respect to the purchase or sale of any security and is for informational purposes only. Information contained herein has been derived from sources believed to be reliable, but Caprock makes no representations as to its accuracy or completeness. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. Registration with the SEC does not imply a certain level of skill or training. Caprock, its Employees, Affiliates and Advisers are not tax or legal professionals and do not provide such advice. Therefore, the discussions contained herein are for informational purposes only and should not be construed as a recommendation or endorsement of a strategy. Please consult with your tax or legal professional for further guidance and information.
