A donor-advised fund and a private foundation both let you commit money to charity now and decide where it goes later, and the real difference between them is who runs the thing. A private foundation is a legal entity you create, govern and file returns for. A donor-advised fund is an account held inside a charity that somebody else operates, where you recommend the grants.
What a donor-advised fund is
A donor-advised fund is an account held by a sponsoring public charity. You contribute cash or assets, the sponsor takes legal ownership, and you keep advisory privileges: you recommend which qualified charities receive grants, and usually you choose from a menu of investment options for the balance. Your deduction lands in the year you contribute, not in the year the money reaches a nonprofit.
The word advised is doing real work in that sentence. A recommendation is a recommendation. The sponsor can decline one, sponsors very rarely do, and the legal control is theirs either way. The contribution is also irrevocable, so money that goes in is committed to charity even if you never name a recipient. Sponsors include the charitable arms of large investment firms, a number of community foundations, and some single-issue charities. Each charges an administrative fee against the account.
What a private foundation is
A private foundation is its own 501(c)(3) organization, typically funded by one person, one family or one company, with a board, a bank account and a name over the door. You appoint the directors. You decide the grants. You can support individuals through a scholarship program approved in advance by the IRS, fund work overseas, set your own investment policy, and pay staff, family members included, within limits.
The control arrives attached to machinery. The entity has to be formed and recognized as exempt. It files a Form 990-PF every year. It pays an excise tax on its net investment income. It operates under self-dealing rules that restrict transactions between the foundation and the people who funded it. Most families that run one keep an attorney and an accountant on the job permanently.
Where the two actually differ
| Donor-advised fund | Private foundation | |
|---|---|---|
| Legal form | An account inside another charity | Its own legal entity |
| Who decides grants | You recommend, the sponsor approves | Your board decides |
| Setting it up | Days, on paperwork | Weeks to months, with legal fees |
| Running it | The sponsor’s administrative fee | Annual filing, excise tax, professional fees |
| Public record | Grants are not published against your name | Form 990-PF is public and lists grants |
| Required payout | None on the individual account | Roughly 5% of investment assets each year |
| Deduction ceilings | The higher public-charity limits | Lower limits |
| Appreciated stock | Generally deductible at fair market value | More restrictive for many assets |
| Grants to individuals | Not permitted | Permitted through an approved program |
Control
This is the trade, and everything else follows from it. A private foundation gives you the last word on investments, recipients, timing and succession. A donor-advised fund gives you a recommendation and an administrative shortcut. If you want to fund an unusual recipient, run your own program, or hold a concentrated position on purpose, an account will frustrate you. If you mainly want to support established nonprofits without holding a board meeting to do it, an entity will bore you and bill you for the privilege.
Cost and administration
An account costs a percentage of assets and an afternoon of paperwork. An entity costs formation, an annual return, an excise tax on investment income and, in nearly every case, professional help to stay compliant. Those entity costs are largely fixed, which is why they matter so much at the small end: below a certain size they swallow the advantage whole. Advisers generally steer smaller commitments toward an account and larger, more complicated ones toward an entity for exactly that reason.
Privacy
A private foundation’s Form 990-PF is a public document. Anyone can look up what it holds, who runs it, and what it gave away and to whom. A donor-advised fund works the other way around: the sponsor files its own return, and a grant can go out without your name attached to it. If you would rather your giving not be searchable by name, that difference outweighs most of the tax arithmetic.
The payout requirement
IRS rules require a private foundation to make qualifying distributions of roughly 5% of its investment assets each year. It is a floor on activity and a discipline on the board. An individual donor-advised fund account carries no equivalent legal requirement, which is the criticism the structure attracts most often: contributed money can sit for years while the deduction has already been taken.
The deduction
Gifts to a public charity, including a donor-advised fund sponsor, are deductible up to higher percentage-of-income ceilings than gifts to a private foundation, and appreciated publicly traded stock given to a public charity is generally deductible at fair market value. Gifts of many appreciated assets to a private foundation are treated less generously. Those ceilings, and the rules for carrying an unused deduction forward, get revised by Congress more often than most donors realize. Confirm the current figures with your own tax advisor rather than from any article, this one included.
The third option, which most people should look at first
Neither structure is the default. For most donors most of the time the direct gift is still the right answer: the money reaches the organization now, it can be spent now, and there is nothing to administer afterward. A food program that is short in March gets no benefit from your deduction being efficient in December.
Structures earn their keep in particular circumstances rather than as a general upgrade. A year with an unusual amount of income. A business sale. A block of stock carrying a large embedded gain. A family that wants to make the decisions together, over years, instead of alone, at year end. Outside those cases, giving directly is faster, simpler, and worth more to the recipient. Gifts of appreciated shares are worth understanding whichever route you take, and donating stock to charity has its own guide here.
Which one fits
- You want to give now and be finished: give directly.
- You have a high-income year and no settled plan for where the money should go: an account holds it while you work that out.
- You want your giving to stay off the public record: an account gives you that, an entity does not.
- You want to make grants to individuals, run your own program, or hold unusual assets: only the entity allows it.
- You want your family making decisions together for decades: either works. An entity gives them formal roles; an account gives them far less to administer.
- Your commitment is modest: the entity’s fixed costs will eat it, so do not start one.
A named fund at the Miami County Community Foundation
There is a third structure that this comparison usually skips: a named fund at a community foundation. The Miami County Community Foundation is a 501(c)(3) community foundation, established in 2007 and serving Miami County, Kansas, with a volunteer board and Tammy Booe as executive director. It holds and manages charitable funds for the people who set them up, and its funds are held care of First Option Bank. A fund it holds sits inside the Foundation’s own 501(c)(3), so there is no separate entity to form and no separate annual return to file.
What the Foundation publishes about those funds is specific. There are two categories. Endowed funds start at $10,000, stay permanently invested, and cannot fall below the amount put in; under a 5% spending policy, roughly $500 of a $10,000 fund is available to spend. Expendable funds start at $1,000 and can be spent to zero, at which point the fund closes. Total fees come to 2%, split between a 1% administrative fee and a 1% community support fee, the latter paying for the Foundation’s own operations. Set-up runs seven to ten business days. The people behind these funds are individuals, families, businesses and churches.
What sits in them is concrete. D.O. Smith pays $3,000 to a permanent Miami County resident holding a CNA certification, or accepted into a nursing program. Steve Pepoon pays $1,000 to a Paola High School senior going into writing, film, television or theater. Three grant programs run alongside the scholarships: Shifting Gears, Stomp Out Suicide, and the Avelyn SonShine Journey, which gives away children’s bibles rather than money. Almost every scholarship is applied for through the student’s own high-school counselor, not through the Foundation.
Which fund structures are available for a particular purpose is a question to put to the Foundation directly rather than to infer from a comparison table. Ask what it can accept, what it can do with it, and on what terms.
Deciding
Start from what you want to happen and how soon, not from the vehicle. If the answer is to support these organizations this year, give directly; the ways to give page lists the routes, including a check made payable to the Miami County Community Foundation with the fund name written in the memo line. If the answer involves a sale, an estate or a ten-year horizon, read the guide to planned giving next. If you want to see what a permanent named fund looks like once it is finished, the funds the Foundation already holds are all public. Questions go to (913) 404-7287, to info@micocf.org, or through the contact page.
