Donors can establish a DAF immediately at a low cost; charitable sponsors require the donors to complete an application and make an initial contribution. Minimum contributions for DAFs can begin around $5,000, although many start at $25,000. This stands in stark contrast to private foundations, which can take months to establish and require significant time and financial investment, due largely to legal fees.
Once established, DAF charitable sponsors handle all administrative work, including managing investments, recordkeeping, tax receipting and grant administration. This allows the donor to focus on their charitable goals. A private foundation, by contrast, must hire staff or ask outside advisors to manage the varied administrative work and tax matters for the foundation. They must also form a board, hold board meetings and record minutes, file state and federal tax returns, and perform other governance duties, sometimes at great expense.
Donor control is one of the key differentiators between DAFs and other giving vehicles. When donors make contributions to their DAFs, they are gifting those assets irrevocably to a public charity. Once accepted, the sponsoring charity owns them in their entirety.
The term donor-advised fund is reflective of this relationship: donors have only advisory privileges to grant the assets in their DAF, and the charitable sponsor has the authority to approve or deny those recommendations. Private foundations do not have this kind of restriction, allowing donors to control grants to qualified charities.
Like most other charitable giving vehicles, there are restrictions on which organizations qualify as eligible recipients for DAF grants. For example:
- Donors cannot recommend that charitable grants be made to individuals.
- Donors cannot receive any goods or services in exchange for their grant, like a ticket to a gala.
- Donors cannot recommend that grants pay tuition to private schools or colleges.
- Similar rules apply for private foundations.
One of the most attractive benefits of DAFs is the fact that do not face restrictions on when their assets must be distributed. In general, DAFs have a payout rate that is consistently above 15%. Private foundations hover around 5%, which is the legal payout federal mandate.
Many DAF charitable sponsors have suggested minimum payouts. National Philanthropic Trust’s policy is that donors must actively make grants at least once every three years.
DAFs are the only charitable giving vehicle that allows donors to make grants 100% anonymously. When charitable sponsors administer grants on behalf of their donors, the charity is legally distributing its own assets, which means donors can choose to remain anonymous.
Some donors choose to name their DAF after their mission (e.g. the “Fund for Early Education) instead of after themselves (e.g. the “John Doe Fund”). This allows a donor’s DAF to be recognized publicly instead of being recognized using the person’s or family’s name. Private foundations, by contrast, must file annual reports that disclose members of their board, grant recipients, and other information that prevents them from remaining anonymous.
How an individual DAF will be advised in the future is determined by the charitable sponsor’s policies on succession planning. Some allow the donors to advise for only one generation, thereby passing the control of the DAF to the sponsoring charity after the death of the original donor. Others, like National Philanthropic Trust, permit donors to appoint successors who receive the full advisory privileges on the original donor’s death, allowing the DAF to exist in perpetuity.
Similarly, most private foundations can be passed down through generations to ensure a family’s charitable giving legacy. However, some private foundations choose to pay out the entire corpus during the life of the original donor.