Seven Reasons for Establishing Complementary DAFs to Private Foundations 

Donor-advised funds (DAFs) attract people looking to establish a charitable legacy. And now, there are more DAFs than private foundations (PFs), and they’re growing at a faster rate. 

According to the National Philanthropic Trust’s 2024 DAF Report, there were about 100,000 PFs and 1,782,281 DAFs in the U.S. in 2023. This is up from 90,000 PFs and 873,228 DAFs in 2019, per the 2020 DAF Report.  

While many donors are working to convert their private foundations into DAFs, others have decided to retain their PFs for a variety of reasons. However, it’s not an “all or nothing” choice. 

Here are seven key reasons to establish complementary DAFs alongside PFs: 

  1. To Enjoy Greater Tax Benefits 
  2. To Establish a Fund for Simpler and Easier Granting 
  3. To Grant Outside a Foundation’s Stated Mission 
  4. To Grant Anonymously 
  5. To Have More Flexibility in Granting 
  6. To Engage Younger Family Members 
  7. To Gain Experience With a DAF Before Converting a PF

Reasons Donors Might Want to Keep PFs (Even When Considering DAFs)  

There are many personal reasons donors might prefer to keep their PFs, even if they’re considering establishing a DAF. 

These might include: 

  • Wanting to continue funding charities through the same channel to maintain continuity. 
  • Running scholarships or charitable programs through their PF. 
  • Employing family and other staff to run the PF. 
  • Preferring to have total control over their investments and grants, especially related to the PF’s stated mission.

Some of these might only be possible by retaining an existing PF. However, many DAF sponsors allow their donors’ financial advisors to manage the assets in the DAF’s investment account, and DAFs often help donors achieve their charitable goals. 

Reasons to Establish Complementary DAFs

Philanthropically minded individuals often seek out many ways to give. Donors who have established PFs may find that a complementary DAF can open up more opportunities to expand philanthropy. There are several key reasons donors typically choose to do so. 

1. To Enjoy Greater Tax Benefits 

Donors can receive greater tax benefits by donating certain assets to a DAF instead of a PF. For instance, if a donor sells their business (or similarly complex asset) and donates privately-held stock to their PF, they typically only receive a tax deduction for the cost basis. However, if the donor opens a DAF and donates the stock to it, the tax deduction will usually be based on the fair market value.* 

Furthermore, DAFs typically allow for higher tax deduction limits on donations, depending on the donor’s specific situation. PF donors who hit the deduction limits on donating to their PF can instead donate additional amounts to complementary DAFs. These tax savings help a donor make a greater impact on causes that are important to them. 

2. To Establish a Fund for Simpler and Easier Granting 

PFs are often complex to run and manage, which can lead to frustration for donors. Furthermore, there are a greater number of IRS regulations for PFs that can impede the ability to grant. 

Establishing a complementary DAF can make the granting process easier, as donors can suggest grants to the DAF sponsor who will vet charities and ensure regulatory compliance, relieving donors of that burden. 

3. To Grant Outside a Foundation’s Stated Mission

PFs are often established with a specific mission in mind. While this mission is undoubtedly important to the donor who set up the PF, their philanthropic goals may shift or expand over time. Additionally, donors may involve family members in their charitable giving who have a more diverse range of interests that are outside the PF’s mission. 

Setting up a complementary DAF can allow for grants to charities that differ from the PF’s focus, while letting family members and trustees be involved in granting to causes that are ethically or geographically meaningful to them. 

4. To Grant Anonymously 

All grants from PFs are available for public review. On the other hand, grants from DAFs can be anonymous. While the vast majority prefer to grant publicly, some donors decide to donate anonymously for reasons related to privacy, reputation, and security. 

A complementary DAF can allow donors to keep certain grants private. They may have financial or professional reasons to prefer anonymity, or they may want to make grants outside their PF’s mission without being publicly linked to a cause. 

5. To Have More Flexibility in Granting 

PFs have a 5% mandatory annual distribution requirement. DAFs are not required by law to grant on a schedule, although DAF sponsors may enforce a policy specifying how often accounts need to grant out. Most donors suggest grants from DAFs regularly anyway, but there is often more flexibility. 

Also, PFs can currently grant out to complementary DAFs to fulfill their legal requirements. However, there have been legislative challenges to this practice over the years. Even aside from this, the fact that there are fewer regulatory requirements for DAFs makes them more flexible philanthropic vehicles. 

6. To Engage Younger Family Members 

Many families have established and funded DAFs for their children so they can gain grant-making experience before joining the board of the PF. Parents are able to observe and then determine if and when the children are ready for the board. 

Giving through PFs can be a challenge. Complementary DAFs can help the next generation understand the philanthropic process before dealing with the complexities of running a PF. 

7. To Gain Experience With a DAF Before Converting a PF 

PF founders may be encouraged by their financial advisors or family members to convert their PF to a DAF. They may also simply be swayed by the relative ease of granting through a DAF or exhausted by the stress of operating a PF. 

A complementary DAF can help these donors decide if they’re comfortable with going through with the conversion process long before closing the PF. 

Looking to Open a Complementary DAF? AEF Can Help.  

For these reasons and more, some donors use both PFs and DAFs to achieve their charitable goals. Some may end up choosing one or the other as their primary charitable vehicle, while others may decide that having both helps them make the greatest difference.  

When comparing DAFs and private foundations, it’s crucial to remember that there is no wrong way to give. If you’d like to discuss the possibility of opening a complementary DAF, American Endowment Foundation (AEF) is ready to talk. Contact us now to discuss how a DAF can help you meet your philanthropic goals. 

* The information provided herein is for informational purposes only and should not be interpreted to constitute legal and/or tax advice. Donors should consult their legal and tax advisors regarding their specific situations.  

NOTE: An earlier version of this article appeared at WealthManagement.com.