Richard English, J.D., Managing Director, Commerce Family Office, Kansas City
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Key Takeaways
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For many high-net-worth families, charitable giving is not only about supporting important causes now, but also about creating a lasting legacy and fostering charitable values in the next generation. Donor-advised funds (DAF) and private foundations are among the most widely used vehicles for sustained and significant charitable giving for high-net-worth families. While both structures offer distinct advantages that may help you achieve your philanthropic goals, DAFs and private foundations differ in structure, administrative complexity, and day-to-day operation.
What is a donor-advised fund?
A DAF can be viewed as a charitable savings account. A donor funds the account, and their contribution is eligible for a charitable deduction in the year the contribution is made to the DAF. Assets in the DAF can be invested for tax-free growth before the DAF-sponsoring organization distributes funds to qualified charities.
After establishing an account at a DAF-sponsoring organization, donors contribute assets such as cash or publicly traded securities. Some DAF-sponsoring organizations may be able to receive more complex assets such as closely held business interests or real estate, depending on their gift acceptance policies. Once a donation is made, the DAF-sponsoring organization typically sells any holdings to convert the assets to cash. The DAF-sponsoring organization can hold the proceeds in cash or invest them according to the allocation you select from the available investment options.
Donors make recommendations regarding how and when the funds are granted to the charities of their choice, and while the sponsoring organization must approve the recommendation, it will generally follow the donor’s recommendations provided the requests comply with IRS rules and the organization’s policies. When you recommend a grant, the receiving charity ultimately receives cash from the DAF, though the distribution may be delayed if more time is needed to sell illiquid assets. Donations are irrevocable once made, so it is important to be comfortable with the fact that you, as the original donor, cannot reclaim assets you contributed.
Establishing a donor-advised fund
If you are considering establishing a DAF, it can be beneficial to work with experienced financial professionals who can make the process more streamlined and efficient. At Commerce Trust, we partner with community-based DAF sponsors to guide you through establishing an account and provide ongoing management of the fund’s investments.
Recently, DAFs have grown in popularity among both individuals and businesses. Both individual donors and businesses can establish a DAF with relative ease while maintaining anonymity and tax efficiency. Corporations can use DAFs to make charitable gifts and receive an immediate tax deduction. If you are a business owner, a DAF can be a practical way to manage corporate charitable giving in a cost-effective and tax-efficient manner.
What is a private foundation?
A private foundation is a charitable organization that is typically funded by a single major source, such as a family, individual, or corporation. Private foundations may be structured as a charitable trust or as a nonprofit corporation.
Forming a private foundation requires the help of a qualified attorney and certified public accountant (CPA) to draft the foundation’s legal documents and ensure tax and legal compliance. Grantmaking decisions are made at the discretion of the board of directors (for a nonprofit corporation) or the trustees (for a trust-based foundation) and generally must comply with the terms of the foundation’s governing documents. Grants are usually made to public charities, but grants can also be made to individuals, other private foundations, or government entities, provided certain requirements are met.
There are two different types of foundations, non-operating foundations and operating foundations. Non-operating foundations focus on making grants to support the charitable work of receiving organizations. In contrast, operating foundations operate their own charitable programs, such as museums, research centers, and educational institutes, and are subject to more specific IRS rules to qualify for and maintain operating foundation status. For our purposes, we will focus on non-operating foundations as they represent the majority of private foundations established for family or individual giving.
Non-operating private foundations can be structured as nonprofit corporations or charitable trusts
When forming a private foundation, whether to structure the organization as a nonprofit corporation or charitable trust is one of the key initial decisions you must make. These structures differ in both setup and governance.
A nonprofit corporation is established by filing articles of incorporation with the Secretary of State’s office in the state of formation, with bylaws governing how the entity operates. A board of directors provides oversight and appoints the organization’s officers, who handle the foundation’s day-to-day operations. By contrast, a charitable trust is governed by a trust document, with the trustee(s) responsible for duties similar to those of both directors and officers in a nonprofit corporation. The responsibilities of the trustee(s) include carrying out the terms of the trust, obtaining tax-exempt status, receiving and investing assets appropriately, and managing the foundation’s ongoing operations.
Because the board of a nonprofit corporation can typically amend bylaws and redefine the foundation’s charitable purpose, this structure may offer greater flexibility. Conversely, an irrevocable trust may provide stronger protection for the creator of the foundation’s intent when the trust document includes strict guidelines and narrowly defined purposes, as these terms are generally more difficult to change.
Key differences between DAFs and private foundations
While both DAFs and private foundations offer ways to support charitable organizations, each differs in structure and governance, tax treatment and potential tax benefits, succession planning, and ongoing administration. For example, private foundations must file an annual tax return and comply with a minimum annual distribution requirement of approximately 5% of their net investment assets, while DAFs do not. Deductibility limits also vary, with DAFs generally allowing higher income tax deductions than private foundations. Note that the timing of your deduction is based on the date you contribute to a DAF or a private foundation, and it applies to that tax year. Another important difference is that private foundations offer the ability to employ people or compensate family members for services, a feature not available with a DAF.
Both DAFs and private foundations are subject to rules against self-dealing, with especially strict penalties for private foundations. In general terms, self-dealing can occur whenever a grant or other transaction provides a benefit to the donor or certain related parties. Consider seeking professional legal guidance if you think self-dealing could be a concern.
Keep in mind, funding a DAF and establishing a private foundation are not mutually exclusive. Many high-net-worth families choose to use both vehicles to meet their philanthropic, tax, and estate planning goals. Some families maintain a private foundation founded by older members of the family, while each family member has his or her own DAF. This approach allows the family’s legacy to continue through the foundation while also giving individual family members the freedom to pursue their own philanthropic interests. Using both structures can provide greater flexibility to create opportunities for engaging the next generation in charitable decision-making.
The differences between DAFs and private foundations come with distinct benefits and considerations. The following table compares key differences and similarities between the two.
Comparing the key characteristics of donor-advised funds and private foundations
Support your charitable goals with specialized guidance
Whether you decide to use a DAF, a private foundation, or a combination of both, working with an experienced team of private wealth management professionals can help ensure your giving to philanthropic beneficiaries aligns with your broader wealth objectives. With the right guidance, you can integrate charitable giving into your wealth management strategy while pursuing tax benefits, engaging the next generation in the process of decision-making and giving, and preserving a family legacy of generosity.
At Commerce Trust, your private wealth management team is comprised of dedicated specialists in estate planning and philanthropy, investment strategy, tax management* and trust administration, who are available to consult about the right charitable giving strategies for you and your family. We offer personalized support to help you evaluate and implement charitable giving strategies that reflect your family values and goals. Our team can manage the investments of your DAF or private foundation, serve as a trustee if your private foundation is structured as a trust, and provide administrative support to assist with ongoing tax reporting, movement of funds, and grant distributions.
Contact Commerce Trust today to learn more about how we can support your charitable giving in alignment with your unique objectives and circumstances.
1 The phrase “foundation managers” refers to the people running the foundation, such as the officers and board of directors in the case of a private foundation set up as a nonprofit corporation or the trustee(s) in the case of a charitable trust.
*Commerce does not provide tax advice to customers unless engaged to do so.
The opinions and other information in the commentary are provided as of September 8, 2025. This summary is intended to provide general information only and may be of value to the reader and audience.
Past performance is no guarantee of future results. Diversification does not guarantee a profit or protect against all risk.
This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.
Commerce Trust does not provide legal advice to its customers. Consult an attorney for legal advice, including drafting and execution of estate planning documents.
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