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Trust Law/Level V · Tax and legacy/5.3 Generations and charity/Lesson 7

Foundations, donor-advised funds and trusts compared

How US private foundations, donor-advised funds and charitable trusts differ in control, rules, cost and privacy, compared side by side.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Giving directly to public charities is cheapest: itemizers deduct cash up to 60% of AGI, though from 2026 only giving above 0.5% of the contribution base counts (IRC §170(b)(1)(I)); non-itemizers may deduct $1,000 ($2,000 joint) of cash, but not gifts to donor-advised funds.
  2. A donor-advised fund keeps public-charity limits, no payout rule and no public donor list; appreciated stock held over a year is deducted at market value up to 30% of AGI with no capital gains tax, but the sponsor takes legal control and charges fees.
  3. From age 70½, a qualified charitable distribution of up to $111,000 in 2026 goes from an IRA straight to a public charity and stays out of gross income, even for non-itemizers; donor-advised funds and supporting organizations cannot receive QCDs (IRC §408(d)(8)).
  4. A private foundation gives the most control at the highest cost: 1.39% excise on net investment income, a 5% minimum payout, self-dealing rules and a public Form 990-PF naming donors; cash gifts are deductible up to 30% of AGI, capital gain property 20%.

MaterialsA published Form 990-PF for any private foundation, which is open to public inspectionThe IRS pages on private foundations and on donor-advised fundsLessons 5.3.4-5.3.6, on charitable trusts, CRTs and CLTs

Wonder

  1. What is the difference between advising on grants and having legal control over them?
  2. Why must a private foundation pay out a minimum each year when a donor-advised fund has no federal payout rule?
  3. Which of these vehicles makes a donor’s name public?

Explore

  1. A US private foundation is a charity, set up as a nonprofit corporation or a trust, usually funded by one person, family or company. Its own board or trustees control its investments and grants. It pays an excise tax of 1.39% on its net investment income (IRC §4940). Under IRC §4942 it must generally pay out each year at least its minimum investment return, 5% of the value of assets not used directly for charitable purposes, by the end of the following year, or face a 30% tax on the shortfall.
  2. Private foundations also face strict conduct rules. Self-dealing between the foundation and ‘disqualified persons’, such as substantial donors, managers and their families, is taxed (IRC §4941), with further rules on excess business holdings, jeopardizing investments and taxable expenditures (§§4943-4945); §4946 defines disqualified persons. A board made up only of family members is allowed. Each year the foundation files Form 990-PF, which is public, and unlike most charities it cannot withhold the names of its contributors.
  3. A donor-advised fund (DAF) is an account, identified with a donor, held by a sponsoring public charity (IRC §4966). The IRS explains that once a donor contributes, the sponsor has legal control; the donor keeps only advisory privileges over grants and investments. The sponsor handles administration and reporting, and sponsors charge their own fees, which vary. Federal law sets no minimum annual payout for DAFs, but taxes apply to certain distributions (§4966) and to benefits returned to donors or advisers (§4967).
  4. A charitable trust can itself be the legal form of a private foundation, or it can be a split-interest trust such as a charitable remainder trust (lesson 5.3.5) or charitable lead trust (lesson 5.3.6), which mix charitable and family interests. The trustee controls it within the terms of the trust document, which are hard to change later. Split-interest trusts file Form 5227 and are subject to some private foundation rules, including the self-dealing rule (IRC §4947(a)(2)).
  5. Tax deductions differ. Gifts to a public charity, including a DAF sponsor, generally have higher income-tax deduction limits than gifts to a private foundation, and some gifts of property to a private foundation are deducted at cost rather than market value (IRC §170; IRS Publication 526). Privacy differs too: a private foundation’s donors are public, a DAF sponsor generally does not publish its donors’ names, and charitable trusts follow their own filing rules.
  6. In short, a private foundation offers the most control with the most rules and public reporting; a DAF offers convenience with less control; a charitable trust offers control fixed by its terms. Costs depend on the size of the gift, the advisers and, for DAFs, the sponsor’s fee schedule, so no general figure is given here. This lesson compares how the vehicles work under US federal law; it does not suggest which, if any, to use.

Key facts

  • US private foundations pay a 1.39% excise tax on net investment income (IRC §4940).
  • Under IRC §4942, a private foundation must generally pay out at least 5% of its non-charitable-use assets each year or face a 30% tax on the shortfall.
  • Self-dealing between a private foundation and its disqualified persons is taxed under IRC §4941.
  • In a donor-advised fund, the sponsoring charity has legal control and the donor has only advisory privileges (IRC §4966).
  • Federal law sets no minimum annual payout for donor-advised funds.
  • A private foundation’s Form 990-PF is public and, unlike most charities, it cannot withhold its contributors’ names.

Exercise nine, six, three, one

9CollectList up to 9 features you would compare across charitable vehicles (some people will list fewer), such as who controls grants, payout rules, excise taxes, deduction limits, public reporting, start-up work, ongoing fees and how long the vehicle lasts.
6ClusterSort them into 6 categories: control, payout rules, taxes, deductions, privacy, and cost and administration.
3DistillReduce the 6 categories to 3 groups: features where private foundations differ most, features where donor-advised funds differ most, and features where charitable trusts differ most.
1CrystallizeWrite 1 sentence explaining, in your own words, the difference in legal control between a private foundation’s board and a donor-advised fund’s sponsor.

Fact check

Dates, figures and claims checked against the published sources listed below.

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