Private Foundations & Charitable Strategy

DAF vs. Private Foundation: The Real Tradeoff

A donor-advised fund (DAF) is a charitable account held by a sponsoring public charity. You contribute, take the deduction, and recommend grants over time. Setup is hours, not months. Annual fees are small. There's no 990-PF, no 5% payout rule, and no excise tax on net investment income.

A private foundation is a 501(c)(3) you control. More setup cost, ongoing compliance, an annual 1.39% excise tax on net investment income, and a 5%-of-assets annual minimum distribution. In exchange you get total control: who gets grants, who serves on the board, what programs you run, and ability to pay family members reasonable compensation.

Rough breakpoints

• Under ~$250K of charitable assets: DAF almost always wins on simplicity.
• $250K–$2M: depends on whether you value control or simplicity.
• $2M+: private foundation often justifies the overhead if family involvement matters.

Setting Up a Family Foundation

Structural steps

1. Form a nonprofit corporation (or trust) in your state of choice.
2. Adopt bylaws designating directors/trustees and successor protocols.
3. File IRS Form 1023 (long form) or 1023-EZ — long form is required for most family foundations.
4. Apply for EIN and open foundation bank/brokerage accounts.
5. Adopt conflict-of-interest, grant-making, and investment policies.

Tax mechanics

• Deduction is limited to 30% of AGI (cash) and 20% (long-term appreciated assets).
• Five-year carry-forward of excess deductions.
• 1.39% net investment income excise tax annually.
• 5% minimum annual qualifying distribution (granted to charity, certain admin costs count).

Self-Dealing and Operating-Foundation Mechanics

Self-dealing — the most-feared rule

Section 4941 prohibits nearly all transactions between a private foundation and "disqualified persons" (founders, family, related entities). Penalties start at 10% of the transaction and can spiral. This includes things you wouldn't expect — leasing space from a family-owned LLC, even at fair value, is self-dealing.

Reasonable compensation for family

Family members can be paid for genuine, documented services to the foundation (executive director, program officer). "Reasonable" requires comparable-compensation studies and documented board approval. This is one of the few legitimate ways to recycle a portion of foundation outflow through the family.

Operating vs. non-operating foundations

An operating foundation runs its own charitable programs (a museum, a research institute) and enjoys public-charity-like deduction limits. A non-operating foundation primarily makes grants and faces the 30%/20% deduction limits.