Private Foundations vs. Donor-Advised Funds: Which Structure Fits Your CPA Legacy?

Private Foundations: Your Own Family Charity

A private foundation is essentially a charitable organization that you create and control. Think of it as starting your own nonprofit: you (and possibly family members) serve as the funders, the investment committee, and the grant approval board. Classic examples include family foundations started by well-known philanthropists, but you don’t have to be a household name to set one up. In practice, many private foundations are relatively small and family-run – as a CPA, you might establish one to support, say, financial literacy programs or local community causes that matter to you.

You establish a corporation or trust, apply to the IRS for 501(c)(3) tax-exempt status, and fund the foundation with assets (cash, stocks, maybe even shares of your practice sale). The foundation’s assets can be invested and grow tax-free. Each year, the foundation must distribute about 5% of its assets for charitable purposes (grants or operating charitable programs) to comply with IRS rules – a requirement meant to ensure foundations actively benefit the public.

 You’ll also pay a small excise tax (~1.39%) on the foundation’s investment income each year. As the founder, you have full control: you decide which qualified charities to support, or even run your own charitable initiatives through the foundation. You also retain control over investments (within prudent management guidelines). This level of control means significant responsibility, as in annual tax filings (Form 990-PF), bookkeeping, adhering to regulations on self-dealing and permissible grants, and possibly managing staff or hiring advisors for help. 

In short, a private foundation is like running a small charitable business. It offers freedom with formality: you can carry out almost any charitable activity you envision, but you’ll be running an organization with all the compliance that entails.

Why would a CPA practice owner choose a foundation? 

One word: legacy. A foundation can be a vehicle to involve family in philanthropy and carry your values forward long after you’ve retired (or even after your lifetime). You can name the foundation after your family or practice, creating a lasting presence in the charitable world. Family members can sit on the board or even draw reasonable salaries for managing the foundation’s operations, which is a way to engage the next generation in purposeful work. Foundations also allow grants to a wider range of targets than donor-advised funds – not only can they give to public charities, they can (with some oversight) fund scholarships or individuals in need, make international grants, or even run their own charitable programs. If you have a very specific mission in mind (for example, creating a scholarship fund for aspiring accountants from underrepresented groups, or operating a local financial education workshop), a foundation provides the flexibility to do that.

Donor-Advised Funds: Simplicity and Flexibility in Giving

If the private foundation sounds like a lot of work, that’s because it is. Donor-advised funds (DAFs) were created as a sort of “foundation-lite” alternative, giving you some of the key benefits with far less hassle. A donor-advised fund is not a separate legal entity you own, but rather an account held under the umbrella of a public charity (typically a sponsoring organization like a community foundation or a financial institution’s charitable arm). You, as the donor, irrevocably contribute assets to that charity, and those assets go into your donor-advised fund account (often you can choose a name for your fund, like “The Smith Family Charitable Fund”). From that point on, the sponsor charity legally owns the assets, but you retain the right to advise how the money is invested and distributed to other charities over time.

In practice, a DAF works a lot like a charitable investment account: you donate, you get an immediate tax deduction, and then the funds can be granted out to charities at your recommendation on your own timetable. For busy retiring CPAs, the immediate appeal is simplicity. Setting up a DAF is usually as quick as filling out a form online or with a sponsoring foundation, with no lawyers or IRS applications needed. 

There’s typically no startup cost or a very modest initial contribution requirement (many national DAF sponsors have minimums like $5,000 or $25,000 to open an account, which is a far cry from the seven-figure sums often used to justify a foundation). All the administrative heavy lifting – tax filings, accounting, compliance – is handled by the sponsoring organization. You won’t be worrying about filing a Form 990 for your DAF; you just get periodic statements of your fund’s balance and grant activity.

As for control, you get to recommend grants from your DAF to any qualified 501(c)(3) public charity. Want to donate $10,000 to your alma mater’s scholarship fund this year and $5,000 to a local animal shelter next year? Just advise the sponsor and they will issue the grants in your fund’s name (or anonymously, if you prefer). You can also typically advise how the fund is invested from a menu of options (e.g. various investment portfolios or allocations the sponsor offers). Some sponsors even let you or your financial advisor actively manage the investments in the DAF account (particularly for larger accounts), though within guidelines. 

The key difference is that with a DAF, your input is advisory. Legally, the sponsor has final say. In reality, sponsors almost always approve legitimate grant recommendations that comply with IRS rules (it’s in their interest to facilitate giving). But you can’t, for example, force a grant that doesn’t meet the criteria (no grants to individuals or non-charities, for instance, and you can’t use DAF funds to satisfy a personal pledge or buy tickets to a charity gala that you’ll attend – those are prohibited benefits).