KVIG Informative

Wealthy donors have two main ways to give through a charitable structure of their own: a private foundation or a donor-advised fund. The rules differ sharply, and so does the debate over each.

The Private Foundation A private foundation is an independent 501(c)(3), typically funded by one family or company, and it carries extra rules that public charities do not. Since the tax year after Dec. 20, 2019, the IRS applies a flat 1.39 percent excise tax to a foundation’s net investment income. Foundations must distribute roughly 5 percent of their assets each year, and a shortfall draws a 30 percent tax on the undistributed amount. Self-dealing, such as lending money to or selling property to the people who run the foundation, is prohibited and taxed. The donor information a private foundation files is public, according to CRS.

The Donor-Advised Fund A donor-advised fund, or DAF, works differently. A donor makes an irrevocable, tax-deductible contribution to a charitable sponsor, such as a community foundation or a national charity, and then recommends grants from the account over time. The sponsor holds legal control, though a 2012 CRS report concluded that donors have effective control over grantmaking in practice. The reports cited in this piece describe no federal minimum annual payout for DAFs comparable to the foundation rule.

What the Numbers Show The Annual DAF Report 2025, produced by the Donor Advised Fund Research Collaborative, found DAF assets reached $326 billion in 2024, up from $250 billion the year before. Donors contributed $89.6 billion to DAFs that year, and DAFs granted $64.9 billion to charities. By the report’s measure, DAFs paid out 25.3 percent of their assets in 2024, compared with 8 percent for private foundations, which gave $118.5 billion. The report calculates payout as grants in a year divided by assets at the end of the prior year.

The Critics’ Case Critics argue that averages can hide the pattern that matters. In its 2011 report to Congress, the Treasury Department cautioned that aggregate DAF payout rates may mask low payout, or none, from a subset of individual funds. CRS illustrated the same point: a sponsor can show a 16 percent payout rate if only 20 percent of its accounts, by asset value, distribute an average of 80 percent of their funds each year while the rest distribute nothing. Some commentators add that a private foundation can count a transfer to a DAF toward its 5 percent requirement. Danielle Vance-McMullen, a co-founder of the research collaborative, has noted that national totals are shaped by the largest funds and largest donors, and that most DAFs are modest in size.

The Defenders’ Case The same Treasury report concluded it would be premature to recommend a distribution requirement, noting that DAF sponsors paid out an average of 9.3 percent of assets in 2006 while private foundations paid just over 5 percent. National Philanthropic Trust, which sponsors DAFs and publishes an annual report on them, says the DAF payout rate has been at or above 20 percent in every year on record. Supporters also point out that contributions are irrevocable and must go to qualified charities, so the money cannot return to the donor.

Where the Loophole Label Comes From Critics use the word loophole for the gap between when a donor takes the deduction, at the time of the gift, and when a working charity receives the money, which can be years later. Defenders respond that the same gap exists for any endowment at a public charity, and that DAF grantmaking has remained steady even in years when contributions fell. Both sides are describing the same rules. They disagree about whether timing alone justifies a mandatory payout.

For readers following a large gift, the useful questions are which vehicle the donor chose, what payout rule applies to it, and what the filings show about where the money went. The answers differ more by structure than by the size of the donor.