As we approach the end of 2025, many affluent families are taking a closer look at their charitable giving strategies. With upcoming changes to tax policy in 2026 that may limit your charitable deductions combined with the SALT cap increase to $40,000, this year presents a unique opportunity to maximize your charitable impact while optimizing tax benefits.
For pre-retirees with substantial assets, the question isn't just about giving but about giving strategically. Two primary vehicles dominate the conversation: donor advised funds (DAFs) and private family foundations (PFFs). While both offer tax advantages and the ability to support causes you care about, they serve different purposes and work best for different financial situations.
What is the difference between DAF and PFF?
Donor Advised Funds are charitable investment accounts established at public charities. You contribute assets, receive an immediate tax deduction, and then recommend grants to qualified nonprofits over time. Think of it as a charitable savings account that grows tax-free while you decide how to distribute the funds.
Private Family Foundations are independent legal entities that you create specifically for charitable purposes. They offer more control and can exist in perpetuity but come with significantly more complexity and regulatory requirements.
The Dollar Threshold: When does each make sense?
For most families in the $1-2 million net worth range, donor advised funds typically provide the most practical solution. DAFs work efficiently for charitable giving ranging from $10,000 to several million dollars annually. They're particularly attractive because there's no minimum distribution requirement and relatively low administrative costs.
Family foundations generally become more compelling when you're looking at initial funding of $1 million or more, with ongoing annual contributions of at least $100,000-$200,000. The administrative burden and costs of maintaining a foundation—typically 1-3% of assets annually—require sufficient scale to justify the investment.
However, the decision isn't purely financial. If your primary goal is operational efficiency and tax benefits, a DAF likely serves you better regardless of asset level. If you want maximum control, the ability to employ family members, and a lasting legacy structure, a foundation may be worth considering even at lower asset levels.
Control and Flexibility: Key differentiators
Donor Advised Funds offer streamlined giving with minimal administrative burden. You can contribute various asset types—cash, securities, even complex assets like private business interests in some cases. The sponsoring organization handles all administrative tasks, investment management, and compliance issues. While you can recommend grant recipients and timing, the sponsoring organization has ultimate legal control.
Family Foundations provide complete control over grant-making decisions, investment strategies, and operational structure. You set the mission, choose the board members, and determine distribution policies. This control comes with responsibility for regulatory compliance, annual tax filings, and adherence to complex rules governing self-dealing and prohibited transactions.
Employment and compensation considerations
One significant advantage of family foundations is the ability to employ family members and pay reasonable compensation for foundation work. This can be an effective way to engage children or grandchildren in philanthropy while also providing income. However, the IRS scrutinizes compensation arrangements closely, and payments must be reasonable for services actually provided.
DAFs don't allow for employment or compensation of donor families, though some sponsors offer volunteer coordination or advisory services that can engage family members in philanthropic activities.
Distribution requirements and timing
Donor Advised Funds have no mandatory distribution requirements, allowing assets to grow indefinitely until you're ready to make grants. This flexibility makes them excellent for donors who want to build their charitable assets over time or who prefer to respond to charitable opportunities as they arise.
Family Foundations must distribute at least 5% of their average net investment assets annually. This requirement ensures ongoing charitable impact but can be challenging during market downturns or when the foundation is newly established and building its asset base.
Setup complexity and timeline
Establishing a donor advised fund is remarkably simple—often completed in a single day with minimal paperwork. Most major financial institutions and community foundations offer DAF services, with minimum initial contributions typically ranging from $5,000 to $25,000.
Creating a family foundation involves significant legal and administrative work. You'll need to file for tax-exempt status, establish bylaws, create operational procedures, and set up proper governance structures. The process typically takes 6-12 months and requires ongoing legal and accounting support.
Choosing providers and administrators
For donor advised funds, consider sponsors based on:
Investment options and performance
Grant-making capabilities and geographic reach
Administrative fees (typically 0.6-2% annually)
Minimum contribution requirements
Additional services like impact measurement or family engagement programs
Major providers include Fidelity Charitable, Schwab Charitable, Vanguard Charitable, and local community foundations, such as the Greater Cincinnati Foundation.
For family foundations, you'll need:
Legal counsel experienced in tax-exempt organizations
Accounting services familiar with foundation compliance, such as annual tax filing requirements
Investment management (which can be self-directed or outsourced)
Grant-making support services (optional but often helpful)
Making your decision
The choice between a DAF and family foundation ultimately depends on your specific goals, desired level of involvement, and long-term vision for your charitable giving.
Choose a donor advised fund if you want:
Immediate tax benefits with minimal complexity
Professional investment management
Flexibility in timing and amount of distributions
Low ongoing administrative burden
The ability to test your philanthropic interests before committing to larger structures
Consider a family foundation if you prioritize:
Complete control over charitable activities
Multi-generational family engagement in philanthropy
The ability to employ family members
A lasting institutional legacy
More sophisticated grant-making strategies
Given this year's unique tax environment, many families are finding that starting with a donor advised fund allows them to capture immediate tax benefits while preserving the option to establish a foundation later as their assets and philanthropic sophistication grow.
The key is to begin. Whether through a DAF or foundation, strategic charitable giving can provide significant tax advantages while creating meaningful impact for the causes you care about most. Please reach out to us if you’d like help in determining which approach best aligns with your overall wealth management strategy.