Small Business

Smarter giving: DAFs versus private foundations

Ann: Welcome back to Building More Than Business. I'm Ann Lucchesi, a certified financial planner and a certified equity professional, a Senior Director here at First Citizens Wealth. I'm joined today by my cohost, Nerre Shuriah, Senior Director of Wealth Planning and Knowledge, and a certified business exit consultant who heads up our wealth and business planning capabilities.

Today, we're talking about something that comes up often when business owners begin thinking about creating a strategy for their philanthropic interests. Should you use a donor advised fund or a private foundation? How to decide which of these vehicles will help them achieve their goals, and how do they assess the pros and cons of everything?

Nerre: It's a timely question too, Ann. Because of that big tax bill that passed over the summer, beginning in 2026 high-income earners and corporations will face new limits on charitable deductions, and that's going to make it even more important to plan ahead and understand the impact of your options—meaning you may want to take some actions this year before some of those changes take effect in January.

Ann: It's a great point, Nerre. Both of these are powerful ways to create impact and build a lasting legacy, but they both work differently. So to get some clarity, we've invited George Burnette, a philanthropic and charitable strategist here at First Citizens, to join us. George has more than a decade of experience helping business owners and individuals design effective giving strategies. Welcome, George. We are so delighted you could join us today.

George: Thanks, Ann. It's really great to be here.

Nerre: So as Ann said, there are a lot of charitable giving strategies, but today we're focusing on two of the most common and fundamental for business owners: donor advised funds, or sometimes we just call them DAFs, and private foundations. But before we get into the details of how these two vehicles work, let's dig into the why. Why do business owners give? George, could you start us off by talking about the reasons business owners typically choose to develop a giving strategy in the first place?

George: Yeah, absolutely, Nerre. I think first and foremost, people give because they're altruistic or they're passionate about some sort of calls or some community, and so I think that's really the key driver at the outset. But beyond that, there's a number of reasons why a business owner may choose to give. Sometimes that's planning around a potential exit or sale transaction and doing some tax planning. Sometimes it's a part of their annual income tax planning strategy. Then there's also the dynamic of building community connection and impact within the communities that that particular business serves. It can also make a big difference in employee recruitment and retention, especially when we're thinking about younger generations. There is quite a lot of data out there, both real and anecdotally, about the desire for younger employees to have value alignment with the companies that they work for.

Ann: Yeah, it's a great point, George. When you think about philanthropic interests, it's really over the journey of a lifetime and often takes on different forms. You know, we often see business owners as they're beginning to work through a sale, that they're about to shift their personal identity, which has been tied up in this business, and how can they begin to create a lasting impact and a legacy, and charitable interests allow them to do that.

George: You really just hit the nail on the head. I was recently working with a former business owner and their family. They had decided to start a DAF as part of their exit strategy, and initially it really was kind of a tax play and they thought, yeah, this will be great. We'll be able to give money back to the things that we care about. But what they didn't anticipate was through those grant dollars, they were able to develop connections to these organizations that led to some really heavy involvement on the volunteerism front. And that really ended up being a huge benefit to that business owner who was transitioning out of the role of, you know, running a business every single day and needed something else to fulfill them and fill their time, and finding that volunteerism aspect of philanthropy was really a big deal.

Ann: So now that we've covered, you know, why so many business owners choose to give, maybe it's time to kind of turn our attention to how they do it. Donor advised funds and private foundations are two of the common ways I think that we see business owners choose to give. George, it would be really helpful if you could start us off by walking us through the basics of each, what they are and maybe how they compare.

George: Sure, Ann. A donor advised fund at its very basic level is effectively an investment account that is held at a sponsoring charitable organization. Usually, it's a community foundation or a financial institution that has a donor advised fund program. Essentially what happens is a donor contributes assets—be that cash or appreciated assets, either publicly traded stock or closely held business interests, something like that. They get an immediate tax deduction for that gift, and then over time they're able to make grant recommendations to the charities and the causes that they care about out of that account.

One of the key things with a DAF is that because it is a public charity that you're giving that money to on the front end, you actually have higher deductibility limits. So in the context of a business owner who gives their company stock presale to a donor advised fund can actually get a fair market value deduction for that gift, which can be really beneficial. Donors can really start with low minimums, usually in the $5,000 range, and the idea is that the account can grow with the donor over time as things change within their life as their wealth changes.

Nerre: That's a great high-level summary of donor advised funds. They're easy to set up, flexible and scalable. So George, by contrast, can you tell us what business owners need to know about private foundations?

George: They tend to be a little more complex and a little more costly to administer. That's primarily driven by the fact that you're effectively setting up a separate charitable entity that you and your family are going to manage going forward. In addition to that, there's also some administrative requirements on an ongoing basis as far as annual filings and individual tax filings. That being said, they really are the vehicle that allows you maximum control over how you administer your charitable goals or how you fulfill your charitable goals, be that from hiring family members to help run the foundation or creating customized grant programs like scholarships or direct international giving. They are a little less favorable from a tax standpoint when you compare them to a donor advised fund.

Specifically, when you're thinking about it in the context of a business owner, if you are contributing or want to leverage your company stock to fund these vehicles, private foundations are limited to a basis deduction when you use or utilize that nonpublicly traded stock to fund the gifts. So that can be a pretty substantial difference in tax treatment. That being said, it can be a trade-off that you're willing to make depending on what your long-term objectives are.

Last but certainly not least on the private foundation front, private foundations are required to spend 5% of their asset base on an annual basis and distribute those funds to charitable organizations. So that's a little bit different than a donor advised fund, where there is no annual spend requirement.

Nerre: The way that I always describe it is the DAF is, think of it more like an earmarked account and a private foundation is really akin to running another company. And that last point you made about foundations is so important. Having to make a 5% annual distribution is tough, especially when the market is in a downturn.

Okay, so let's pivot a bit. Let's say I'm a founder who just exited their business and I've got, I don't know, $2 million earmarked for giving. What characteristics about or goals about me as a donor make one or the other a better choice?

George: Yeah, generally when we are thinking and comparing different gift strategies or different gift instruments to employ with a potential giver, we're looking at a couple of different things. One is the complexity of the type of giving that they want to do. I would say that regardless of size, if somebody is intending to make a handful of gifts on a consistent basis to US-based charities, is not really interested in doing a ton of international giving or any sort of really customizable grant strategies, a DAF can be a really great tool regardless of size. And so I always focus on that kind of at the outset.

And then I start to look at, hey, what's the dollar amount that we're talking about utilizing from a funding perspective? And typically what we see is that on the smaller or lower-dollar-amount side, a DAF can be a really attractive option just because of the lower barriers to entry. When we start to think about larger gift amounts or larger funding amounts, a private foundation can make a lot of sense. And really too, thinking about the complexity of how you want to administer those funds. Are there thoughts around familial control, doing complex international grant making, those sorts of things. It all goes into the equation, and we're really balancing those two interests of ease and flexibility versus control.

Ann: Thanks, George. That really helps to give some context around how to think about these different options. We've got more information about these differences in the show notes, so listeners may want to check it out.

One thing I'd really like to underscore in this process is that it doesn't really have to be an either-or. You might want to use a DAF because it's really simplistic and particularly it's easier to use around a liquidity event. But then as you grow your wealth, you may want to add a foundation for more control and giving these more kind of complex places that you talked about, George.

Ann: All right, we've covered the basics of how donor advised funds and private foundations work, but even with that understanding there are a lot of myths that can trip people up.

Nerre: One misunderstanding I hear all the time is, usually clients love the idea of a DAF or a foundation but they think that once you fund it, you immediately have to decide where it all goes. This is an important factor, especially when we're positioning charitable giving as a tool to lower taxes from the sale of a business. You know, optimizing available deductions can appeal to a transitioning business owner, but they're really overwhelmed in the exit process. So they're not really ready to determine which charity they want to be a recipient at that point. George, I know you've faced this. Can you explain for our listeners why that's not the case and how these vehicles actually give owners more flexibility than they might think?

George: You just hit on it with regard to a business owner going through a highly emotional, highly technical transaction. DAFs are quite flexible, both in the context of the timing around when gifts have to be made in that there is no requirement from an annual for any sort of annual giving. But they're also really flexible with regard to how much you need to fund to get the account started. And so I mentioned this a little bit earlier, but generally speaking, as little as $5,000 can be earmarked and utilized to fund these accounts. And so we see a lot of business owners start with a smaller account and allow them to grow over time as things transition within their financial lives. Meanwhile, contrast that with a private foundation—we're still very flexible in when, where and how you give. But generally speaking, we kind of focus on that $5 million threshold for where it makes sense for someone to utilize that as a tool. That's really where we're thinking about and focusing on goal-based and goal-driven decisions around which tool to implement.

So, for example, I was recently working with and talking with a family who had multiple children. Some of them were engaged and worked in the family business. They had some that weren't heavily involved and didn't really want to be involved in the family business going forward. And so this particular family actually decided to utilize a private foundation as a means to balance out some of the things that they were discussing from a family dynamics perspective. So by allowing the children that were involved in the family business to continue down that path and maintain the growth trajectory that they were on, and then using the private foundation to allow the children that were not involved in the family business to kind of own that piece of the family legacy and the family plan, they were really able to create a nice balance between roles within the family dynamic and then also carry on their legacy both within the business and then also more broadly within their philanthropic strategy.

Nerre: Having those options and flexibility are so key, right? They're helpful to letting you customize your plan to what you really want to happen. And I'll tell you that flexibility matters even more with the coming tax law changes. Starting in 2026, charitable deductions will be harder to take, especially for high earners and corporations. The new law contains some positive features like an above-the-line deduction for non-itemizers. But there's also a floor and a ceiling to giving for higher-income taxpayers. That's why 2025 may be a smart year to front load some of your donations and get a full deduction that may be curtailed year. But if you're accelerating your gifts into the next couple of months, you may not be ready to decide which public charity ultimately benefits. So having that flexibility is key.

Ann: Now we're going to move on to one of our favorite sections that we like to do, which is what would you do differently? And so along this theme, misconceptions are one thing, George, but there's also a lot of mistakes that people make along the path and it costs them real money. Can you tell us what you've seen in practice, George?

George: The biggest thing that we see over and over again are business owners selling an asset before and then giving the proceeds from that sale after the fact. What we really try to preach to the people that we work with is that you should really look at trying to give that asset before you sell it because there is really a double tax benefit there. You get to avoid the tax or avoid the capital gain on the asset that you gave away, and you also get a charitable tax deduction for the value of that asset. And so it really is a nice and tax-efficient way to utilize your wealth and to fund your charitable goals when you're thoughtful about the timing of it.

Ann: Yeah, George, it has a real impact in the amount that they're able to give if they kind of pay attention to what it is they're giving.

A related pitfall we often see has to do with timing. You know, I know everyone's busy—and particularly when you're a business owner—but waiting until it's too late in a transaction to start this process, to give the asset, can be a real problem. It's really important that they take the time to plan ahead, get the DAF set up, have the conversation about what it means to put an illiquid asset in it, or if you have a foundation you need even a longer runway to get there. Maybe you can tell us a little bit about what you've seen in that space.

George: Yeah, I think when we talk about the timing piece, I have a story that really sticks out in my mind. I was working with a business owner family, and they had a transaction on the horizon, and so we were talking with them about a number of different strategies and really had enough time to implement most of them. But there was a real hesitancy on the part of the business owner to relinquish some of that control in advance of the sale and ultimately a little bit of anxiety about whether or not that transaction would actually go through. And so they kind of punted on implementing any of the things that we talked about and specifically giving to a donor advised fund. And when they finally circled back around, they had actually already signed a purchase and sale agreement. And at that point it's too late in the game, so you've got to really be thoughtful about the timing piece and have a keen eye to be aware of when is it too late to actually give to avoid that tax hit when you're talking about these transactions.

On the other hand, there is a bit of a needle that you have to thread. Charities don't want to hold on to illiquid assets for too long. I mean, usually you're talking about in the 2- to 3-year range, and so you really are going to threading that needle. You don't want to be too early, and you don't want to be too late.

Nerre: That timing caveat is really important, and I love that phrase, thread the needle. It's such a good analogy to the limited window that owners have. So asset choice and timing really do go hand in hand. If you're thoughtful about both, you can dramatically increase the value of your gift without it costing you more.

For any listeners who are approaching a sale or thinking about a major gift, this is something to raise with your advisor early on way before the transaction closes. So the moral of the story here is simple: The earlier you plan, the more options you have and the greater the impact your philanthropy can make.

George, thank you so much for sharing your insights and expertise today. This has been a terrific conversation. We really appreciate you joining us, and we hope to have you back again soon.

George: Thanks so much, Nerre. It's been a pleasure for me as well.

Ann: And as we close, I want to leave our listeners with this thought: Charitable giving isn't just about generosity. It's about strategy. The right vehicle, the right timing and the right asset can multiply the impact of your gift while protecting your financial goals—whether you're starting small with a donor advised fund or building a foundation for your family's legacy.

Nerre: That's right, Ann. There's a lot to consider, but having the right team around you can make all the difference. Explore the show notes for resources, and talk with your advisor about which approach will work best to fit your goals.

Ann: Thanks for joining us for today's episode of Building More Than Business. Be sure to follow the show on Apple Podcasts, Spotify and YouTube Music, and if you liked what you heard, share it with someone who might find it valuable too. We'll see you next time.

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