A foundation's cost is mostly fixed, a donor-advised fund's is a sliding percentage, and the asset given can matter more than either.
On running costs, a donor-advised fund is cheaper until the assets are large: with an illustrative fixed foundation cost of $120,000 a year and a tiered donor-advised fund fee falling to 0.15 per cent, the two cross at $143.5 million. Below that the foundation costs more every year: $99,400 more on $20 million. And for a gift of private company stock the gap is larger still: a donor-advised fund deducts its $20 million market value, a private foundation only the $2 million basis.
Worked in full in The Family Office Professional by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A private foundation is a separate legal entity the family controls. It pays for its own administration, audit, legal advice and Form 990-PF, a cost that is largely fixed, plus an excise tax of 1.39 per cent on its net investment income, which includes realised gains. It must pay out about 5 per cent of its assets a year.
A donor-advised fund is an account at a public charity. The sponsor owns the assets and the family advises on grants. The sponsor charges an administration fee as a percentage of the account, usually in tiers that fall as the account grows, and there is no excise tax and no federal minimum payout. Investment management costs both structures much the same and drops out of the comparison.
| Input | Value |
|---|---|
| Donor-advised fund fee, first $500,000 | 0.60% |
| Donor-advised fund fee, next $1,500,000 | 0.30% |
| Donor-advised fund fee, above $2,000,000 | 0.15% |
| Foundation fixed cost: staff time, audit, legal, tax return | $120,000 |
| Excise tax on net investment income | 1.39% |
| Net investment income, including realised gains, as % of assets | 5% |
The fee schedule and fixed cost are illustrative: sponsors' schedules vary, and a foundation run by a family office's existing staff may cost less in cash than one paying outside advisers.
DAF cost = 0.60% × first 500,000 + 0.30% × next 1,500,000 + 0.15% × the rest
Foundation cost = 120,000 + 1.39% × 5% × assets = 120,000 + 0.0695% × assets
Crossover: 7,500 + 0.15% × (A − 2,000,000) = 120,000 + 0.0695% × A
Excel: =MIN(A,500000)*0.6%+MIN(MAX(A-500000,0),1500000)*0.3%+MAX(A-2000000,0)*0.15%
Step 1, the fixed cost against the fee. The donor-advised fund fee on the first $2 million is $7,500. Above that, each extra dollar costs 0.15 per cent in the fund and 0.0695 per cent in the foundation. The foundation's marginal cost is lower, but it starts $120,000 behind.
Step 2, solve for the crossover. The foundation closes the gap at 0.0805 per cent of each extra dollar, which takes until $143.5 million.
| Assets | Donor-advised fund | % of assets | Private foundation | % of assets | Foundation costs more by |
|---|---|---|---|---|---|
| $5,000,000 | 12,000 | 0.240% | 123,475 | 2.470% | 111,475 |
| $20,000,000 | 34,500 | 0.172% | 133,900 | 0.670% | 99,400 |
| $50,000,000 | 79,500 | 0.159% | 154,750 | 0.309% | 75,250 |
| $100,000,000 | 154,500 | 0.154% | 189,500 | 0.190% | 35,000 |
| $250,000,000 | 379,500 | 0.152% | 293,750 | 0.118% | −85,750 |
On $20 million the foundation costs $99,400 a year more, $1,988,000 over twenty years before any investment return on the difference: about two years of the foundation's own 5 per cent payout of $1,000,000.
The crossover is a property of two schedules, and it moves a lot.
| Change | Crossover |
|---|---|
| Foundation fixed cost $60,000 | $68.9 million |
| Case: fixed cost $120,000, top tier 0.15% | $143.5 million |
| Foundation fixed cost $250,000 | $305.0 million |
| Donor-advised fund top tier 0.10% | $375.4 million |
| Donor-advised fund top tier 0.25% | $65.1 million |
A family whose office already has the staff to run grant-making can bring the fixed cost down, and a large account can usually negotiate the donor-advised fund's top tier. The same logic of a fixed cost against a sliding percentage sets the size at which a family office itself pays, worked in at what level of wealth a family office starts to pay.
For appreciated publicly traded stock, both structures allow a deduction at market value, within annual limits of 30 per cent of adjusted gross income for a public charity such as a donor-advised fund and 20 per cent for a private non-operating foundation. For anything else, private company shares, real estate, partnership interests, the foundation deduction is generally limited to the donor's basis.
Take a gift of $20 million of shares in the family company with a basis of $2 million. Given to a donor-advised fund, the deduction is $20 million, worth $7,000,000 at an illustrative 35 per cent. Given to the foundation, it is $2 million, worth $700,000. The difference, $6,300,000, is worth more than sixty years of the foundation's excess running cost at this size. With adjusted gross income of $15 million, the donor-advised fund deduction is capped at $4,500,000 a year and takes 4.4 years to use, within the five-year carryforward. Check that the sponsor accepts the asset: many have policies on private stock, and both structures are subject to the excess business holdings rules.
Comparing the two on the headline fee alone. A foundation's percentage cost looks reasonable on a large endowment and punitive on a small one, and the gift itself can matter more than either. What a foundation buys is control: family members on the board, paid reasonable compensation for real services, grants to individuals under approved procedures, running programmes directly, a permanent institution with the family's name. At $20 million that control costs about $99,400 a year here, and much more if the first gift is private stock. That is a price worth stating, not a reason to refuse it.
The Family Office Professional covers how single-family and multi-family offices invest and operate; the free workbook for this case computes the cost of a staffed office against a multi-family office. On whether a foundation's payout can last, see whether a private foundation can pay out 5 per cent a year forever.
It depends on two schedules. With an illustrative $120,000 a year of foundation fixed cost and 1.39 per cent excise on a 5 per cent investment income, against a donor-advised fund fee tiered down to 0.15 per cent, the crossover is $143.5 million. At $60,000 of fixed cost it falls to $68.9 million; at a 0.10 per cent top tier it rises to $375.4 million.
Generally no. For a private non-operating foundation, gifts of property other than qualified appreciated publicly traded stock are deductible at basis. A $20 million gift of family company shares with a $2 million basis deducts $2 million, against $20 million to a donor-advised fund: a $6,300,000 difference at an illustrative 35 per cent.
For appreciated capital gain property, 30 per cent of adjusted gross income for a donor-advised fund, as a public charity, and 20 per cent for a private non-operating foundation, with a five-year carryforward. On $15 million of income, a donor-advised fund deduction of $20 million is used at $4,500,000 a year over 4.4 years.
This article is one calculation from The Family Office Professional. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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