Quick Answer
Private foundations and public charities are tax-exempt; a donor-advised fund is a giving account administered by a tax-exempt sponsoring organization, where the donor only recommends, but does not control, grants. They differ on funding source, control, and mandatory distributions. Only private foundations must distribute a minimum share of assets each year and pay an excise tax on investment income.
The exam leans on that distribution requirement to separate private foundations from the other two. Once you have that anchor, the rest of the comparison (funding source, donor deduction limits, control) falls into place.
What Sets a Private Foundation Apart?
- Typically funded by a single source (an individual, family, or corporation)
- Tax-exempt as a charitable organization recognized under the Internal Revenue Code
- Must distribute at least 5% of net investment assets annually for charitable purposes
- Subject to an excise tax on net investment income (1.39%)
- More restrictive rules than public charities, including limits on self-dealing and excess business holdings
- Donors receive a tax deduction, but with lower adjusted gross income (AGI) limits than donations to public charities: 30% of AGI for cash, versus 60% for public charities
- Must file Form 990-PF annually
Exam Tip: Gotchas
- The 5% distribution requirement applies to private foundations only, not public charities or donor-advised funds.
- The 1.39% excise tax on investment income applies to private foundations only.
- "Which client type has a mandatory annual distribution?" The answer is a private foundation, at 5%.
How Does a Public Charity Differ?
- Receives funding from the general public, government grants, or other public sources
- Also tax-exempt as a charitable organization under the Internal Revenue Code
- No minimum distribution requirement
- Donors receive more favorable tax deduction limits: up to 60% of AGI for cash contributions
- Subject to less regulatory scrutiny than private foundations
What Is a Donor-Advised Fund?
- A charitable giving vehicle administered by a sponsoring organization, usually a public charity
- Donor receives an immediate tax deduction at the time of contribution
- Donor recommends, but does not control, grants to qualified charities
- No required minimum distribution or timeline for granting
- Cannot benefit the donor or the donor's family; no self-dealing
- Simpler and cheaper to establish than a private foundation
Exam Tip: Gotchas
A donor-advised fund (DAF) donor cannot legally compel a grant; they can only "recommend."
How Do the Three Compare Side by Side?
| Feature | Private Foundation | Public Charity | Donor-Advised Fund |
|---|---|---|---|
| Funding source | Single source (family/corp) | General public | Individual donor |
| Required distribution | 5% annually | None | None |
| Tax deduction limit (cash) | 30% of AGI | 60% of AGI | 60% of AGI |
| Control | Full board control | Board governance | Donor recommends only |
| Setup complexity | High | High | Low |
| Excise tax on investment income | Yes (1.39%) | No | No |
What Should You Check on Exam Day?
- If a question mentions a mandatory annual distribution or an excise tax on investment income, it is describing a private foundation.
- If a question mentions a donor who can only recommend, not direct, a grant, it is describing a donor-advised fund.
- Donor deduction limits run in the same direction as regulatory scrutiny: private foundations have the tightest limit (30% of AGI) and the most oversight; public charities and DAFs share the looser 60% limit.