Rising Tax on Private Foundations Accelerates Growth of Donor-Advised Funds

Donor-advised funds (DAFs) are increasingly favored in the U.S. philanthropy landscape, partly due to pending federal tax legislation that would significantly raise taxes on private foundations. Unlike private foundations, which are required to distribute at least 5% of their assets annually, DAFs have no mandatory payout requirements and offer donors immediate tax deductions upon contribution. This flexibility, combined with the ability to contribute non-cash assets such as appreciated securities and cryptocurrency, enhances their appeal to donors seeking to minimize capital gains taxes.

Sponsoring organizations, mainly public charities associated with major investment firms like Fidelity, Vanguard, and Schwab, administer DAFs. Donors, while not technically controlling DAF resources, effectively direct the fund distributions to accredited charities under the provider’s policies. The anticipated tax hike on private foundations’ investment income, especially for larger entities, is expected to accelerate the shift from traditional foundation giving to donor-advised funds.

Recent surveys show DAFs resonate strongly with high-net-worth individuals, with 96% of donors in a 2025 study having a net worth above $1 million. Tax advantages are a primary motivation, cited by 62% of respondents, alongside the convenience and cost-efficiency of DAFs relative to private foundations. Privacy remains a nuanced area; while a minority of donors choose anonymity, experts suggest confidentiality is not the key driver behind the DAF trend.

Despite the growing popularity, some concerns have emerged about the transparency of DAFs. Research indicates that these funds tend to support politically engaged organizations more than other funders, raising questions about the opacity of donor intentions and distributions. The public and regulators have limited insight into the specific allocations of DAF resources, which has implications for philanthropic accountability.

Overall, the evolving tax environment and regulatory pressures appear to be reshaping philanthropic strategies among wealthy donors, favoring the rise of donor-advised funds over traditional private foundations. This transition reflects broader changes in compliance, tax strategy, and donor behavior within the charitable sector.