Individual donors across the globe contribute billions of dollars to charities. The majority of them state the reason being the positive impact on society while many also find tax deduction a good reason alongside the positive impact. High-net-worth individuals consider philanthropy to be done only with the right understanding of the organization with proper charitable giving for HNWIs.
HNWIs have two means of philanthropy strategy; Donor Advised Funds (DAFs) and Charitable Trust/Private Foundation. Both of these will allow you to create a positive difference in society, however, the ways they act are different. So let Avestar Capital help you understand the difference between donor-advised funds and private foundations.
What’s The Difference Between The Two?
Donor-advised funds and charitable trusts are the best philanthropic strategies for wealthy families, helping the causes you care about. If you fund either option, the contribution cannot be reclaimed and is irrevocable. The best financial advisors for charitable planning often suggest these two options.
Donor Advised Funds
Think of DAF as your ‘Charitable Savings Account’, a highly flexible option for philanthropy. Allowing you to make contributions through it at any time and any amount. There are limited requirements to make distributions which are mandatory based on time or monetary value. How donor-advised funds work, is that they help in letting your funds grow, similar to how a bank grows your savings.
You get to put your money, stocks, or assets into the funds, and later decide the charitable organization in which you must donate. Meanwhile, the funds grow as DAFs help get tax deductions for the amount deposited. They are easy to administer and set up and there’s no need for an attorney. You also don’t need to file for annual tax documents.
Charitable Trust
This is more of a “Charitable Investment Plan” that allows you to donate assets, cash, stocks, and other valuables. The assets added here are typically high, perfect for HNWIs and UHNWIs. There are two types of Charitable Trusts:
Charitable Remainder Trust (CRT): This allows you to generate income for up to 20 years or until death. The trust sells your donated asset tax-free and reinvests the proceeds in income-generating avenues such as stocks, bonds, or rental properties. Up to 5% of the returns are distributed to you or your beneficiaries, with the remainder going to charity.
Charitable Lead Trusts (CLT): Exactly opposite to CRT, this trust gives your credited funds as income payments to charity for a set amount of time. After the end of the period, the remaining funds are transferred back to you or your beneficiaries.
Pros and Cons for Donor-Advised Funds (DAFs) vs. Charitable Trusts (CRTs & CLTs):
| Feature | Donor-Advised Fund (DAF) | Charitable Trust (CRT & CLT) |
| Who Controls Donations? | You recommend grants, but a sponsoring organization has the final say | Trust terms are set in advance—less flexibility |
| Who Gets Income? | No income to the donor—you donate and distribute later | CRT: Donor/family gets income first, then charity CLT: Charity gets income first, then heirs |
| Tax Benefits | Immediate tax deduction, no capital gains tax, assets grow tax-free | Tax deduction, estate tax reduction, capital gains tax benefits (varies by type) |
| Complexity | Very easy to set up—low fees and no legal structure required | More complex—requires legal setup, trustees, and ongoing administration |
| Best For | People who want a simple, flexible way to donate over time | High-net-worth donors who want tax benefits and structured giving |
| Estate Planning Benefits? | Not typically used for estate planning | Can reduce estate taxes and transfer wealth efficiently |
| Can You Take Money Back? | No—you can only recommend grants to charities | No—once assets are in the trust, they follow the legal terms set up |
| Costs | Low fees (often 0.6%-1% per year) | High setup and legal costs, plus ongoing management fees |
| Flexibility | Very flexible—you can change charities and grant amounts anytime | Less flexible—once set, the trust follows the terms |
Best philanthropic strategies for wealthy families
Wealth management firms specializing in philanthropy like Avestar Capital make it advantageous for you to do multiple approaches. A one-size-fits-all charitable strategy doesn’t exist, however, an amalgamation can be particularly beneficial in certain situations.
Avestar Capital suggests that it’s important to designate successors for your fund or trust to manage assets and direct donations after your passing. These successors should be familiar with your philanthropic goals, your connections to specific charities, and your approach to making an impact.
