Over a decade, a $10 million charitable account could save an average of $1 million in fees by being held in a donor-advised fund rather than a private foundation, according to Vanguard.

The difference between a foundation and a donor-advised fund is analogous to the difference between a separate account and a mutual fund, says Foundation Source's Mellinger.

In a mutual fund, the investor must accept all decisions of the fund company and its manager, regardless of the effect on an individual portfolio. In the separate account, the client can have a big say in how the portfolio is set up, how taxes are managed and other matters. The foundation has these same control advantages over the donor-advised fund.

"With a donor-advised fund, donors set up a charitable account and contribute assets, which are then administered by a third-party fund," according to Foundation Source literature. "The donor's role is that of an advisor, rather than a decision maker." 

Mellinger adds that fund directors make all the final decisions on which charities receive how much money from a donor-advised fund.

Barnes, who says the solution for some clients is to use both options, says the correct option depends on the needs of clients. Advisors also need to be aware that these needs can change.

"Say a husband and wife set up a foundation and the husband really was enthusiastic about running the foundation but the wife isn't interested," he says. "The husband dies and the wife doesn't want to run things. Then the best option is to convert to a donor-advised fund."

It's common to see donors attempt to switch from one charitable vehicle to another. Wright-Violich says she often hears from people in small foundations, say $250,000 in assets or less, that expenses are too high and administrative burdens are daunting. The expenses, she adds, are becoming more of an issue due to the bear market. With asset size declining, the average expense basis for small foundations becomes a headache, she warns.

Wright-Violoich gives clients seeking to exit foundations the following plan for converting to a donor-advised fund:

1. Adopt a plan of dissolution. If necessary, notify the state authorities, such as the state attorney general, of the dissolution.
2. Give all of the foundation's assets to a donor-advised fund by distributing the assets to one or more 509(a)(1) public charities that have existed for at least five years.
3. File a Form 990-PF for the taxable year in which final distributions are made and check "final return" at the top of the form.
4. Submit any final state regulatory or tax filings.