What is a Donor-Advised Fund?
A donor-advised fund (DAF) combines investing and charitable giving. This popular giving vehicle can support long-term philanthropic legacy and planned giving goals. Individual accounts are created for each donor within the DAF, allowing for individualized management of the account balances.
First a donor makes a tax-deductible donation to a DAF-sponsoring organization. Sponsoring organizations commonly include community foundations, 501(c)(3) nonprofits attached to financial institutions, and mission-based charities within a specific industry like education or the environment. DAF sponsors also define the kinds of charities they will support for grants from their fund, ranging from virtually any IRS approved nonprofit to a narrow focus of charities and charitable purposes for their grant gifts.
Donations can be made in cash or via various approved assets. Depending on the sponsoring organization chosen, a minimum gift to establish a DAF may range from $100 to more than $100,000.
The funds donated to the DAF are irrevocable and destined for charitable purposes only. The donor will receive an acknowledgement from the DAF for the tax-deductible contribution into the DAF account. The sponsoring organization owns and controls the assets of the DAF. However, the donor still recommends (hence “donor advised”) to the sponsoring organization on the investments made and the grants to be issued with the money in the account.
Investing the assets within the DAF allows the assets to grow tax-free, generating additional funds in an account for charitable granting. In most cases, there is no minimum distribution required each year when using a DAF, versus a planned giving vehicle like a charitable gift annuity. This means you can accumulate money, tax-free, before making an even larger donation to charity.
When the donor is ready to recommend a grant to a charity, the sponsoring organization helps facilitate the donation by managing the compliance review of the charity and issuing the grant payment to the nonprofit. Generally, DAF sponsors will support grant requests to most 501(c)(3) nonprofits.
What Can Donors Give to Donor-Advised Funds?
Each sponsoring organization maintains its own guidelines for DAFs. However, the following are assets commonly donated to establish a DAF:
- Cash
- Stocks and bonds
- Retirement accounts
- Shares from mutual funds
- Private company stock
- Real estate assets
- Life insurance policies
- Cryptocurrency
What are the Benefits of a Donor-Advised Fund?
As one of the trendiest ways to give a major gift to a nonprofit, donors find many benefits in DAFs.
Taxes
Several different types of tax benefits exist for DAF investors. First, depending upon the donor’s tax situation, donors receive a tax deduction with each contribution into their DAF account. Donors who already give many gifts each year can experience significant tax benefits all at once the year they give to a DAF, instead of the smaller tax benefit of individual gifts over time.
Example: A donor typically gives to multiple charities $1,000 a month or $12,000/year. The $12,000 per year may not qualify for a deduction on their annual tax return, but giving $60,000 to establish a DAF can be applied to their tax returns and rolled over for up to five years. Getting a large deduction in a particular year may be attractive to a donor.
Additionally, donations to a DAF avoid the liability of capital gains taxes and estate taxes.
Simple Estate Planning
Donors can stipulate that the balance of their DAF be transferred to a nonprofit or collection of nonprofits upon their death. This often provides a simplified and seamlessly managed bequest option for planned giving donors.
In addition to transferring assets to charity, DAF donors can choose to transfer the responsibility of managing their DAF to another individual, a family member for instance, continuing their charitable goals for years into the future. This means a DAF can become the first step in establishing a family legacy of philanthropy.
Make Meaningful, Informed Grants
Donors to a DAF often collaborate with community foundations or other sponsoring organizations to invest and make grants with their fund. This means donors receive high-quality information to help them make decisions that can maximize the value of their philanthropy.
Donors become more informed about the needs of their communities by reviewing the eligible nonprofits to which they can make grants.
A Bequest vs. a Donor-Advised Fund
The most notable difference of donating to a DAF vs. leaving a bequest to charity is the loss of control from the donor once the assets are gifted. A bequest can be changed before the distribution of the funds to a charity, while a gift to a DAF is irrevocable.
Donors make “recommendations” to the DAF sponsor as to how their funds are invested and granted, and while the sponsoring organization retains full control over the assets, for the majority of the time, organizations follow the donor’s suggestions. However, each sponsoring organization has their own policies and guidelines for investments and grants.
Also DAF accounts come with fees, which may be a deterrent to some donors. Some sponsoring organizations have annual fee programs based on fund balances, and some charge based on transactional activity.
Conclusion
Donor-advised funds provide a simple way for donors to feel connected to their philanthropic decisions via this investment-slash-planned giving tool. DAF donors enjoy several tax benefits and can learn a lot about the nonprofit community. While DAF policies and fee structures may not be aligned with donor goals, discouraging some donors, the benefits of using a DAF account to achieve philanthropic objectives may provide flexibility and growth opportunities over other planned giving tools.
