Donor-advised funds (DAFs) are gaining popularity and making supporting the causes you care about easier than ever.
With a DAF, you can make a tax-deductible donation now and decide which IRS-approved charities to support later. It's like having your own charitable savings account!
DAFs are becoming more popular, with grants soaring to over $52 billion in 2022 alone, which was a 9% increase from the previous year. But what exactly are DAFs, and how do they work?
Discover how DAFs stack up against other giving options and learn insider tips to maximize your impact.
What is a Donor Advised Fund?
A donor-advised fund is a separately identified fund or account administered by a public charity organization, which is also called a sponsoring organization. It serves as a charitable giving account, collecting donations on behalf of an organization, an individual, or a family.
DAF allows donors to contribute various public or private assets beyond cash.
These include:
- Stocks
- Private equity
- Mutual funds
- Cryptocurrency
- Real estate
- And other assets
When a donor makes a contribution, the sponsorship organization has legal control over it. Donors still maintain advisory privileges over the distribution of funds. This means they have the choice to recommend funds to their favorite charities, ensuring their giving reaches the causes they deeply care about.
How Do Donor Advised Funds Work?
A donor-advised fund typically incorporates the following steps:
Step 1: Establish a DAF Account
Step 2: Look for Investing Options to Ensure DAF Growth
Step 3: Choose Charitable Organizations to Support
1. Establish a DAF Account
To start with donor-advised funds, donors can pick a well-known sponsor to open their DAF account and invest in cash, stocks, or non-publicly traded assets.
Many charity organizations sponsor DAFs, including the National Philanthropic Trust, Fidelity Charitable, and Charles Schwab.
2. Look for Investing Options to Ensure DAF Growth
If you're not ready to distribute your DAF funds to charities immediately, you can invest them so they can grow over time and have a bigger impact later on.
Many sponsoring organizations, like banks and community foundations, offer different investment options. They'll work with you to find the best way to invest your charitable dollars based on when you think you'll want to make grants.
3. Choose Charitable Organizations to Support
While sponsorship organizations have legal control, donors can suggest their favorite charities or community service programs that align with their passion for distributing the DAF fund.
The charitable organization should incorporate DAF giving directly into its donation forms to secure these donations.
Advantages of Donor-Advised Funds
For Donors
According to the National Philanthropic Trust, contributions to DAF totaled $85.53 billion in 2022, a 9% increase from $78.44 billion in 2021.
Due to its simplicity and versatility, DAF has become one of the fastest-growing fund-giving mediums to fulfill philanthropy needs.
Some of the many positives it offers to donors are:
1. Tax-Efficient Way of Giving
Probably the bigger perk of donor-advised funds lies in its immediate tax benefits.
Whether the donors decide to donate to charity immediately after contributing or let the assets grow tax-free for a certain period, they can seek an income tax deduction during the year they contributed.
The donor-advised fund holders generally enjoy a federal income tax reduction of up to 60% of their adjusted gross income (AGI) for cash distributions and up to 30% of AGI for the long-term appreciated securities donated.
By transferring assets such as limited partnership interests to donor-advised funds, account holders can avoid capital gain taxes and secure an immediate fair market value (FMV) tax deduction.
2. Anonymous Charitable Donations
Some donors prefer donor-advised funds because of their anonymity. The giver has the choice to opt for privacy and withhold identity. This is especially beneficial if they don’t wish to be solicited for future contributions or don’t want their giving to become public knowledge.
3. Greater Flexibility
Another benefit of donor-advised funds is that they are not limited to cash donations. DAF account holders can contribute stocks, bonds, and other complex assets, such as C-corporation stocks.
Donors can support their favorite charities at a pace they’re comfortable with. They can make donations when the time suits them - particularly when donors need tax deductions.
4. Less Administrative Burden
Donor-advised funds are managed by a professional fund manager who is also responsible for grant-making. Donors can seek investment advice from them to make an informed decision about how to grow their charitable assets over time.
The assets in the DAF account can be invested in a variety of stocks, mutual funds, and alternative investment choices.
5. Develops a Legacy Of Giving
With DAFs, a legacy of giving can be established, and philanthropy values can be instilled in younger family members. It allows donors to name their children or other family members as their advisors for the funds.
For Nonprofits
Donors are not the only ones benefiting from a donor-advised account. Since DAF account holders often suggest their preferred charities for fund distribution, nonprofits can direct these funds toward their organization by reaching out to them and making a compelling appeal.
Given its tax benefits, many donors show greater interest in opening a DAF account and investing considerable dollars. By tapping into the DAF donor-advised fund base, charities can acquire a fair amount of money.
All nonprofits have to do is create a donation page that asks donors if they have a DAF account. They can then contact these donors to let them know their organization is open to accepting donor-advised funds.
Disadvantages Of DAF
For Donors
While DAFs offer several benefits, such as tax advantages and the ability to donate appreciated assets, there are a few important factors to consider.
1. Irrevocable Donations
Once contributions are made to the donor advised funds, there is no turning back. While donors can recommend grants, they no longer have control over the donated assets and the fund manager has the final say.
Some sponsor organizations require minimum donations to open a DAF account.
2. Limited Investment Options
Depending on the platform selected, DAF offers limited investment options. Donors may only have a small selection of bonds or stocks to choose from. Before choosing a DAF sponsor and setting up an account, it's important to research the available investment options.
Some sponsors often charge administrative and investment management fees based on the assets in the DAF. These fees will vary among different sponsors and can impact the overall amount available for grants.
3. Limited Options with Charities
DAFs allow donations to IRS-approved charities only, which means there is a limited pool of nonprofits where donors can recommend grants.
For Nonprofits
The major drawback of DAFs for nonprofits is that they do not have an annual payout rule. As a result, they often face delays in these charitable funds.
For different reasons, donors postpone the fund disbursement. They are either unable to decide on a charity or cause or are not confident about donating to a particular nonprofit.
Many charities aren't very keen on choosing the DAF way to donate and they often prefer private foundations and other donation methods.
How is a Donor Advised Fund Different from a Private Foundation?
While DAFs come with their fair share of benefits, they may not be right for every philanthropist. Some families and individuals prefer complete control over their charities. In this case, a private foundation is a choice, assuming donors have the capital to start one.
Although DAFs and private foundations are similar in that they are forms of charitable giving, they have certain differences.
FAQs
What is the charitable limit for a donor-advised fund?
There are no limits on how much donors contribute to a DAF. Sponsors can ask for a minimum contribution of up to $250,000 to establish a DAF account.
What is the difference between donor advised funds and donor-designated funds?
Donor-designated funds are similar to a donor advised fund, except the former lets donors support one charity as opposed to DAF giving to many nonprofits.
How long can money stay in a donor-advised fund?
While there is no stipulation on when the asset should be disbursed to charities, many DAF sponsors have set their own timeline for giving. For instance, Fidelity states that donors must give one gift of at least $50 every two years to keep their accounts active.
