Donor-advised funds (DAFs) are charitable giving accounts administered by public charities. Like other public charities, DAFs offer tax advantages for cash gifts and donors who wish to donate high percentages of their incomes. Non-cash assets, such as stocks, mutual funds, retirement assets, bonds, cryptocurrency, and complex assets, can also be donated.
DAF is one way to organize your philanthropic giving and support causes important to you for your lifetime and beyond.
Donors can contribute to the fund as frequently as they like. Each time you want to make a gift, specify the recipient and the amount. Most parent charities make every effort to approve recommendations, provided the funds are going to a legitimate charitable purpose. Final approval for all grants rests with the parent charity.
The gift you make to establish the fund, and any future gifts, are irrevocable or nonrefundable. While this might seem to be a drawback, it, in effect, creates what you might think of as a philanthropic nest egg.
By creating your donor-advised fund account, you can structure it to best suit your charitable goals. You can name your donor-advised fund (DAF) as you wish.
How does a donor-advised fund work?
As a donor, you make a grant to a parent charity. That money is used to open an account – the donor-advised fund – in your name. The charity manages the fund and distributes gifts to specific charitable organizations in response to your recommendation or advice.
The assets in your account are invested to create tax-free income that can be reinvested. Any reinvested income increases your giving power and the potential benefit to your chosen charities. And, of course, you can continue to contribute additional assets to your fund on either a regular or irregular schedule. DAFs make money like any investment account grows money – through stocks, bonds, and interest accounts.
Afterward, you can recommend grants from your account to any active, qualified charity with a 501(c)(3) designation. The DAF sponsor approves all grant recommendations. DAF can provide grants to various organizations to support hunger alleviation, educational and religious institutions, social service organizations, etc.
Which factors must be considered before opening a DAF?
Since you decide to set up your donor-advised fund, you need to consider several factors. For example, the mission of the parent charity, the charity’s ability to accept and process certain assets, the investment options available for your fund, or specific restrictions on giving that a charity might impose.
Once you have decided to create a donor-advised fund, the next important question is where to open it. There are a few criteria to consider, one or more of which might be a deciding factor for you. For example, some parent charities have restrictions on the types of gifts that can be accepted – not all charities can liquidate and process real estate, art, or other tangible personal property. In addition, the parent charity where your fund is established and managed can determine how your fund is handled and how the assets will be used.
Another critical consideration is any special interests or requirements of the parent charity. For example, certain university-run donor-advised funds require that a large percentage of your gifts be assigned during your lifetime or at your death to benefit the university. On the other hand, it may be fine with you if supporting your alma mater is one of your main philanthropic interests. In addition, some charities screen out certain types of recipients, and some will approve donor-requested grants only to their preselected list of charities.
Researching your options to match your individual requirements and objectives with the capabilities and missions of various parent charities is the best way to start the selection process. You may also want to speak with your financial adviser, or a representative from your financial institution, to determine if the parent charities they’re most familiar with are a good fit for you.
What are the advantages of a donor-advised fund?
Donor-advised funds share some characteristics with other ways you might make charitable gifts, but they also offer many unique advantages.
The most significant advantage of donor-advised funds is immediate and potentially substantial tax deductions. Once you contribute to your donor-advised fund, you may be eligible to claim an itemized tax deduction for federal and/or state income tax purposes.
One of the benefits of DAFs is the ability to gift from assets rather than just from income. DAFs can usually be funded with a wide range of assets, including cash, personal property, several types of stock, and gifts from other charitable vehicles, such as a charitable lead trust. In addition, you won’t pay capital gains taxes on the assets you put in a donor-advised fund by donating these.
Another massive benefit of choosing a donor-advised fund over a traditional charity is the option to give gifts anonymously. For example, if you don’t want your donation to become public famous, you can hide your identity.
Access to streamlined recordkeeping and minimal paperwork. The parent charity manages all the paperwork and recordkeeping associated with charitable activity. Additionally, instead of tracking receipts from multiple charities, you’ll get one receipt that details the grants that have been made from your fund and any gains earned on your fund’s investments.
A legacy of giving. By starting your legacy through the DAF, you may involve family members in DAF management; appoint loved ones as individual successors, support your favorite things now and beyond your lifetime. Then, you commit that money to establish or expand your philanthropic legacy, just as you might assign money to an irrevocable trust for your children, for example, to help them enjoy a secure financial future.
In addition to the above, we need to mention that a DAF has more advantages, like consolidation and organization of charitable giving, low administrative costs, benefit of due diligence done on prospective receiving charities.
Disadvantages of a donor-advised fund
Despite the benefits mentioned above, which might make you want to switch to a donor-advised fund, there are some disadvantages worth considering.
Firstly, it is the irrevocability of your assets. When you establish your fund, you make an irrevocable contribution of personal assets. That means your assets cannot be returned to you for any reason.
The next thing we need to mention is administrative fees. All DAFs come with annual administrative costs and investment fees. This includes operating costs such as legal, accounting, processing, and staff.
Also, assets can remain in the fund indefinitely. For example, if you set up a donor-advised fund but don’t donate to specific charities, the money can stay there without benefiting society. You can avoid this by choosing the charity and setting a deadline for when the assets must be disbursed to the charity.
Furthermore, many sponsoring charities have minimum donation requirements to start the account.
Another drawback is that you don’t have the final say on which charities receive your donation after donating your money. However, you can suggest the charities you would like to receive your distributed assets.
What are the types of a DAF?
There are several different types of donor-advised-fund from which to choose.
Programs Public charities
Those are nonprofit organizations, often with a nationwide presence, that exist to support philanthropic causes or other public charities. These organizations can be attractive choices as parent charities for donor-advised funds, as they offer you tremendous flexibility in supporting causes of your choice.
Financial services companies
The financial services companies, including investment firms and mutual fund companies, sometimes offer DAFs as a special option for clients’ advisory services.
These charities often simplify community-based giving even further by offering a selection of opportunities for your grants, for example, adult literacy, afterschool programs, or a local park renovation.
University or alma mater foundations
DAFs transform educational institutions by providing gifts to areas of greatest need.
These foundations allow gifting money to fund religious institutions.
DAF vs Private foundation
Private foundations and donor-advised funds are charitable-giving vehicles that help donors facilitate their giving and achieve their philanthropic goals.
A significant similarity between DAFs and private foundations is that gifts are irrevocable.
However, DAFs are gaining newfound attention because of their advantages, especially the increased tax benefits, the elimination of extensive paperwork, startup costs and maintenance fees, and greater flexibility in giving.
Privacy is also a factor to consider. Being a donor-adviser gives you a much greater degree of privacy on many levels. For example, a private foundation must file public forms about every aspect of itself, from assets to completed grants and staff. Not so with a donor-advised fund – through which you can make gifts anonymously or in someone else’s name.
Foundations have an annual required payout of 5% of the year’s income, whereas most DAFs have no such requirement.
What Happens to a Donor-Advised Fund After the Death?
A donor-advised fund allows you to go beyond a series of individual gifts – it gives you a platform from which to create a legacy of giving. When you establish your fund, you can name advisers and successors, who can be your spouse, your children, or even friends, allowing them to take over the responsibility of recommending gifts on your behalf. You can involve those close to you in your philanthropic efforts by naming advisers. And by naming successors, you offer your heirs a way to carry on supporting the causes that are important to you.
In fact, after the death of the fund creator, there are two ways:
• To distribute the remaining funds to an approved charity and close the account
• To name the successor of the fund, who can then make all necessary administrative decisions related to it.
With some parent charities, instead of naming successors to your donor-advised fund, you may be able to choose to gift the entire remaining amount of the fund to a charity or selection of charities upon your death – essentially, naming the charity as your beneficiary.
What Is A Donor Advised Fund? by Inna Rosputnia
Wishing you a great week!
Want Your Money To Grow?
Subscribe to get free research, trading lessons, and more insights.
(We do not share your data with anybody, and only use it for its intended purpose)