All you need is a place, a name, and the initial grant – and you’re ready to give. You can choose how to invest money in your fund so that it potentially grows over time.
A donor-advised fund is a giving account that a donor establishes within a public, nonprofit sponsor organization, such as a community foundation, religious foundations, university or alma mater foundations, or financial services companies.
What Is A Donor Advised Fund?
A DAF is a separately identified fund maintained and operated exclusively by a section 501(c)(3) nonprofit organization, also known as the sponsoring organization.
Some aspiring philanthropists, such as children and young adults, may be working with a smaller budget than the usual minimum requirements. But there are still ways for them to open a DAF: Some sponsoring charities recognize the need to encourage giving and allow young people to open a DAF with a reduced minimum — sometimes as low as $2,000.
A donor-advised fund (DAF) is one way to organize your philanthropic giving and support causes important to you for your lifetime and beyond.
A donor-advised fund works like a charitable checking account. DAFs, like other public charities, offer tax advantages for gifts of illiquid assets and for donors who wish to donate high percentages of their incomes.
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. In addition, with a donor-advised fund, you can make gifts anonymously or in someone else’s name.
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.
How to open a DAF?
There are three simple steps to open a DAF:
1. Make a tax-free gift. Contribute to all kinds of charitable donations and assets. For more significant tax savings, these can be not only cash and checks but also non-cash gifts such as stocks, business interests, and real estate.
2. Choose an investment option. While deciding on an investment strategy for assets in your donor-advised fund account, you can select an allocation from among the pre-approved investment offerings. In addition, any increase in investment is tax-free, allowing you to create an even greater charitable impact.
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3. Grant when you are ready. As soon as your donor-advised fund is established and funded, you will be able to recommend grants to the charitable organizations closest to you.
What’s in the name DAF?
With a new DAF, you have two types of naming to do. First, you give the name to the fund itself. Parent charities generally recommend that it includes your own name and an indication of the causes you support – for example, The Erin Smith Wildlife Habitat Fund. But you can remain anonymous if you choose a name that protects your identity.
Next, you name your advisers and your successors. An adviser assists you in recommending grants from the fund. Successors are named to take over all the fund’s responsibilities at your death, including recommending grants and investments. Some parent charities allow you to name multiple successors who can split the account equally or share responsibility jointly. Some may limit how many future generations can advise the fund.
Due diligence, in this context, means research or investigation to confirm or disprove presented facts, usually about an organization or charitable project. It is always a necessary step in completing a grant recommendation.
What is the initial contribution?
You open your account with an amount that must meet the minimum set by the parent charity. Often, these minimums are $10,000 or $25,000, but they can be as high as $100,000 or more. That limit may be one of the reasons you selected the parent charity you did.
You can amass the total required amount by combining several assets, such as cash, appreciated or restricted stocks, and real estate. Still, often the individual elements must be valued at a certain amount. Parent charities may impose these rules to streamline liquidating the assets that aren’t already cash, as that’s their responsibility. In the case of appreciated securities, liquidation may be completed as quickly as the next trading day. Other, less liquid gifts may take as long as a few months to process.
After your initial gift, you can keep making additional gifts to increase the size of your fund. You can give as often as you like at most parent charities, but the subsequent gifts must usually be of a specified minimum value.
How often, how much to give?
You can recommend as many grants as you like each year, as long as they are for amounts that meet the minimum set by the parent charity, usually in the $100 to $250 range. However, remember that because the donation takes a less direct route than when you simply write a check, the transaction may take a little longer – often up to two weeks. So, suppose you are counting on a donation to be processed and received by a charity by a specific date – for example, in time for a particular event or calendar day. In that case, you will need to plan for the extra time it might take for the fund to complete all the necessary transactions. This is especially true of end-of-year gifts, given during the busiest time for philanthropy professionals.
Once the fund has been created, you can begin to recommend grants that you would like to be paid out of your DAF account. This part of the process gives the DAF its name – the donor advises the parent charity on specific gifts to be made. The parent charity does due diligence on the charity you have named to confirm its status as a legitimate nonprofit organization or purpose. The parent charity also needs to establish that your grant is not being used as payment for anything that will benefit you directly – such as membership dues, pre-existing pledges, or tuition.
If a recommended grant is not approved, the parent charity will inform you of the decision and its reason. In these cases, the parent charity will often help by suggesting related or similar organizations where you might redirect your grant.
The process, A to Z
|Step 1||Step 2||Step 3|
|You select a parent charity and give the necessary initial amount or more)||You recommend an investment strategy for the fund||Once approved, the parent charity writes a check to
|The parent charity liquidates noncash assets and provides a letter for tax filing||You recommend a grant||At the end of the giving period, you get a statement
detailing this gift
|You name your fund, advisers, and successors||The parent charity does due diligence on the charity and makes sure the money is going for charitable purposes||If the grant is not approved, the parent will
inform you of the problem and may recommend
a similar charity as an alternative
How to keep track of your gifts to a DAF?
One of the most incredible benefits of a DAF is that the parent charity manages all of the paperwork and recordkeeping associated with charitable activity. You receive statements, usually on a quarterly and annual basis, that detail the grants that have been made from your fund and any gains earned on your fund’s investments.
This document consolidates all receipts into one comprehensive statement. Still, it also can give you a perspective on your charitable giving – providing a snapshot of how much you are giving and to whom. It’s easier than piecing this information together from your checkbook register at year’s end.
How Does A Donor Advised Fund Work? by Inna Rosputnia
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