What is a Donor Advised Fund?
By Denise Stevens
Donor advised funds are the fastest growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity. A donor advised fund, or DAF, is like a charitable investment account for the sole purpose of supporting charitable organizations you care about.
Read on to learn more about DAFs, how they work, and the benefits they provide for charitable giving.
How Does A DAF Work?
- Establish a donor advised fund account with a custodial sponsor such as Fidelity.
- Once established, you can then contribute cash, publicly traded securities, or certain other assets such as private business interests, private company stock, or even cryptocurrency. (Note: your contribution to a DAF is an irrevocable commitment and cannot be used for any other purpose other than grantmaking to charities.)
- You are generally eligible to take an immediate tax deduction of donated assets (just like donating directly to a charity) in the year you donate.
- You decide when to instruct the DAF sponsor to make a charitable donation to any IRS-qualified public charity. You can recommend such donations now or later.
- Meanwhile funds in the account can be invested for tax-free growth until you are ready to recommend the donations be made to named charity or charities.
What are the Benefits of Giving with a DAF?
You want your charitable donations to be as effective as possible when you give. Here are some of the many benefits of a donor advised fund:
- Simplified recordkeeping and organization. You don’t have to keep track of every gift acknowledgment from every charity you support – just the receipts from your DAF contributions.
- Generally low costs to maintain and low initial contribution requirements.
- You can support multiple charities with one bequest vehicle.
- You can continue to add assets to your DAF account as you desire, which you can continue to direct via your recommendations to the DAF sponsor.
- You can get a current tax deduction but decide which charities you want to support in the future, therefore providing flexibility to make these decisions.
- You can invest your donation for tax-free growth so that you are able to give even more in the future.
- The DAF sponsor will conduct due diligence to ensure the funds granted go to an IRS-qualified public charity and are used for charitable purposes.
- These gifts can also help reduce or eliminate the estate tax burden for your heirs.
- Donating long-term appreciated securities directly to charity – instead of liquidating the asset first and donating the proceeds – can maximize both your tax benefit and the overall amount you have to grant to charity. These donations provide two tax benefits: (1) Become eligible for an income tax deduction of the full fair-market value of the asset (up to 30 percent of your adjusted gross income). (2) Eliminate capital gains tax on long-term appreciated assets.
- A DAF can be an effective in-between vehicle to enable the donation of non-cash assets, which some charities might find difficult to accept. Since non-cash donations can be more tax-advantageous than cash/credit cards, this broadens charitable giving options.
- You can enhance your legacy planning by incorporating your donor advised fund into estate planning by making a bequest in your will to the DAF sponsor or by making the sponsor a beneficiary of a retirement plan, life insurance policy, or charitable trust.
- Many DAF sponsors enable you to create a succession plan for your donor advised fund, thus allowing you to pass the remaining funds in your account on to your heirs to decide on charities. Some programs allow you to break the fund up into multiple smaller funds to pass down to different successors.
- Donor advised funds can be a valuable tool for estate planning. These gifts can also help reduce or eliminate the estate tax burden for your heirs.
Other Important Notes
- You cannot fulfill legally binding pledges with a donor advised fund.
- You can only support IRS-qualified 501(c)(3) organizations. You cannot support private foundations, political groups, or crowdfunding campaigns with a DAF.
- You cannot recommend grants that may provide a personal benefit – such as school tuition for a grandchild or tickets to a charity event that you will attend.
- You can still specify a specific use, campaign, or purpose for your grant recommendation. And you can still make “in honor of” or “in memory of” contributions.
- You can still request anonymity.