Donor-advised funds (DAFs) can be used as a bridge between your values and public charities, helping to build a better world.
They offer flexibility for what can be given, as well as when and how gifts are distributed.
DAFs have been in existence in some form since the 1930s but have experienced renewed interest and tremendous growth in recent years. The National Philanthropic Trust 2021 DAF Report says that in 2020, there were more than 1 million DAFs holding more than $159 billion in charitable funds.
Let’s look at what makes them so popular, and how they can help you fulfill your intentional giving goals.
Think of a DAF as a sort of “charitable giving investment account.” It is owned and controlled by an independent, sponsoring organization whose purpose is to raise and distribute funds to other charities. DAFs are considered charities, with a mission to support the causes of their donor advisors nationally or locally. Some DAFs even focus on charities connected to a single issue. Sponsors can be investment companies or independent entities.
A DAF is set up to:
- Receive your tax-deductible gifts of cash or other financial assets.
- Provide regular statements identifying the value of your contributions.
- Allow you to advise the fund on how to invest, and when and where to distribute the gifts.
Distributions are regularly approved to public charities meeting the 501(c)(3) exemption requirements. That’s if you and your family members do not have direct or indirect control of the entity or receive more than an incidental benefit as a result of the distribution. Qualifying recipients typically include religious charities, educational institutions, arts organizations, environmental causes, etc.
Why would someone want to store charitable funds and direct someone else to distribute them later, rather than giving them directly to the organization?
- You may want time to carefully identify appropriate charities to receive grants.
- Your annual income may be irregular, but you still want to consistently give to charity.
- You want to build a fund to sustain a lifestyle of giving in retirement.
- You want an opportunity to realize compounded growth, which over time helps build a fund that can execute your charitable vision.
You may already be helping to build a better world through your profession or community service, but that could also limit your time and ability to achieve other personal giving goals. A donor-advised fund can serve the high-performing employee, executive, and/or business owner by providing:
- One place to make donations using year-end bonuses or profit distributions, while quickly receiving a current-year tax deduction.
- One receipt for annual tax purposes, no matter how many grants are made throughout the year.
- The option to automate regular gifts on different cycles.
- The option to give anonymously to charities and limit the requests you receive.
Donor-advised funds can be used to proclaim your legacy by encouraging your family to think strategically about donations. Some children give alongside their parents to a single DAF in support of charities they see as positively impacting their future.
Every DAF sponsor has its minimums, but the accounts are typically easy to open. An initial contribution is often as low as $5,000. Optional future contributions can be as small as $500 and grants out of the fund as low as $50.
In estate planning, a DAF is increasingly used as the primary bucket to receive designated income- and estate tax-reducing charitable contributions. Families may want a DAF that allows them to distribute remaining funds to specific charities at death or designate other family members to carry on as successor advisors to the fund. DAFs appeal to a wide range of families, their attorneys, and other advisors — regardless of estate tax requirements — because they have simpler administrative rules and lower costs than a private foundation.
A goals-based financial planning process can help you uncover current income or future resources for charitable purposes you or your family already want to support.