A Donor Advised Fund (DAF) is both a type of financial account and a charitable giving vehicle that allows the donor to contribute cash and non-cash assets into a fund where those assets are then invested. The donor can then direct grants from the fund to their charity of choice when they choose.
That is a simplified explanation, but Donor Advised Funds have become very popular over the past few decades due to their ease of set up, tax benefits, and flexibility. According to the National Philanthropic Trust’s 2022 DAF Report, as of 2021, there were more than 1.2 million Donor Advised Funds in the US, and grants from these Donor Advised Funds accounted for more than 10 percent of all charitable giving in the US. That’s not insignificant, so let’s get into a bit more detail.
How do you open a Donor Advised Fund?
After opening up a Donor Advised Fund with their fund sponsor of choice, the donor makes an irrevocable contribution to their fund. They can take a tax deduction for that gift in that tax year only (since technically that DAF is a 501(c)(3)). Then once the funds are in the DAF, they may be invested and can grow tax-free. The donor can then recommend grants to their qualified charity of choice, at any point in time.
Typically, a donor will contribute appreciated stock or other appreciated non-cash assets to the fund, since contributions made to a DAF avoid capital gains tax if they have been held for more than a year.
DAFs can be funded with various assets (cash, stock, real estate, etc.), though not all fund sponsors accept every type of asset. Depending on where the fund is held and the fund size, donors may have a variety of investment options available to them. This can be another benefit to opening a DAF, as the donor may have the option to retain some investment discretion over their funds.
Many, if not all, fund sponsors will offer succession planning for the fund. For example, donors can choose a successor who will continue to make grant recommendations on their behalf, after they’ve passed. Another option would be naming one or more charities that will receive the remaining funds upon the donor’s passing.
Tax Implications
In whatever year the donation is made to the Donor Advised Fund, that’s the year the donor can claim a charitable deduction to their taxable income (up to a certain amount and if they itemize).
As previously mentioned, assets donated to a Donor Advised Fund will not be subject to capital gains tax if held for more than a year. So even if the donor is not itemizing, they can still reap a benefit by potentially avoiding capital gains tax that they may otherwise owe.
Donors should always work with their tax professional and financial advisor to make sure the timing of the gift(s) makes the most sense for them.
Things to Consider
Typically, there are no grant requirements once the funds have been contributed to the DAF (e.g., the donor doesn’t have to know right away which charity they want to support). However, donors can only make grants to 501(c)(3) organizations and certain private foundations.
Depending on the sponsor, there may or may not be a minimum gift amount, so donors should always check first.
Gifts to a Donor Advised Fund are irrevocable, so donors cannot change their mind once the contribution has been made.
Donor Advised Funds are not the only giving vehicle and may not be the right fit for all donors. Donors should consult with financial and gift advisors to discuss other giving vehicle options.
If the donor knows which organization they want to support, I recommend they reach out to that organization’s charitable giving team to discuss how they can make the most impact with their gift. There may also be extended benefits to the donor (e.g., donor recognition, engagement events, etc.).
If charitable giving is already part of someone’s ethos, Donor Advised Funds are a great way to make an impact in a tax efficient way. This article is not an exhaustive list of all DAF features, so please discuss with a tax and financial advisor first.
By: Polly Price