If you are charitably inclined, you should consider making your gifts to your favorite charities through a Donor Advised Fund (or “DAF”).
What is a Donor Advised Fund (or “DAF”)?
A Donor Advised Fund (or “DAF”) is a philanthropic giving vehicle that allows donors to make charitable contributions, receive an immediate tax benefit, and then recommend grants from the fund to specific charities over time.
How does a Donor Advised Fund work?
To establish a DAF, a donor contributes assets – such as cash, securities, or other appreciated assets – into the fund, which is typically managed by a sponsoring organization like a community foundation or a financial institution like Charles Schwab or Vanguard. The donor receives an immediate tax deduction for the entire contribution. The assets in the fund can then be invested and grow tax-free, allowing donors to recommend grants to qualified charities at their own pace.
What are the benefits of using a Donor Advised Fund?
- Immediate Tax Deduction: Donors receive an immediate tax deduction (if they itemize deductions on their tax return) for their entire contribution to the DAF, even if the funds are distributed to charities later.
- Flexibility: Donors can take their time to decide which charities to support and when to make the grants.
- Simplicity: DAFs streamline charitable giving by consolidating administrative tasks and record-keeping into a single account.
- Investment Growth: The assets in a DAF can potentially grow over time, increasing the amount available for charitable giving.
Who can contribute to a Donor Advised Fund?
Individuals, families, corporations, and foundations can all contribute to a DAF. There is typically no minimum contribution requirement, although some sponsoring organizations may have their own guidelines.
What types of assets can be contributed to a Donor Advised Fund?
Cash, publicly traded securities, closely held stock, real estate, and other complex assets can often be contributed to a DAF. Each sponsoring organization has its own policies regarding acceptable assets.
How are grants recommended from a Donor Advised Fund?
Donors can recommend grants to eligible charities directly from the DAF. The sponsoring organization conducts due diligence to ensure that the recommended charities meet IRS guidelines for public charities or private operating foundations.
Are there any restrictions on grants from a Donor Advised Fund?
Grants from a DAF must be made to IRS-qualified public charities or private operating foundations. They cannot be used to fulfill personal pledges, support political campaigns, or provide goods or services to donors or their families.
What are the costs associated with Donor Advised Funds?
Sponsoring organizations typically charge administrative fees, which can vary depending on the organization and the size of the fund. It’s important for donors to review the fee structure before establishing a DAF.
Can Donor Advised Funds be established as part of an estate plan?
Yes, DAFs can be established as part of an estate plan to provide ongoing support for charitable causes after the donor’s lifetime. This can be a way to involve future generations in philanthropy.
What happens to assets in a Donor Advised Fund if the donor passes away?
Upon the donor’s passing, any remaining assets in the DAF can be used to support charities according to the donor’s recommendations or the policies of the sponsoring organization.
Donor Advised Funds offer a flexible and efficient way for individuals and families to engage in strategic charitable giving while maximizing tax benefits. By understanding how DAFs work and their potential impact, donors can make informed decisions to support causes they care about.