DONOR ADVISED FUNDS
A Donor Advised Fund (DAF) is like a charitable investment or charitable checking account. When cash or appreciated securities/assets of any kind are contributed to DAF donors are eligible to receive an immediate tax deduction. This is because funds contributed to DAFs must, either immediately or at a future date, be contributed to a qualified public charity.
DAF funds – charitably intended funds – are invested and able to grow tax-free until the initial donor(s) recommends a grant from the fund to a qualified public charity. Ultimately, DAFs are the fastest-growing charitable giving vehicle in the U.S. because they are an easy, private, and tax-advantageous way to give to charity.
How DAFs Work
Select a community foundation, investment firm, or public charity to open a DAF. Most require a minimum initial contribution of $5k or more.
Contribute cash, appreciated assets, mutual funds, non-publicly traded assets, appreciated real estate, and more to a DAF and qualify for a tax deduction.
Discuss investment of contributed DAF funds with the DAF manager. Allow contributions to grow while determining what charitable initiatives to support.
Recommend grants from the DAF to a qualified charity.
Pending approval from the DAF holder, contributions will be released.
Continue to add funds to the DAF, including through an estate. DAFs are powerful tools to bring appreciated assets to liquid.
How Do Contributions Flow Through DAFs?
DAFs are one-directional. Donors irrevocably contribute cash and/or appreciated assets to a DAF, receive their tax deduction, and the funds become the legal property of the company managing the fund. This is why donors must recommend distribution of grants from the fund and, for protective measures, the DAF manager can reject grant recommendations under extreme circumstances. Funds may not return to the original donor(s).
Why DAFs vs. Foundations?
The administrative responsibilities and investment requirements of private foundations do not apply to DAFs. Where foundations are required to “pay out” a certain percentage every year, DAFs have no such requirements. Foundations are also required to file a 990-tax form and DAFs are not. Because of this, DAFs offer increased privacy and flexibility. Finally, foundations are more expensive to manage as staff are compensated. In contrast, managing companies typically charge 1% of a DAFs gross holding to manage the fund.
Tax Benefits of DAFs
As soon as a donation is made the donor is eligible for an immediate tax deduction. Note that tax deductions may depend on the type of donation.
Cash donation - If donating cash, via check or wire transfer, donors are typically eligible for an income tax deduction of up to 60% of adjusted gross income (AGI).
Long-term appreciated assets - Donating long-term appreciated securities potentially allows donors to maximize capital gains tax advantages, which could help reduce taxes and ultimately give more to charity. With long-term appreciated assets, such as stocks, bonds or real estate, donors have an opportunity to further maximize their deduction(s). By donating these types of assets directly to charity, donors generally won't have to pay capital gains, and can take an income tax deduction in the amount of the full fair-market value, up to 30% of AGI.
Other Benefits of DAFs
Personal Service: The DAF management company works to increase the fund principal via strategic market investments. They also provide regular updates on fund balances, receive future contributions, and process grant recommendations to charities.
Direct Participation: While not managing the fund, donors recommend organizations to whom they would like to provide financial support. Upon approval of the managing entity’s board of directors, the grants are made in the DAFs name (not the donors name, hence the increased privacy).
Investment Expertise: Fund contributions are stewarded by expert investment managers to ensure the longevity and growth. Donors also receive expert advise as they bring highly complex assets to liquid.
Ensured Legacy: DAF funds may be left to familial or non-familial successors for grant/gift recommendation. DAFs are wonderful tools to help philanthropy transcend generations.
Criticisms of DAFs
Slows Funds to Charity: DAFs are often said to be financial holding pens for the assets of people who want quick tax deductions and have no actionable plan for supporting charitable initiatives or organizations. At the same time, as funds are invested, the amount of charitable dollars to be granted is growing.
Management Fees: Like any retirement plan has fees, so do DAFs. By the time charitably intended assets are granted to charity some of the funds will have been chipped away by fees. At the same time, some unearned gains will be added as the funds have been invested.
Middleman: Many wonder why DAFs are needed as donors could simply gift assets to charity directly. At the same time, DAFs can handily bring gifts of complex assets to liquid which the majority of nonprofit organizations are not capable of doing.
Cannibalizing Traditional Giving: People are giving approximately 2% of their discretionary income directly to charitable organizations and 5% of their discretionary income to their DAFs. Thankfully, DAF managers have guardrails in place to regularly remind their fund holders to make grants to charity.
