What is a Donor-Advised Fund?
Think of donor-advised funds (DAFs) like a savings account for the sole purpose of charitable giving. Individuals, families, or groups contribute to their donor-advised fund that is managed by a sponsoring organization, such as a community foundation or financial institution. The donor gets an immediate tax break when they contribute funds to their DAF and can later suggest where their funds are granted out to. Essentially, DAFs act as a bridge between a donor's money and the charities they want to support.
How Do Donor-Advised Funds Work?
- Contribute Funds: Donors contribute assets (like cash, stock, crypto, or other appreciated securities) to their DAF, held by the sponsor organization (ex: Fidelity Charitable, Schwab Charitable, Charityvest). The donor gets an immediate tax deduction when they give to their DAF and their contributions are irrevocable.
- Invest Funds: These contributions are typically invested and can grow over time. The donor can often have a say in how it's invested, giving their funds the opportunity to increase in value over time. This can ultimately provide even more funds for charitable giving.
- Recommend Funds: The donor's funds (including any growth from investing) can then be recommended as grants to their favorite nonprofits. They get to decide who gets it, how much the grant is, and even the purpose. The sponsor organization will ensure the grant complies with IRS regulations and then distribute the funds directly to the nonprofit.
What are the Benefits for Donors?
- Maximizing Tax Benefits: Donors can make an immediate tax deduction when contributing funds to their DAF account, as well as grow their contributions over time (tax-free) for more charitable giving.
- Simplified Giving: DAFs provide a central platform for managing charitable giving and streamline the record-keeping process. For example, donors can make one large contribution to their fund and then recommend grants to multiple nonprofits over time – while only having to keep track of a single tax receipt.
- Flexible Funding Options: Donors have the flexibility to decide when and where to give, as well as the purpose of their grant. This means they can give right away or choose to build up their DAF over time for more significant giving. Typically, DAFs have no annual distribution requirements and also give options for anonymous granting.
- Contribute Wide Range of Assets: This includes cash, crypto, and stock. If donors contribute non-cash assets, they get the added benefit of not having to pay capital gains tax since they are donating it.
- Charitable Legacy: DAFs can also be an 'easy to establish' option to allow families to continue with philanthropic giving.
