(Photo credit: Prism Financial Planning)
Donor-advised funds have been growing in popularity among philanthropists and it’s easy to understand why.
Contributions to these funds allow people to create charitable accounts and receive an immediate tax deduction. DAFs are relatively simple to set up and their management is outsourced to an institution, such as a community foundation, Jewish federation or commercial sponsor like Fidelity and Vanguard.
Besides the tax deduction, donors can also avoid capital gains taxes if a gift is property that has appreciated in value. For donors concerned about inheritance taxes, their gift reduces the size of an estate by the value of the asset. DAFs are also considered by the IRS to be public charities and won’t be subject to the 2 percent excise tax private foundations must pay on net investment income.
This low-maintenance way to oversee donations both large and small has increasing appeal. A report from the National Philanthropic Trust, one of the largest DAFs, found assets in these funds were nearly $54 billion in 2013, a 23 percent jump from the year before.
(Source: ASU Foundation)
DAFs can also be a complement for philanthropists who have a trust or foundation. For example, a foundation may be established to focus on a cause like cancer research or supporting Jewish day schools. A philanthropist could then use a DAF for giving in other areas rather than going through the rigmarole of establishing another foundation.
As their name implies, DAFs still allow donors to have an active role in advising where their money goes—to a point. Donors can typically recommend which organizations receive their gifts. Most organizations that sponsor DAFs will honor those requests, so long as donations are to approved charities with 501 (c)(3) status. However, it is ultimately the organization, not the donor that has the final say.
Here are some other factors to consider in deciding whether a DAF would be a good fit for your philanthropic portfolio:
- You intend to limit grants only to IRS-approved charities, and not to individuals.
- You want to make a charitable donation for tax purposes, but don’t want to decide right away where the money should go. With DAFs there is no time limit to make a donation. In contrast, a foundation must disburse at least 5 percent of its assets annually.
- You want to make gifts anonymously, which is more difficult when the money comes from a private foundation.
- You don’t want to commit a large amount of assets right away. Some sponsors allow DAFs to be set up with just a few thousand dollars.
If you are not comfortable with ceding the final say about where your money goes or may chafe at granting restrictions imposed by sponsoring organizations, a DAF may not be right for you. Also, bear in mind that DAFs do have administrative fees that can start at 0.6 percent of assets or more annually.
Still, the ability to get an immediate tax deduction and the allure of having just one document to deal with at tax time is tempting. So is the prospect of allowing philanthropy to become a hands-on family affair. As an example, children can place b’nai mitzvah gifts in DAFs and take an active role in deciding where the money goes. Building that kind of philanthropic legacy may be a DAF’s greatest gift of all.
Journal of Financial Planning; a good overview of the advantages and disadvantages of donor-advised funds.
Article: How to find the Right Donor-Advised Fund (And Why), Forbes
Article: Invasion of the Charity Snatchers, Wall Street Journal
Donor-Advised Funds FAQs, National Philanthropic Trust
Establishing Donor-Advised Funds for Lifecycle Events, Jewish Communal Fund
Donating Appreciating Securities, Fidelity Charitable
Strategic Giving with Donor-Advised Funds, Schwab Charitable
Op-Ed: Donor-Advised Funds are a Boon to Savvy Charities, The Chronicle of Philanthropy