What Is a Donor-Advised Fund (DAF) and How Do They Work?
Your heart is in the right place, but you might be doing it wrong.
Americans love charitable giving. About 69% of us regularly donate to organizations we truly believe in. The problem is, too many of us donate inefficiently or fail to maximize the impact of our giving by handing out cash.
Increasingly, goodhearted people are maximizing both the impact of their charitable donations and the immediate tax benefits they get by supporting charitable organizations through donor-advised funds.
Donor-advised funds give you the flexibility to grow and use your charitable funds and immediately enjoy end-of-year tax advantages from giving.
What is a Donor-Advised Fund?
Choosing a cause to get involved in can take a lot of time to contemplate. But by setting aside money for charity in a donor-advised fund (DAF), you don’t have to immediately decide how to use your money. DAF-sponsoring organizations like Charityvest allow you to set aside money now and immediately receive the tax benefits, while giving you time to choose the charities you want to support.
Here’s the deal: Donor-advised funds (DAFs) essentially act like investment accounts for charitable giving. You can contribute a variety of assets into a DAF – cash, stocks, cryptocurrencies, real estate, fine art and other assets.
Rather than donating a lump sum of money or donating cash periodically, a donor-advised fund account offers you the ability to sustain your charitable giving over time and grow the money you donate. That means you can have an even more significant impact on the charitable organizations you care about the most.
How a Donor-Advised Fund Works
You entrust your contributions to a DAF-sponsoring organization, such as Charityvest. These contributions are consigned for charity, and you can’t reclaim them for personal use.
The funds in your account can be invested tax-free to help grow your charitable contributions, much like an investment account.
You’ll get to advise how your contributions are invested, as well as when, where and how much of it is granted to a charitable organization.
Advantages of Donor-Advised Funds
There are lots of reasons there’s been a sharp uptick in contributions to donor-advised funds from 2011’s $8.13 billion to 2020’s $34.67 billion, according to a report from the National Philanthropic Trust.
Here are some of the most compelling reasons for the dramatic rise in popularity of this type of giving vehicle:
- You can immediately claim a tax deduction, even if you haven’t decided on a charity to donate to.
- You have one place and one receipt for all your giving.
- The potential for growth through investing charitable dollars gives you the opportunity to donate more over time than you could if you just gave your favorite charity cash.
- You can donate more than just cash, including assets like stocks and cryptocurrency and grant the proceeds to any charity. Not all charities directly accept non-cash assets.
- You don’t have to pay capital gains taxes on assets you contribute to your donor-advised fund. Your contributions grow tax-free.
- You can claim a tax deduction of up to 60% of your adjusted gross income on cash contributions, and up to 30% on non-cash assets.
- Unlike private foundations, you don’t have to be wealthy to start a donor-advised fund, and operational costs are much lower.
- You can claim a tax benefit on the current value of assets you’ve contributed to your donor-advised fund, even if they’re worth more than you originally paid for them.
- You aren’t required to disclose your identity to charities, so you can make anonymous grants if you’d like.
Disadvantages of Donor-Advised Funds
Donor-advised funds have faced some scrutiny from regulators and pundits who have questioned the intentions of those who use this giving vehicle. Are they in it for charity, or just the sweet tax benefits?
That’s because you’re not required to grant out your contributions periodically, as you are with private foundations. Fortunately, DAFs do have a higher payout rate to charities than private foundations.
Donors contributed more than $48.7 billion to DAFs in 2020, and granted out most of that ($34.6 billion) in the same year, according to a report from the National Philanthropic Trust.
There’s also the issue of control. Technically, when you put money in a DAF, it’s no longer yours, and the DAF sponsor can legally deny your grants. That said, grants are very rarely denied, usually only for fringe legal reasons. Oftentimes funds are transferred the very same day.
How to Open a DAF
Part of what makes donor-advised funds great is that it’s so easy to get started. Starting your fund is as simple as choosing the right DAF sponsoring company to help you invest and disburse your contributions.
Choosing a Sponsor
The DAF sponsor you choose will play a large role in how your fund is invested and how your money is granted to charities. Sponsoring organizations range from those that cater to the ultra-wealthy, to those that focus on a single issue.
When choosing a sponsor, you need to review a few key elements:
- The minimum contributions. Some DAF sponsors have significant minimums just to open an account.
- Investment and administrative fees. DAFs make money through administrative fees, and they can vary a lot between DAF sponsors.
- Investment options. Most DAFs have a standard menu of investment options. You want to make sure they align to your personal investing philosophy.
- Values + grant policies. Some donor-advised funds will limit charities that can be supported based on their stated values or grant policies. While most are generally flexible, you want to make sure your DAF of choice has policies that can align sufficiently with your values.
With a sponsoring organization like Charityvest, you don’t need to be ultra-wealthy to donate. And you can choose from more than a million charities to support.
They let you choose from a variety of exchange-traded funds and managed portfolios of growth stocks so your contributions can grow tax-free and work even harder for the charities you support.
Launch your Donor-Advised Fund Today
With Charityvest, you can set up your donor-advised fund in less than two minutes. They won’t pressure you to constantly fund your account or burden you with a huge minimum contribution.
Instead, you can contribute as little or as much as you like, whenever it’s convenient for you.
Charityvest provides a single platform for you to execute all your giving and track it, including a single tax receipt at year end.
And you don’t have to worry about them levying fees on the funds you choose to grant out to your favorite charities. Your recipients will get every cent of the funds you grant out of your account.
Frequently Asked Questions about Donor-Advised Funds
Still have a few lingering questions about leveraging the benefits of a donor-advised fund? Here are some answers to some of the most popular questions about DAFs from around the web.
How much can you contribute to a Donor-Advised Fund?
You can contribute as much cash or assets to a donor-advised fund as you’d like. However, there are upper limits for the tax benefits you can enjoy from your contributions.
For cash contributions, you can claim tax deductions for up to 60% of your adjusted gross income. For non-cash contributions, you can claim a tax deduction of up to 30% of your AGI.
Do you pay taxes on a Donor-Advised Fund?
Yes, but you can immediately claim a tax deduction on your contributions. You can deduct up to 60% of your adjusted gross income on cash contributions, and up to 30% of your AGI on non-cash assets.
What companies offer Donor-Advised Funds?
There are more than 1,000 DAF-sponsoring organizations in the US, according to estimates. One of the best and most popular sponsoring organizations for donor-advised funds is Charityvest, due to its ease of use and low administrative fees.
What happens to my Donor-Advised Fund after I die?
DAFs aren’t legally a part of your estate (the money in the DAF is the legal property of the DAF sponsor), so if you pass without informing your DAF sponsor of your desired succession, the funds in your account may become endowed to the DAF sponsor that manages your fund.
Fortunately, many DAFs, such as Charityvest, allow you to assign “beneficiaries” to your DAF account, which instructs them on how to allocate your DAF’s funds upon your passing. This ensures your charitable giving legacy.