In an era marked by a growing desire for positive societal impact, philanthropy has emerged as a vital vehicle for change. Donor advised funds (DAFs) have gained prominence as a flexible and efficient tool for individuals and families to engage in charitable giving. A DAF—typically sponsored and managed by a community foundation or commercial investment company—offers many of the benefits of a private foundation at a fraction of the cost.
Upsides of a DAF
A DAF allows you to make tax-deductible contributions to an investment account and to advise the fund regarding which charities your contributions and earnings should be used to support. Tax regulations require the sponsor to have the final say on how your charitable dollars are spent, but in most cases the fund will follow your recommendations.
The advantages of a DAF include:
Contribution of a wider range of assets. Charities are not always able to accept non-cash assets, but a DAF generally accepts:
- Cash equivalents, such as checks and wire transfers
- Publicly traded securities or mutual fund shares
- Restricted stock
- Private equity and hedge fund interests
- Private company stock
Immediate charitable deductions. When you contribute cash, securities, or other assets to a donor-advised fund at a public charity, you are generally eligible to take an immediate tax deduction without needing to identify a specific charitable beneficiary.
By bunching contributions—wherein donors make larger, tax-deductible contributions to their DAF in specific years—you can surpass the standard deduction threshold and maximize their tax benefits in those years. Additionally, donors can leverage appreciated securities by contributing them directly to their DAF. This not only avoids capital gains tax but also provides a fair market value deduction for the full amount of the appreciated assets.
Higher deduction limits. Cash contributions to DAFs, like donations to other public charities, are deductible up to 60% of your adjusted gross income (AGI). Noncash contributions are deductible up to 30% of AGI. Deduction limits for private foundations are 30% and 20%, respectively.
Simplicity and low cost. Setting up a DAF is nearly as cheap and easy as opening a mutual fund account. Minimum contributions average around $25,000, although some DAFs allow you to open an account with no minimum initial contribution, such as with our financial partner, Fidelity Charitable.
Private foundations, on the other hand, usually involve six- or seven-figure contributions, take several months to set up, and come with significant legal fees and other expenses. And while a DAF’s sponsor handles investment management and administration, a private foundation requires you to establish a board, hold periodic board meetings, keep meeting minutes and file tax returns.
Privacy. Unlike private foundations and other charitable giving vehicles, a DAF allows you to remain anonymous if you’d rather. Technically, when a DAF sponsor donates to a charity, it’s distributing its own assets, so you can elect to keep your name out of it or name your DAF after your mission, such as “the Fund for Alzheimer’s Research.”
Downsides of a DAF
Lack of Direct Control. While donors can recommend grants to specific charities, they do not have direct control over the funds once they are contributed to the DAF. The sponsoring organization ultimately oversees the assets and must adhere to IRS regulations regarding grantmaking.
Perceived Delay in Impact. Some may argue DAFs create a delay between the time funds are contributed and when they are actually disbursed to charities. This perception could deter donors seeking more immediate and tangible impact from their charitable gifts.
Minimum Contribution Requirements. Many DAF providers require a minimum initial contribution, which might be a deterrent for smaller-scale philanthropists.
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Donor advised funds present a compelling option for individuals and families seeking to engage in philanthropy while maintaining a strategic alignment with their financial goals. By offering tax efficiency, flexibility, and the potential for legacy building, DAFs are particularly attractive from a wealth management perspective.
Contact your M&S Wealth partner today to help you evaluate the relative costs and benefits to determine if a DAF is right for you. Through our partnership with Fidelity Charitable, you can create a DAF with no minimum initial contribution requirements and typical fees amounting to about 1% of the balance, making utilizing an account accessible, simple, and effective.