April 12, 2022

Utilizing the Donor-Advised Fund in Charitable Giving

If you are active in charitable giving, you may want to consider a donor-advised fund (DAF) to support the organizations you are passionate about. 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

  • Cryptocurrency

  • 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.

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 as little as $5,000.

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.

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.

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

The downside of a DAF is once you contribute assets to a DAF, they become the sponsor’s property. Your role in directing distributions is, as the name indicates, strictly advisory, and you have little or no control over investment management.