The Benefits of Donor-Advised Funds
Philanthropic initiatives can be accomplished through many different channels, so why choose a donor-advised fund? The following are some key general benefits:
Immediate income tax deduction for contributions, subject to IRS limits
No capital gains tax on appreciated securities donated to the DAF if they’ve been held for more than one year
No tax on income or capital gains on investments in the DAF
Flexibility and Convenience
The donor can request a grant to any IRS-qualified public charity at any time
Grants may be anonymous, if the donor desires, or given in the fund name the donor requests
The donor can designate individuals to request current or future grants, even beyond the donor’s lifetime
Investments can be managed considering donor goals and recommendations to the extent possible, given the sponsoring organization’s overall investment policy
Contributions can be made to a specific DAF at any time, by anyone, including individuals, trusts and private foundations
Typically significantly lower cost, less time intensive, and lower risk than establishing and managing a private foundation
What is a Donor-Advised Fund?
A DAF is a separately identified fund, comprised of donor contributions, maintained and operated by a sponsoring organization that is a 501(c)(3) public charity (such as Fiduciary Trust Charitable). The sponsoring organization has legal control over the donated assets, but the donor or others retain advisory privileges to the fund. Such advisors make recommendations regarding the distribution of the funds and may have a voice regarding the investment of assets in the account.
A primary advantage of gifting to a DAF is the immediacy of the tax deduction combined with the flexibility of recommending charitable grants over time. Given that DAF-sponsoring organizations are public charities, contributions to DAFs are eligible for maximum charitable tax deductions. The types of assets that can be contributed to DAFs range from cash and publicly-traded securities to restricted stock, real estate, tangible personal property, and other illiquid assets, depending on the sponsoring organization’s guidelines. DAFs are appropriate for donors with smaller balances to devote to charitable causes, but can also be attractive for large gifts, including multi-year gifts made with a “bunching” technique. In fact, there are individual DAFs holding well in excess of $100 million in assets.
Some restrictions do apply to DAF distributions, however. For example, under IRS rules, DAFs may not distribute to individuals or provide a “more than incidental benefit” to the donor. Most DAF-sponsoring organizations require that any grantee organization be a 501(c)(3) organization classified as a public charity and, therefore, do not permit grants to private foundations. There are no IRS-imposed requirements for the timing and amount of DAF distributions. DAF-sponsoring organizations, however, may have their own distribution rules, such as requiring at least one distribution every two years, or a minimum distribution amount per grant.
DAFs can provide a simple way to involve multiple generations in philanthropy. Younger children can be included in discussions regarding grant recommendations and adult children can be named as advisors or successor advisors to the fund. Because DAFs are not tied to specific grantee charities, as a family’s philanthropic vision changes and matures, the family can revise its grant recommendations accordingly. DAFs also can be used to make anonymous donations to charities, which can be beneficial to both family and individual donors.