What is a Donor Advised Fund?
A donor advised fund is a charitable investment account designed for the sole purpose of financially supporting the charitable organizations of which a philanthropic individual, family, or group aligns with on mission and value.
When an individual contributes cash, securities or other assets into a donor advised fund held with a public charity, they are generally eligible to take an immediate tax deduction. Those funds can then be invested for tax-free growth, and the donor can recommend grants to virtually any IRS-qualified public charity.
When considering a philanthropic gift, it’s important to make any charitable donations as effective as possible. Donor-advised funds are undoubtedly one of the fastest-growing charitable giving vehicles in the United States, mostly because DAF gifts are one of the easiest and most tax-advantageous ways for charitably inclined individuals to give to charity. Donor advised funds also allow an ability for contributors to make DAF gifts anonymously.
Keep in mind that not all donor advised funds operate equally, as administration costs, investment options, support and service capabilities can vary greatly.
For example: What if a family wanted to establish a philanthropic legacy using assets like real estate or a business interest? Most donor advised funds would not offer help directly and would instead refer you to consult with a trust & estates attorney, CPA or qualified team of fiduciary advisors who are well-staffed and trained on DAF gift rules and allowable donations. Depending on the size of the DAF, some might simply refuse the gift or state that complex or in-kind gifts cannot be accomplished with their organization.
What happens to Donor Advised Fund (DAF) when the grantor dies?
When an individual, couple or family initially sets up a donor advised fund, there is typically a provision included regarding its desired succession. Whoever is appointed to inherit or assume control of the DAF is commonly referred to as the successor grantor.
While naming some, or all, adult children as the successor grantor(s) is very common, a successor grantor certainly does not need to be a family member. In situations where the size of financial legacy is substantial or a donor is very philanthropic, individuals might even designate a charitable trust or private family foundation as the successor grantor.
After the grantor of a donor advised fund has died, a successor may have certain limits placed on the types of gifts allowed. Some DAF’s have adopted rules with forbidden lists of investments or exclusions based on values contrary to the DAF’s charitable mission & values, while others leave options wide open for successor grantors to select anything.
Does the grantor of a donor advised fund leave directive papers within estate plan to help guide and direct successor grantors?
Practically speaking, any individual intending to leave a financial legacy would be very wise to engage with their successor(s) during their lifetime, in an effort to help express their philanthropic values, wishes, goals, and help explain the desired process of making charitable gifts.
That being said, documenting any specific processes or particular wishes for important financial gifts to be made in writing for heirs & successor grantors can not only be courteous, but also incredibly helpful. After all, your loved ones will be going through enough while settling your estate.. The least you can do is provide them with a feel-good sense of knowing they’re carrying out your best wishes.
The most effective way for doing this is by working with a qualified trusts & estates attorney to incorporate these wishes into a valid, tax optimized & flexible estate plan using a last will & testament, trust
The most effective way for doing this is by working with a qualified trust & estates attorney to incorporate these wishes into a last will & testament or family trust ensuring a flexible & tax optimized estate plan as one's situation changes over time.
Pro-tip: Documenting your charitable or philanthropic values by including a self-written, personal philanthropic mission statement can be both a meaningful personal touch and functional addition on top of a well-documented estate plan.
What types of investments are made inside of Donor Advised Funds?
The majority of DAF’s have a limited offering of investment portfolios, ranging from very conservative money market holdings, to growth oriented investments such as ETFs and named equity mutual funds.
Some DAF’s offer greater flexibility by supporting custom brokerage account investing, though also usually have higher minimum investment requirements.
There are a few DAF administrators that offer “impact investments,” aka privately held investment offerings that are selected in-part due to their corporate mission or value.
Much of the rationale behind impact investing is that it has the ability to offer a two-fold benefit (or impact), as the allocation of the investment towards, or away from, companies committed to measurable social and environmental impacts creates a philanthropic social good above and beyond the underlying financial performance.
While impact investing is carried out in many different ways, it’s most often achieved by focusing on particular sectors or mission-oriented themes, such as social, environmental, & governance (ESG), access to health & education, faith-based & religious objectives, social injustices, or general ethical & sustainability standards.
What are some of the key benefits of using Donor advised funds that donor’s receive?
The simplicity of accounting, reporting and ongoing tracking is perhaps the biggest benefit to using donor-advised funds to establish a financial legacy. Imagine the time, energy and general headache of having to chase down gift receipts from 30 or 40 different charities at the end of each year in order to properly report charitable donations.
Another great benefit to using donor advised funds is the flexibility in structure and flexibility regarding timing of making philanthropic gifts, both into the DAF as well as from the DAF to the individual charities. Let’s assume for example that you’d like to make a charitable gift and that the most tax-efficient way of doing that is by gifting appreciated stock. Using a donor advised fund to hold the initial gift can provide flexibility later in the event you’re not quite sure that you’d like to give 100% of the gift to a single charity, may want to grow that investment a bit more before actually sending to the non-profit, or perhaps feel called to arrange for distributing your financial support in a monthly, quarterly or annual fashion, or on particular dates like a birthday or scheduled retirement date.
DAF are considered public charities by the Internal Revenue Service (IRS) and can therefore grant gifts to qualified nonprofits & charities with a tax-exempt status under section 501(c)(3) of the Internal Revenue Code. Public charities are not required to report that gave to what so you can give anonymously as well.
This additional anonymity can also be a clever way to stay off the future mailing lists and year-end ‘ask/commit’ distributions for any organizations that actively market prior donors for additional giving campaigns.
Why do so many individual charities offer DAF as an option for their donor base?
There are many reasons why tax-exempt organizations make Donor Advised Funds available to their donors.
For starters, organizations recognize the flexibility and easability characteristics of DAFs listed above and likewise have a vested interest in making it as easy as possible for charitable individuals and families to make donations to their organization’s cause.
Most charities can simply “private label” an existing DAF product, making it incredibly fast to get an engagement loop for prospective donors to establish.
While most non-profits operate with a more limited staff than for-profit companies, it’s equally as important for charities to create a general sense of ability to market, promote their cause(s) and to appeal to philanthropic donors by adjusting to meet industry best-practices.
For nonprofits that operate with a limited staff who is most often trained more in the know-how of executing on an organization's mission than administrative functions, charities are well-positioned to benefit from the outsourcing of gifting activities to a DAF such as the acceptance & processing complex gifting of financial assets and/or conversion of assets to cash.
In this capacity, charities are also often able to leverage unique knowledge, management and accounting of non-cash asset gifts as well. For these reasons, both donor advised funds and community foundations are essentially financial services-oriented companies that operate from the lens of a philanthropic, charitable intention.
Do donor advised funds have any limits or restrictions?
Many donor advised funds have minimum funding requirements for getting started with a new account. While minimum initial funding requirements for donor advised funds vary, amounts like $5,000, $10,000 or $25,000 are common. It can also be standard to see additional fees apply anytime a balance falls below a minimum threshold, although post-funded minimum account balance requirements for DAFs are generally smaller than initial funding requirements, and can often be as low as $1,000.
Some donor advised funds will also charge a fee for each distribution, or for each check issued from the pool of charitable funds.
It’s not uncommon for donor advised funds contracts to include language that sounds almost as though donated funds are held seemingly forever, until remitted to the hosting company upon event-based triggers like the death of the donor or grantor. Keep in mind, however, that most DAFs are able to transfer account funds to other qualified 501(c)(3) organizations, which also includes other donor-advised funds or community foundations.
As an example, let’s assume a philanthropically-active DAF grantor lives in Seattle, WA decides to make donations by funding the Seattle community foundation, but then moves to Dallas, TX where they proceed to again get involved into local projects around the community after moving the account balance, or corpus, of their funded DAF in Seattle into a new Dallas-based donor advised fund.
What is not common?
When assessing the suitability of making a donor-advised fund gift, another factor to keep in mind is that nearly all donor advised funds are very limited in their ability to receive, manage or accept complex or alternative assets such as timber or solar farm contracts, oil & mineral rights, real estate, privately-held business interests and inventories or collections of physical goods.
That being said, there are a few donor advised funds which cater towards and truly excel with these types of asset classes, and have grown faster than most of the non-specialized DAF community.
Are there upper limits on the amount contributed to DAF?
Donor advised funds generally have no financial cap or ceiling on the amount of donations contributed into a DAF. However, from a personal accounting or tax efficiency standpoint, donors are advised to look into their specific situation based upon any funding amounts or other applicable factors.
If you are curious to learn more or follow DAF giving industry trends, the National Philanthropic Trust publishes an annual Report compiled from industry data, thematic trends and general best practices by philanthropic donors.
A case study on DAF gifts
Mary has appreciated investment assets including real estate, stocks, mutual funds and has been giving to her favorite charities for years by simply writing checks from her checking account. To maximize her financial impact, Mary’s advisor suggested she open DAF and fund it initially with some of her stock investments which had appreciated significantly since purchase.
The first advantage her advisor mentioned was an opportunity to avoid long term capital gains taxes by making an in-kind transfer of the appreciated stock assets to the donor advised fund.
As a second benefit, Mary could receive a deduction for the entire amount of the gift, rather than an amount based on after-tax proceeds Had Mary sold the appreciated stock, then gifted the proceeds, the transaction would have also triggered other potential taxes like Social Security and Medicare programs.
Most years Mary does not itemize her taxes due to higher standard deduction now available (i.e. up to $14,250 in 2021 if single or head of household and above the age of 65).
Mary’s accountant also suggested bunching multiple years of gifts into one year, rather than spreading them out annually. Mary’s normal charitable giving is ~$7,000 year, with additional write off opportunities like real estate taxes of ~$4,00. That totals ~$11,000 under the standard deduction or SD.
Mary decided to bunch five years of charitable giving through an appreciated DAF gift, resulting in more than a $5,000 advantage.
Viewed differently, Mary was effectively able to create an additional $5,000 of value towards her philanthropic legacy by use of a donor advised fund purposefully.
Before After
Taxes: $8,457 $2,945
Donor Advised Funds or Community Foundation dollars can positively help charitable donors maximize the impact of their financial legacy, while also achieving valuable mission-oriented impact.
