A Donor-Advised Fund (DAF) is a philanthropic vehicle that allows individuals, families, or organizations to make charitable contributions, receive an immediate tax deduction, and recommend grants to charitable organizations over time. DAFs are popular because they offer a flexible, tax-efficient way to manage charitable giving. Here’s a detailed overview of how DAFs work and their key features:
- How a DAF Works:
– Contribution to DAF: A donor makes a contribution to a DAF, which is typically hosted by a public charity, such as a community foundation or a national charity (e.g., Fidelity Charitable, Schwab Charitable). This contribution can include cash, stocks, real estate, or other assets.
– Immediate Tax Deduction: The donor receives an immediate tax deduction for the full amount of the contribution, up to the IRS limits. This deduction applies in the year the contribution is made, regardless of when the funds are distributed to charities.
-Investment and Growth: The assets in the DAF can be invested and have the potential to grow tax-free over time, increasing the amount available for charitable giving.
-Grant Recommendations: The donor (or their advisor) can recommend grants to IRS-qualified public charities from the DAF over time. The DAF sponsor reviews these recommendations and, if they meet all legal requirements, distributes the funds to the specified charities.
#2. Key Features of DAFs:
-Flexibility: Donors can make contributions when it’s most advantageous for them (e.g., in a high-income year) and then take their time deciding which charities to support.
-Tax Efficiency: Donors can contribute appreciated assets, such as stocks, to a DAF without incurring capital gains taxes, allowing them to donate more to charity than if they had sold the assets first.
-Anonymity: Donors can choose to remain anonymous in their grant recommendations, allowing for privacy in their charitable giving.
-Legacy Planning: DAFs can be part of estate planning, with donors naming successors or charities to manage or receive the remaining assets after their passing.
#3. Eligible Contributions:
-Cash: Simple and straightforward, cash contributions are immediately tax-deductible.
-Securities: Donating appreciated stocks or bonds can provide additional tax benefits by avoiding capital gains taxes.
-Real Estate and Other Assets: DAFs can accept complex assets like real estate, privately held business interests, and more, though this typically requires additional steps and approval by the DAF sponsor.
#4. Grant-Making Process:
-Grant Recommendations: The donor recommends grants to specific charities, specifying the amount and timing of each grant.
-Approval by Sponsor: The DAF sponsor ensures that the recommended charities are eligible (i.e., 501(c)(3) public charities) and that the grants comply with IRS regulations.
-Distribution: Once approved, the DAF sponsor distributes the funds to the designated charities.
#5. Restrictions:
-No Direct Personal Benefit: Grants from a DAF cannot result in any personal benefit to the donor, such as paying for event tickets, memberships, or tuition.
-No Political Contributions: As mentioned earlier, DAFs cannot make grants to 501(c)(4) organizations or other entities that engage in political activities.
-No Binding Recommendations: Donors can recommend grants, but the DAF sponsor has the final say in whether the grants are made. However, in practice, sponsors generally follow donor recommendations that meet legal requirements.
#6. Growth and Popularity:
– DAFs have become increasingly popular in recent years. According to the National Philanthropic Trust, as of the most recent data, there are over 1 million DAF accounts in the U.S., holding over $150 billion in assets.
– In 2021, DAFs distributed approximately $34 billion to charities, reflecting their significant role in the philanthropic landscape.
#7. Considerations and Criticisms:
-Holding Period: There has been criticism that some DAFs hold onto funds for too long without making distributions, leading to calls for increased regulation and minimum distribution requirements.
-Transparency: Unlike private foundations, DAFs are not required to disclose detailed information about their grant-making activities, leading to concerns about transparency.
-Impact on Charitable Giving: Some argue that DAFs can encourage greater giving by making the process easier and more flexible for donors, while others worry that they might delay the flow of funds to charities in need.
#8. Comparisons to Private Foundations:
-Costs: DAFs typically have lower administrative costs compared to private foundations.
-Privacy: DAFs offer more privacy since they are not required to publicly disclose their grants, unlike private foundations.
-Control: Private foundations offer more control over grant-making and investments, while DAFs are subject to the policies and procedures of the sponsoring organization.
DAFs are a powerful tool for charitable giving, offering donors flexibility, tax benefits, and an easy way to manage their philanthropy over time.