For most people, charitable giving involves writing checks to the charities of their choice.
However, changes in the tax law, as well as an increase in the number of solicitations received from charities, have created a demand for a way to donate more efficiently. One way to do this is through a Donor Advised Fund (DAF).
The money used to make these gifts is held in a DAF account maintained by a sponsoring organization that is a public charity qualified under Federal tax law to accept funds from donors. Once the funds have deposited into the account, the donor can “advise” the sponsoring organization in deciding who receives the funds.
With a DAF, the donor records a tax deduction in the year the funds are deposited into the account. The donation itself does not have to be made in the same year. To maximize the tax deduction, it may make sense to make the DAF contribution in a year when the donor anticipates higher taxable income than in future years.
There is an administrative advantage to using a DAF as well. Rather than keeping track of all charitable receipts for tax time, a DAF sends the donor an accounting of all giving from the account that year, as well as a tax acknowledgment letter for tax purposes.
A further advantage is the ability to give anonymously. This is difficult to do when giving individually as the law requires charities to provide tax acknowledgment letters to donors. DAFs also do not create issues for the charity receiving the donation, since the tax letter acknowledging the gift is given to the sponsoring organization (while you receive a letter from the sponsor).
Choosing a Sponsoring Organization
There are three types of sponsoring organizations: National charities, single-issue charities, and community foundations.
National charities are sponsoring organizations that are national in reach. Examples are the Fidelity Charitable Gift Fund, Schwab Charitable, JustGiving.org, and the Vanguard Charitable Fund. Single-issue charities are organizations that focus on a specific issue, cause or religious faith. Examples of these types of organizations are The Sierra Club Foundation, Impact Assets, and Jewish Federations. Community foundations focus on charitable giving within a specific region, such as a city or county. Examples are The Princeton Area Community Foundation and the Brooklyn Community Foundation.
All three types of sponsoring organizations allow the donor to recommend donations to 501(c)(3) charitie; although some single-issue organizations require that a certain percentage of the recommended donations go to specific causes supported by the sponsor.
The distinct advantages each of the three types of sponsoring organizations offer varies slightly. National charities offer a wide range of investment options, low fees, and ease of funding, particularly for donors who already have brokerage assets at the institution. Single-issue charities offer the donor the opportunity to be aligned with the causes most important to them. They can provide resources to help the donor choose the right opportunities. Community foundations, meanwhile, offer donors the tools to give to local, national, and even international charities.
According to Elizabeth Wagner, Senior Vice President & Chief Philanthropy Officer of the Princeton Area Community Foundation, “You’ll find that community foundations have great tools – we can help you identify your priorities, talk to your kids and grandkids about your values, explore high-impact organizations that you’ve never heard of, and make grants wisely. We work closely with families to achieve their short- and long-term giving goals.”
This is similar to what many single-issue charities provide for their donors, focusing on a geographical region rather than a specific issue.
Funding a Donor Advised Fund Account
Typically, contributions are made with cash deposited into a DAF account, although other non-cash contributions are generally accepted as well, such as appreciated securities, real estate, limited partnership interests, and artwork.
Another nice thing about DAFs is the ability to name a successor owner(s) for the fund. Doing so allows giving from the account to continue after you are gone. Ensuring your children or grandchildren understand the goals of the fund guides those successors when you are no longer around.
Minimums and Fees
To open an account, you usually need to deposit a minimum of $5,000, although each sponsoring organization sets its minimum deposit amount. Fees are typically expressed as a percentage of the value of the fund’s assets and can decline as the size of the account grows. Many sponsors impose a minimum fee to cover administrative costs, typically ranging from $100 to $500.
The investments you choose to invest the funds in may charge additional fees. They can range depending upon the type of investments.
Donor Advised Funds can be a good charitable vehicle to use to give more efficiently, both administratively and tax-wise. They can allow you to stay anonymous and avoid unwanted solicitations. They also provide a good tool to bring families together and to create a legacy of giving to children and grandchildren.