Donor Advised Funds (DAFs)

A donor-advised fund, often referred to as a DAF, is a bit like a personal charitable investment account or charitable savings account. It is an account established at and controlled by a nonprofit called a sponsoring organization. The sponsoring organization might be a community foundation or an arm of an financial services company, such as Schwab or Fidelity, established for the purpose of investing and managing the donor’s contributions and any earnings that might result.

The account is funded by a contribution or contributions by a donor. The contributions are irrevocable – the donor loses control and access to the funds. The donor has the right to suggest to the sponsoring organization what charitable donations they are to make from the DAF but the sponsoring organization is not legally bound to follow the donor’s advice. To satisfy IRS regulations, the donor must technically be only an advisor. While not legally bound, the sponsoring organizations have a history of following donor suggestions.

There are several advantages for the donor:

1. There is a charitable tax deduction in the year the contribution is placed into the DAF. If the contribution is cash, it is limited generally to 60% of the donor’s adjusted gross income (AGI).
2. If the contribution is in the form of appreciated assets, the tax deduction is based on the current fair market value of the asset or assets, generally limited to 30% of the donor’s AGI, but capital gains tax on the appreciation is avoided.
3. Monies left in the fund may grow free of taxation, potentially increasing the future charitable donations.

As a result of the increased standard deduction, now $24,000 for a couple, a donor-advised fund may be a way to make a large charitable donation in a single year to a DAF and receive tax benefits and then make distributions to the suggested charities over several years. By pooling their charitable intent in a single year, donors can still support their charities as they normally would on an annual basis but gain tax advantages they would not have received by making direct smaller gifts annually.

Different sponsoring organizations have different rules in the matter of succession (passing advice control on to future generations) and other organization circumstances. It is best to determine your goals as a donor and make sure the sponsoring organization can adequately fulfil those goals prior to making any contributions. As in all matters of charitable and estate planning, seek the advice of a professional for your own protection.