With the many financial tools and charitable giving options available today, you don’t have to take on the responsibility of overseeing a private foundation to make a difference in your community—or even in the world—and a donor-advised fund (DAF) is one way it’s possible.
But what is a donor-advised fund and what exactly do you have to do in order to establish one? We’re here to tell you everything you need to know about DAFs—including its benefits, what you need to consider before moving forward with this tactic, and even how to set up your very own.
First and Foremost, What is a Donor-Advised Fund?
A donor-advised fund is an easy, flexible form of giving that allows you to support some of the organizations and causes that are closest to your heart while providing you with a tax deduction for your contributions. In simpler terms, you can think of a donor-advised fund like an everyman’s charitable foundation, but free from the obligations and restrictions of actually running one.
When you set up a donor-advised fund, you partner with a public charity, which is usually a community foundation or the charitable arm of a financial services company, to manage and administer your fund. Best of all, you can make contributions to your account whenever you’d like for tax-free growth. Once it’s invested, your gifts can be distributed over time to qualifying charities, which are any organizations that are tax exempt and listed under Section 501(c)(3).
Diving Deeper into DAFs
Now that you know the basics of a donor-advised fund, you’re probably wondering: “How does it work?” Fortunately, the process behind a donor-advised fund is pretty painless—and there are immediate benefits. When you contribute to your donor-advised fund you directly receive a tax deduction once the donation has made its way into the account. Though the investment is no longer technically yours, it can grow tax-free until it’s time to disperse it in the form of grants to qualified charitable organizations.
Keep in mind, that you are only an advisor for your DAF, so you have the freedom to suggest charities you’d like to support to the foundation or company overseeing your account, but they are not obligated to do so. Generally, they do follow your wishes, but that’s why it’s so important to take time to think about the following questions:
- Is a donor-advised fund the ideal giving vehicle for me?
- What public charity—also known as a sponsoring organization—is best suited to work with me and my specific giving plan and/or wishes?
Determining if a Donor-Advised Fund is the Giving Route for You
As we mentioned above, there are many different ways to give and see your money make a difference for others. Here are a few key things to know about DAFs when determining if it’s the right giving route for you:
Tax Benefits
If you’re someone who regularly donates a certain amount of money each year right out of your checkbook, you may not be getting the full tax benefit if you don’t itemize deductions. With a donor-advised fund, you can set aside a pool of donation money all at once, which may enable you to receive the additional tax benefit of itemizing deductions in the year that you set it aside. This immediate tax deduction does not mean that you must recommend certain charities and allocate the funds right off the bat. DAFs are adaptable to your time schedule, allowing you to strategize when you want to give.
Varied Contributions
Another positive attribute of a donor-advised fund is that you can contribute cash, but it is not the only contribution you can make. Real estate, stock, and other appreciated assets can also be donated to a DAF, which can enable you to avoid capital gains taxes.
Giving Legacy
If a giving legacy is important to you, it’s significant to note that when the time comes to make your charitable donations, you can use the name you’ve chosen for your fund. You can also choose to give your gifts anonymously.
Also, a donor-advised fund can continue even when you pass away, but only if you name a successor advisor to the account. Your successor advisor does not have to pay taxes on the fund after they assume responsibility of it either—they can simply put money in and donate it whenever they want as the new advisor of the fund.
Your Giving Preferences
Some could argue that other forms of giving—such as charitable remainder trusts or donating directly to an organization—are better routes, but truthfully, it varies from person to person and depends on their unique situations.
With charitable remainder trusts, you can also receive a tax deduction after supplying assets to a trust, but the difference is that you maintain an income stream for the entirety of your life based on your donation, and that income is not dispersed to charities. With that being said, distributions from a charitable trust can be placed into your donor-advised fund rather easily. Also, if you feel called to support a sole charity or you are passionate about a very particular cause, a direct donation over a DAF might be the better option for you.
What to Consider When Selecting Your Sponsoring Organization
Once you’ve determined that you wish to move forward with a donor-advised fund, the second most important step is selecting who you’re going to work with and trust with your gifts. The most essential thing to keep front of mind during this selection process is that you’re a partner with whomever you choose to sponsor your donor-advised fund, so do the work to find an organization that aligns with your values and respects your opinions. If your partner has the same or similar values as you, you can gain peace of mind knowing they’ll honor your charitable wishes and/or select charities to give to that match who or what you want to support.
Luckily, you have a lot of options to choose from when it comes to who you want to work with. Sponsoring organizations often can include:
- Public charities, such as the National Philanthropic Trust, the National Christian Foundation, Schwab Charitable, Fidelity Charitable, and more.
- A community foundation or local foundation that can support local charities.
- Financial services companies that have a charitable foundation—also known as a charitable arm—as part of their entity.
Depending on the size of your DAF and the partner you choose, it may also be possible for your financial advisor to manage the investment assets within your fund, much like they would your personal assets. They may be able to work directly with the sponsoring organization to make the process more seamless for you.
Last, but certainly not least, there can be minimum amounts to establish your DAF and to make grant recommendations to your sponsor. There can also be administrative fees to consider—these are fees your sponsor charges for managing your account. These fees are usually annual and can range from 0.6% to 1.0% or more of the account balance—so don’t forget to look into these things or inquire about them before making your final decision.
Getting Started with a Donor-Advised Fund
Creating a donor-advised fund is relatively easy, in fact, if you’re well-prepared, it’s possible to set up a donor-advised fund in a day. When the time comes to get started with your donor-advised fund, you can expect the following to take place:
- You’ll pick your sponsoring organization.
- You’ll make your very first contribution—remember, there might be a minimum amount that depends on your sponsoring organization’s requirements.
- You’ll make any customizations—such as naming your DAF or appointing your financial advisor to make changes to it.
- Your gift will be tax deductible, which may enable you to receive a greater tax benefit.
- Your contributions will be invested and start to grow tax-free.
- You can log in to your donor-advised fund and touch base with what’s happening—but you cannot take anything out for your own personal gain.
- You can couple your DAF with other financial tools and strategies—such as tax planning—to give smarter and in more creative ways.
- You can recommend charities that you’d like to support to your sponsoring organization and make an impact in your community and beyond!
If you’re interested in establishing a donor-advised fund, Advent Partners can help you take the next step. Our Certified Financial Planners® are available as a resource to you whether you’re ready to discuss and move forward with your charitable wishes or plans, or you want to ask more questions before making a final decision. Whatever you need from us, we’re here to ensure you feel Ready for Good—so schedule a one-on-one meeting with our experts today!
