Charitable Giving: Take a Closer Look at the Donor-advised Fund

This increasingly popular giving option can be used in place of—or together with—a private foundation. 

For more than 100 years, having your own private foundation has been a traditional hallmark of personal success. And it's easy to see why: Not only do private foundations give donors complete control over investment and granting decisions, they can also create enduring family legacies (think Ford, Carnegie, Gates).

Let's take a look at some of the advantages and limitations of a donor-advised fund (DAF).

Setting up a donor-advised fund

Unlike private foundations, DAFs can be set up quickly and easily with as little as $5,000 and no startup costs or legal fees. Once your DAF is up and running, you can use the funds to support any number of IRS-qualified public charities.

Choosing a sponsor

A DAF sponsor (also known as a sponsoring charity) is a public charity through which a DAF is set up, operated and maintained. Be sure to familiarize yourself with the different types of DAF sponsors to make sure your choice is a good fit for your goals. Common sponsor types include community, faith-based, affinity group and educational foundations, as well as national DAF sponsors.

Your DAF sponsor will handle all administrative tasks, including recordkeeping, investment management and grant making. You'll be released from those responsibilities, and you won't have to concern yourself with the board meetings, tax filing requirements and other administrative duties that come with having a private foundation.

How the gifting of assets is handled

One of the biggest differences between DAFs and private foundations is control over the fund's assets. When contributions are made to a DAF, those assets become the property of the DAF sponsor and cannot be revoked. Not so with private foundations, in which donors control grants to qualified charities without restriction.

Here's where the "advised" part of donor-advised funds comes in: Donors can only advise the DAF sponsor as to where they'd like the funds to go. The DAF sponsor has the final say—another reason why it's so important to do your research before deciding on a sponsor.

Investment options

Some DAF sponsors provide a limited number of investment offerings, while others give their donors the flexibility to build a more customized portfolio. And because all assets belong to the DAF sponsor, they also assume all risks in managing and investing the funds.

Tax advantages

Consider the many tax advantages that DAFs bring to the table:

  • Invested assets grow tax-free, potentially making even more money available for charities.
  • Donations, including cash, stocks and non-publicly traded assets such as real estate qualify for an immediate tax deduction.
  • Tax deduction limits typically run between 30% to 60% of adjusted gross income—considerably higher than the 20% to 30% associated with private foundations.
  • Donors don't pay excise taxes and can avoid capital gains taxes.

Donor anonymity

When the DAF sponsor makes grants, it's legally distributing its own assets. This allows donors to be completely anonymous.

Along these same lines, donors can also protect their anonymity by naming their DAFs after something other than themselves, such as "Fund for Early Childhood Education." This puts the focus on the mission instead of the person or family behind the DAF. Private foundations don't have that kind of protection because they're required to file annual reports disclosing personal information, such as the names of board members.

How assets are distributed

While many DAF sponsors suggest a timeframe and minimum amount for payouts, the law places no such restrictions on DAFs.

Even so, aggregate grant payout rates from DAFs annually exceed 20% for every year on record. The payout rate for 2017 was 22.1%, nearly four times higher than that of private foundations.a

Combining a donor-advised fund and a private foundation

Under the right circumstances, it may be wise to have a DAF and a private foundation working in conjunction. Reasons can include the increased amount of privacy afforded by the DAF, tax advantages for newer assets, and the opportunity for younger family members to use the DAF to gain experience before assuming the reins of the private foundation.

Choose wisely with an eye on the future

Your decision to use a DAF, private foundation or combination of giving options depends on your philanthropic goals as well as your personal and financial situation. Because these factors can change over time, you might want to revisit your giving structure once a year to make any needed adjustments.

Consider consulting with tax and legal professionals, as well as your financial advisor, to help you navigate the complexities of each option, weigh all the facts and create a plan to help achieve your goals.

Source: National Philanthropic Trust, The 2018 DAF Report(opens in a new tab)

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