How Does a Donor-Advised Fund Work?

If you’re looking for ways to be more charitable or for simpler alternatives to establishing a private foundation, you may have come across donor-advised funds in your research.

Donor-advised funds are a tax effective, flexible way to increase your impact and help you respond to emerging needs. For example, more than $1 billion in grants have been made by donor-advised funds managed at community foundations since the start of COVID-19.

A donor-advised fund is a philanthropic giving vehicle administered by a charitable sponsor, such as a community foundation (like The San Diego Foundation) or commercial institution. Philanthropists establish donor-advised funds with a charitable sponsor, fund the account with an irrevocable, tax-deductible contribution and receive an immediate tax deduction.

Donor-advised funds can be funded with either cash or non-cash gifts, such as private stock or real estate. After you receive your immediate tax deduction, you can support your favorite community initiatives or nonprofit organizations over time, when you are ready.

It’s easiest to understand how donor-advised funds work in three easy steps:

• Give: Make your tax-deductible donation to The Foundation. You can contribute assets such as cash, stock or real estate and get one tax receipt.
• Grow: Your initial contribution grows tax-free. It is invested to maximize your return and strengthen your grantmaking and social good power.
• Grant: Recommend a grant to support your favorite community initiatives or nonprofit organizations when you are ready.

Who manages the fund and investment?

Charitable sponsors manage all the heavy lifting for donor-advised funds.

At The San Diego Foundation, for example, our Development & Stewardship staff is a team of experts helping donors make the most impact with their charitable giving. We process grants, maintain historical records of philanthropy and provide regular fund statements to make tax reporting as seamless as possible.

Just like other investment vehicles, your donor-advised fund provides an opportunity to invest and grow your money over time. With these philanthropic vehicles, however, your goal is to grow your charitable funds for greater philanthropic impact.

At The San Diego Foundation, for example, we build investment strategies that increase the impact of your gift and create sustainable growth. Depending on the type of fund you set up, your assets are invested to maximize your return and strengthen your grantmaking and social good power.

With over 150 years of combined expertise, our Investment Committee drives asset management and investment growth to meet fund objectives.

Donor-advised funds and fees

All charitable sponsors have one thing in common when it comes to managing donor-advised funds: Administrative fees.

However, rarely are two fee structures the same.

Some organizations design their fee structures based on fund type, while others charge based on fund longevity or level of fund support.

When assessing fees, charitable sponsors typically charge donors a percentage of the fund size for administering the fund, calculated using basis points. Additionally, they charge minimum fees and/or transaction costs.

Other variables that impact fee structures include spending policies, timing, capacity and fund activity.

While fee structure may differ from one organization to the next, it’s important to keep your philanthropic goals in mind when evaluating fees percentages.

For example, fees generated from funds at commercial institutions become revenue that can be used at the firm’s discretion and primarily benefits stockholders. Community foundations, however, are generally committed to sharing fee income with local nonprofits. They put your fees to work in the community.

Learn More

When thinking about philanthropy, we know that impact is an important factor in deciding how to give. We also know deciding the best philanthropic vehicle for you can be a tough choice.

If you’re interested in learning more about donor-advised funds and how they work, our team of experts can help.

Learn More