For charitable individuals and families looking to maximize their giving impact and tax benefits, donor-advised funds (DAFs) have become increasingly popular ways to support charitable causes.
In fact, due to their simplicity and flexibility, DAFs are among the fastest-growing charitable giving vehicles in the U.S. in 2022.
According to the National Philanthropic Trust, contributions to DAFs increased by 80 percent from 2015 to 2019, and DAF grantmaking increased by 93 percent during that same period.
What is a Donor-Advised Fund & How Does it Work?
A donor-advised fund acts as a charitable giving account for you or your family.
You can contribute an array of private or public assets that extend beyond cash to a DAF, including gifts of stock, real estate, cryptocurrency, private equity, mutual funds, retirement assets and more.
Opening a DAF takes three easy steps:
1. Make a tax-deductible contribution
Donate cash, non-cash or complex assets to your DAF, which is maintained and operated by a section 501(c)(3) sponsoring organization. Your contribution is eligible for an immediate tax deduction at the time your gift is made.
2. Grow your donation, tax-free
While deciding which community initiatives or nonprofit organizations to support, your charitable assets grow, tax-free. Sponsoring organizations, such as community foundations and commercial banks, typically offer a variety of investment options for your charitable assets based on your projected grantmaking time horizon.
3. Grant when you are ready
Support public charities, causes or community initiatives that align with your passions or to meet emerging, critical needs through grant recommendations from your DAF.
Donor-Advised Fund Rules & Contribution Limits
Each sponsor organization has a set of rules for donor-advised funds they manage. In general, the following are fairly standard with any sponsor:
- Contributions to DAFs are irrevocable, meaning assets cannot be taken back once they are gifted.
- Although donors maintain advisory and grantmaking privileges for their DAF, once assets are gifted to the account, they belong to the sponsoring organization.
- There are no contribution limits on how much you may donate to a DAF. Sponsors may, however, require a minimum contribution to start a DAF and/or a minimum grant amount.
- All grant recommendations from DAFs must be approved by the sponsoring organization. Although rare, a sponsor can block a grant recommendation if the donor doesn’t abide by the organization’s standards or guidelines.
- Grants must go to a public, 501(c)(3) nonprofit organization recognized by the IRS. No grants to individuals are allowed. DAFs may, however, fund scholarship opportunities based on a defined set of student criteria.
- Donors cannot receive a personal benefit from DAF grantmaking.
It’s important to read the documentation at sponsoring organizations to understand rules, limits and guidelines before opening a DAF.
Donor-Advised Fund Tax Deductions
The popularity of donor-advised funds continues to rise due asset flexibility, charitable impact and tax benefits. Immediately following a DAF contribution, donors are eligible for a tax deduction that calendar year – similar to giving to a public charity.
Other tax benefits include:
- Donating cash, via check or wire transfer and generally be eligible for an income tax deduction of up to 60 percent of your adjusted gross income.
- Donating long-term appreciated securities directly to charity to help maximize both your tax benefit and the overall amount you have to grant to charity.
- Becoming eligible for an income tax deduction of the full fair-market value of the asset, up to 30 percent of your adjusted gross income.
- Eliminating capital gains tax on long-term appreciated assets (assets held for more than one year)
- Donations exceeding limits can be carried over for up to five tax years
Donor-Advised Fund Pros & Cons
In addition to tax deductions, benefits for donors include:
- Leveraging investment expertise from sponsoring organizations to grow charitable assets over time and strengthen grantmaking and social good power
- Actively engaging in grantmaking to support community initiatives and nonprofit organizations when you are ready
- Opting for privacy by giving anonymously if donors do not want to be identified publicly.
- Centralizing recordkeeping to simplify documentation for tax planning
- Supporting family philanthropy and/or legacy planning for future generations
Community foundations provide the added benefit of connecting donors to giving experts who have insights into community needs, regional challenges and impactful nonprofit organizations.
While DAFs provide many benefits, they may not be for every philanthropist.
Some donors and families may prefer complete control over every aspect of their philanthropy, in which case a private foundation may be an option, assuming they have the capital to begin one.
Also, some DAF sponsoring organizations require a minimum initial contribution of $25,000 or more, pricing some out of the DAF market, while other sponsors require a minimum grant amount too high for individuals who donate less than $250 each year.
All DAFs come with annual administrative costs and investment fees. At community foundations, fund fees are reinvested into the community by way of programmatic work, staff support and grantmaking. Fund fees at commercial banks, however, benefit stockholders.
Lastly, if a sponsoring organization does not enforce time requirements for grantmaking, charitable assets may sit in DAFs for long periods of time rather than be granted into the community.
Comparison: Donor-Advised Funds & Private Foundations
DAFs and private foundations are similar in that they are both charitable vehicles to invest and grant our charitable assets.
“There are many advantages to a private foundation, especially family control that can last for generations. But, there are other ways to achieve similar results,” said Lynda Sands, JD, MBA, who has advised nonprofits, families and businesses in high-net worth philanthropic planning and the creation of private foundations and new public charities for 40 years.
DAFs provide the benefits of a private foundation without the complexity, administrative burden or added expenses.
Although donors have complete control over a private foundation, they can be challenging to start and maintain over time. They require a lot of time and resources, not to mention a degree of expertise to ensure all legal requirements are met.
DAFs, on the other hand, offer the charitable benefits of a private foundation, without being subject to start-up costs, tax-exempt status or annual income excise tax.
While donors may maintain complete control over branding, investments and grantmaking with a private foundation, they are also subject to IRS requirements, must research and secure their own investment vehicles, and are burdened with startup costs, taxes and administration fees.
Also, donors can deduct their donor-advised fund gift up to 50% of their adjusted gross income compared to 30% of a private foundation gift.
|Tax status||Donor-Advised Fund|
|Administration and fiduciary responsibility||Donor-Advised Fund|
Fiduciary services provided by your support staff at The San Diego Foundation
Private Foundation handles all accounting, investments and IRS filings
|Research and expertise||Donor-Advised Fund|
Expert staff is available to inform grant decisions and provide research on most impactful ways to give
Private Foundation handles all needs assessment and research about social impact areas
|Liability and risk||Donor-Advised Fund|
The San Diego Foundation provides insurance
Private Foundation must purchase liability and risk insurance
Donor and family name may remain anonymous
Donor and family name, along with grant information, is open to the public
|Donor involvement||Donor-Advised Fund|
You and your trustees decide investment pool and recommend grants to nonprofits
You and your trustees appoint a board which controls investments and grantmaking
The San Diego Foundation staff streamline and execute a grantmaking and/or scholarship process that fits your needs
Private Foundation develops and solicits RFPs, as well as reviews applications and communicates with nonprofits
|Trustee support||Donor-Advised Fund|
The San Diego Foundation staff helps facilitate meetings in a neutral environment to mitigate trustee and family dynamics and provide charitable expertise
Trustees and family handle all decisions internally on their own
|Cash gifts||Donor-Advised Fund|
Up to 60% of adjusted gross income
Up to 30% of adjusted gross income
|Appreciated stock gifts||Donor-Advised Fund|
Fair market value up to 30% of adjusted gross income
Fair market value up to 20% of adjusted gross income
|Real estate gifts||Donor-Advised Fund|
Fair market value up to 30% of adjusted gross income
Cost basis up to 20% of adjusted gross income
|Startup costs||Donor-Advised Fund|
Thousands in legal costs that increase based on size and complexity of Private Foundation
|Excise taxes||Donor-Advised Fund|
Subject to tax of up to 2% net investment gains
If a private foundation already exists, it can be converted to a DAF. Otherwise, DAFs can be considered private foundation alternatives.
Maximizing DAFs at Community Foundations
While any sponsoring organization can manage the compliance and basic functionality of donor-advised funds, community foundations provide local community expertise and connections for donors to maximize their impact.
As San Diego’s only regional community foundation, we have helped passionate philanthropists create positive impacts across our county for more than 45 years. If you’re interested in learning more about maximizing your impact through donor-advised funds, contact us today at (619) 235-2300 or email@example.com.
Or download the Essential Guide to Donor-Advised Funds eBook to learn more about DAFs.