Read in English Leer en Español

What to Know About Donor-Advised Funds in 2022: Rules, Tax Deductions, Comparisons and More

Last Updated: July 7, 2022

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.

Download the Essential Guide to Donor-Advised Funds

Donor-Advised Fund Rules & Contribution Limits

Advisor with couple

Each sponsor organization has a set of rules for donor-advised funds they manage. In general, the following are fairly standard with any sponsor:

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:

Donor-Advised Fund Pros & Cons

Older adult and child

In addition to tax deductions, benefits for donors include:

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

Couple doing paperwork

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.

Table: Donor-Advised Fund vs Private Foundation

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.

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 donorservices@sdfoundation.org.

Or download the Essential Guide to Donor-Advised Funds eBook to learn more about DAFs.

Download the Essential Guide to Donor-Advised Funds

"*" indicates required fields

Name*
ZIP Code of Residence*
This field is for validation purposes and should be left unchanged.

Related Content