Donor Advised Funds (DAFs) have been gaining popularity in recent years as a way for individuals and families to donate to charity in a more strategic and tax-efficient manner. In this article, we will explore what DAFs are, how they work, and their advantages and disadvantages.
What is a Donor Advised Fund?
A Donor Advised Fund is a philanthropic vehicle that allows donors to make a charitable contribution and receive an immediate tax deduction, while retaining the ability to recommend how the funds are distributed to charities over time. The donor makes a charitable contribution to a public charity that sponsors the DAF, and then recommends grants from the DAF to eligible charitable organizations.
How do Donor Advised Funds work?
To open a Donor Advised Fund, the donor makes an irrevocable contribution of cash or appreciated assets, such as securities or real estate, to a sponsoring organization. The sponsoring organization manages the fund and invests the contributions, which can grow tax-free over time. The donor can then recommend grants from the fund to eligible charitable organizations.
The sponsoring organization reviews the donor’s grant recommendation to ensure that it is consistent with its charitable mission and that the recommended organization is eligible to receive tax-deductible contributions. Once approved, the sponsoring organization distributes the grant from the DAF to the recommended organization.
Advantages of Donor Advised Funds
1 – Tax Benefits: Donors receive an immediate tax deduction for the full amount of their contribution to the DAF, which can be taken in the year of the contribution or carried forward for up to five years.
2 – Flexibility: Donors can recommend grants from the DAF to any eligible charitable organization, including religious institutions, educational organizations, and public charities.
3 – Simplified Giving: Donors can make one contribution to the DAF and then recommend grants to multiple charitable organizations over time. This simplifies the giving process and reduces administrative burdens for both the donor and the recipient organizations.
4 – Investment Options: Donors can choose from a range of investment options for the DAF, which can potentially grow tax-free over time and increase the amount available for charitable giving.
Disadvantages of Donor Advised Funds
1 – Loss of Control: Once the contribution is made to the DAF, the donor loses control over the assets, which are managed by the sponsoring organization. While donors can recommend grants from the DAF, the sponsoring organization has final discretion over the distribution of the funds.
2 – Fees: Sponsoring organizations charge administrative fees for managing DAFs, which can vary depending on the organization and the size of the DAF. These fees can reduce the amount available for charitable giving.
3 – Limited Disclosure: Unlike private foundations, which are required to disclose their grants and activities, DAFs are not required to disclose their grant distributions, which can make it difficult for donors and the public to track the impact of their giving.
Conclusion
Donor Advised Funds offer a flexible and tax-efficient way for individuals and families to support charitable organizations. They provide donors with the ability to make strategic and impactful gifts, while simplifying the giving process and potentially increasing the amount available for charitable giving through investment growth. However, it is important for donors to carefully consider the advantages and disadvantages of DAFs and to choose a sponsoring organization that aligns with their philanthropic goals and values.
[1]This article was written by chat.openai.com and was edited for accuracy by Daniel J. Rohr, CPA/PFS, EA, M.S. Tax.