According to a recent study by the National Philanthropic Trust, donor-advised funds, or DAFs, are the single fastest growing form of philanthropy. DAFs comprise roughly 12% of individual giving, amounting to over $23 billion globally in tax-deductible gifts – that’s no chump change. Let’s explore how donor-advised funds work, who can participate, and the benefits and drawbacks to this rapidly growing form of charitable giving.
How it Works
Consider a donor-advised fund like a personal charitable savings account, to be controlled by a foundation or section of a 501(c)(3) organization, known as a sponsoring organization. Donors can make contributions of cash, stocks, private business interests, real estate, cryptocurrency, or private company stock to a donor-advised fund with the ability to make an immediate tax deduction for the gift.
However, once a donor has made a contribution to a donor-advised fund, the sponsoring organization is in control of the funds. Donors can inform the sponsoring organization where they’d like their funds allocated, but the supporting organization is not legally required to follow their advice. More often than not, supporting organizations will honor donors’ requests.
Gifts may only be made to IRS-qualified public charities, where donor-advised funds generally cannot support individuals, political groups or crowdfunding campaigns. Private foundations are also ineligible to receive donor-advised fund grants.
There are three general categories of donor-advised funds: commercial, community foundations and single-issue funds. The most common forms of donor-advised funds are community foundations like the Oregon Community Foundation and commercial funds, like Fidelity Charitable or Schwab Charitable. Because donor-advised funds act like a savings account, they can accrue interest, which gives donors the opportunity to grow their gift over time. Donors can choose to invest their DAF contributions in a myriad of mutual funds or exchange-traded funds, as well as cash accounts.
Donor-advised funds have been a popular charitable response to COVID-19, with Fidelity Charitable (the largest donor-advised fund in the United States) reporting over $230 million dollars in relief efforts, issued in grants to over 8,000 charities. Studies have shown that grant-making from donor-advised funds remains strong during recessions, suggesting these numbers will likely increase in the coming months.
Who Can Make a Donor-Advised Fund?
Individuals, families, companies, foundations, and other entities are welcome to start a donor-advised fund account.
Donors can choose any name for their donor-advised fund account. Including the terms “Foundation” or “Fund” are fairly popular choices because they clearly convey the fund’s purpose, like the “John and Jane Doe Foundation” or “Smith Education Fund,” for example.
Depending on where donors choose to open or contribute funds, there may be a minimum contribution fee associated with opening an account and subsequent administration fees that cover record keeping, annual audits, tax filing, etc. For example, the National Philanthropic Trust requires an initial contribution of $25,000 or more to open an account, with minimum subsequent contributions of $5,000 or more.
While there are no other specific requirements to open a donor-advised fund, these monetary restrictions mean that donor-advised fund accounts are not financially accessible to everybody.
What Are the Benefits of a Donor-Advised Fund?
Donor-advised funds give donors the opportunity to bequeath an immediately tax-deductible gift that may not be a cash donation. This means stocks, private business interests, real estate, or cryptocurrency are fair game – gifts that are frequently more complicated to share with nonprofit organizations.
DAFs also allow donors to grant their funds across various organizations, rather than giving to one nonprofit. DAFs allow givers to specifically set aside money for charity, and they can use the funds for philanthropic gifts when it suits them. They can contribute to a DAF as frequently as they’d like, and then recommend grants to their favorite charities.
What Are the Downsides for Nonprofits?
The biggest downside for nonprofit organizations is that grants from a donor-advised fund do not always come from one individual donor or the same individual donor – making relationship-building a more difficult feat.
Additionally, DAFs are not required to make distributions every year, unlike private foundations. Donors can have multiple account successors and can pass these accounts down to children and grandchildren, which can create a precedent for donors to hoard rather than share.
All things considered, the donor-advised fund is simply another vehicle for giving, and a rapidly growing one at that. While it is not a financially accessible option open to everyone, it creates an opportunity for more people to give to charity with ease and regularity.
The new tax law and subsequent updates through the CARES Act have recently made donor-advised funds a more accessible vehicle to give. Find out more about how these laws impact charitable forces on the CauseMic blog.