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What is a Donor-Advised Fund and its Benefits?

What is a Donor-Advised Fund and its Benefits?

Posted on May 17, 2021

In 2020 when the pandemic impacted all types of businesses including charitable giving. One of the philanthropic options, Donor Advised Funds(DAFs) actually recorded growth compared to the contributions made in 2019.

“Grants from DAFs to qualified charities have grown twice as fast as contributions to DAFs and have increased more than 90 percent over the last four years. The majority of DAFs reflect their donors’ wish to be active philanthropists who give generously and regularly. Donors continue making contributions to their DAFs because they experience how easy it is to support the causes most important to them.”—Eileen Heisman, CEO National Philanthropic Trust.

It is encouraging to note that grant-making rose by nearly 30% compared to that in 2019 during the same period. A whopping US$8.32 billion was donated in grants during the first half of 2020! The rise in donations is attributed to an increased number of donors in response to the COVID 19 pandemic.(Source: Barrons)

What are donor-advised funds?

Donor-Advised Funds(DAFs) is a public charity in which donors can establish a giving account. When donors make a charitable contribution, they receive an instant tax deduction. Grants are recommended from the funds over time by the donors to charities of their choice as and when they decide to donate.

Things to Know About Donor Advised Funds:

A donor-advised fund can be understood as investing in a brokerage firm. Rather, it is like setting up an investment account with a nonprofit sponsoring organization that offers DAF services.

“Donor Advised,” fund implies that after the donor donates to a DAF, the donor “advises” the sponsors on where and when to distribute his funds.

Once a donor donates his assets to a DAF, it does not belong to him anymore!

However, he can control the movement of his funds by “advising the sponsors.” Until it is donated to a charity, it stays in the DAF account of the donor and earns interest.

Donors are free to invest in low-cost mutual funds to earn interest like any other investment.

How do donor-advised funds work?

Step 1: Donors Contribute to the DAF

It can be set up like any other investment account. Donors can fund it with the funds that they have allocated for philanthropy.

Donors can establish their donor-advised funds by making an irrevocable contribution of personal assets. This contribution is recorded as a donation by National Philanthropic Trust(NPT). This balance reflects in the donor’s donor-advised fund account. Donors can choose from a wide range of personal assets to donate. Contributions may be made in the form of cash, stock, real estate, and many more.

Step 2: Tax Deduction

Since donor-advised funds are public charities, donors are eligible for an itemized tax deduction for state/federal tax. Factors like the type of asset, how long the donor has owned it, and other such factors determine the exact amount of tax deducted. This provides the flexibility to the donors to plan their gift so that they can claim the tax deduction when they need it. Donors also have the option to recommend grants to charities of their choice at a future date according to their convenience.

Step 3: Customize the DAF

DAF offers the donors the flexibility to customize the account according to their charitable goals. For instance, you can structure the Legacy plan that establishes what happens to your DAF assets beyond your lifetime. You can appoint family members and friends to manage the responsibilities of your DAF as well.

This is a 3-step process by which you can set up your donor-advised fund account and benefit from it.

What are the Benefits of donor-advised funds?

Plenty! Let's look at some of them:

Cost-Effective: It is economical to set up when compared with a private foundation for "giving." Besides, it can be funded with few thousand dollars.

Tax Deduction: Donor-advised funds are public charities so they help the donors avail tax deduction in state or federal taxes.

Tax-free Investment Growth: Donors can select an investment strategy for their assets from a list of pre-approved investment options. Your investment growth is exempt from taxes.

Support Charities of your Choice at your Convenience: NPT approves grants to several charities that are tax exempt. Donors can choose charitable organizations they care about and donate.

Customized Donation: DAF is the only charity option that helps donors build a philanthropic strategy and donate according to their convenience.

Genuine: When you contribute to a charity through DAF, you can be sure that the donations reach the charity to which you want to contribute with an irrevocable contribution.

Several Options: DAF offers the donors complete control over their funds and donations. They can choose the charities they like, contribute at a time they prefer, set up a customized investment strategy. It also enables its users to plan for setting up a systematic philanthropic strategy beyond their lifetime and set up a legacy

Donate to Global Charities with Tax exemption: You can donate to any charity across the globe through DAF and get a tax deduction for your donations.

After looking at the benefits DAF offers, one would be inclined to invest in one.

However, before you decide to go ahead with the investment, make sure to look into these caveats:
  • Once you donate to a DAF, it does not belong to you anymore. You cannot change your mind later. So, you have to be 100% sure about the donation of your personal asset.
  • While considering the overall costs of setting up your DAF, you need to bear in mind the administrative costs associated.
  • If your annual giving is below $2500, DAF is not an ideal charitable donation for you. This is because you will get a tax exemption only if you deposit an amount that significantly higher than the standard tax deduction in the year when you make the deposit.
  • If your annual giving is in the range of $100,000, then other charities might prove to be better.

Therefore, it is best to get a clear understanding of all aspects of DAF and assess whether it is the best choice for you or not.

If you have decided that DAF is the best charitable funding option for you, there are several DAFs you can choose from.

Based on their sponsors, DAFs are classified as:

National Charities: These may be independent national organizations like NPT or account custodians such as Fidelity or Schwab Charitable.

Community Foundations: Some big cities like Seattle and Tacoma, etc. offer DAF to carry out the charitable interests of citizens of a specific geographical area.

Single-issue Charities: These are established for funding a single charitable intent. These may be faith-based, environmental, or for social causes.

Here’s a list of the Top 10 Donor-Advised Funds for 2021 where you can invest:

  1. Fidelity Charitable
  2. Schwab Charitable
  3. Donors Trust
  4. National Philanthropic Trust
  5. Foundation Source(Private Foundation)
  6. Silicon Valley Community Foundation
  7. SCOF(Supporting Organization)
  8. New York Community Trust
  9. Impact Assets
  10. National Christian Foundation

Each of these DAFs has specific rules and regulations. It is recommended that you consult an expert before you choose the best donor-advised fund for you.

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