In the philanthropic universe, there are many ways to give. The challenge becomes selecting the tool that best helps donors meet their unique philanthropic goals.
The fastest-growing tool in this arena is the widely acclaimed donor-advised fund. More than 270,000 DAFs have been created, with an estimated $79 billion now under management, making over $15 billion in grants each year.
DAFs are 501(c)(3) philanthropic accounts established at a public charity. They allow donors to make donations to the DAF and receive immediate tax deductions, usually larger than those available for donations to private foundations.
At that point, the DAF legally controls the money. At any later time, donors can advise the DAF regarding which specific charities should receive donations. The DAF usually follows the donor's advice about where donations should be made. DAFs offer the option of donating with complete anonymity. Many private foundations also utilize DAFs as an additional part of their giving strategy.
Contributed funds are held in the DAF account and invested for growth and stability. Under present law, there is no requirement that the funds be contributed to another charity within any particular time frame. The tax advantages of DAF contributions can be considerable and should be explored with your tax adviser.
DAFs can be found at national sponsoring organizations that are often associated with financial investment firms, such as Fidelity Charitable or Schwab Charitable, or at independent entities like the National Philanthropic Trust or the American Endowment Foundation. Your own financial advisor may maintain one. DAFs are also housed at many of the more than 700 community foundations across the United States.
All DAFs are not alike. They differ from each other in ways that depend on the provider. Before opening a DAF, ask several questions:
_ How much does it take to open a DAF? To open an account, DAFs typically require a range of $5,000 to $25,000. The minimums for subsequent donations are in much smaller increments.
_ What kind of assets may I contribute? All DAFs accept cash or publicly traded securities. Some DAFs are now accepting other assets _ such as restricted or privately held stock, real estate, life insurance proceeds and tangible personal property such as art or other collectibles.
_ To what kinds of nonprofits can I direct my money? DAFs almost always accept donors' advice to contribute any amount to any 501(c)(3) charity approved by the IRS (although they are not required to). Some DAFs also honor requests for donations to international charities, scholarship funds and other charities.
_ Can my investment adviser manage my DAF investments? Not typically. However, some DAFs allow donors to select from different investment pools as a "home" for their funds, including some with social screens. Some DAFs allow donors to have their funds separately managed by their own investment advisers.
_ Can my DAF persist for future generations? DAFs differ in the number of subsequent generations to which their control may be passed. In many cases, this is a significant difference from private foundations.
_ Can my DAF make program- or mission-related investments? Some DAFs allow "impact investments" in their accounts, including low-interest loans to help nonprofits.
_ What fees are charged to manage my DAF? The fees for DAFs vary widely, with financial firms usually offering lower fees and community foundations charging more. The latter, however, often bring to the donor more community knowledge and philanthropy expertise.
_ Have the laws regarding DAFs changed? Today, there is no DAF payout requirement. However, proposals currently being discussed in Congress may result in a number of potential changes, including one requiring that contributions to DAFs be donated within five years.
_ Can my philanthropic adviser be involved with my DAF? Although some philanthropic consulting services may be offered by the DAF, they are usually limited in scope. Most DAFs are happy to include your philanthropic adviser in any discussions about your unique granting strategy including help with governance, multi-generational engagement, mission development, nonprofit research, impact evaluation and much more.
Establishing a DAF is a cost-effective way for donors to reap maximum tax benefits while supporting the causes they care about. Consider this popular option as a part of your overall philanthropic strategy.
