Is a donor-advised fund right for you? How does it work? What are the differences between all the types of donor-advised funds?
These are some of the common questions we addressed on a recent webinar done in partnership with Family Business Magazine. You can sign up to watch the full event here, and I hope you will.
We sprinkled throughout the presentation several tips to summarize key points. Watching the whole presentation will paint a fuller picture of the ins and outs of DAFs, but these six points hit some of the essential benefits and reasons why so many people find a donor-advised fund to be the right tool for their charitable efforts. Let’s explore these.
- Donor-advised funds, or DAFs, are also sometimes called charitable gift funds, giving funds, or even a charitable savings account.
- Any donor-advised fund provider can offer the same basic benefits.
These first two go hand-in-hand as a reminder that while DAF providers may use different names to describe their offerings, these are the same basic product. Among these core benefits include:
- A simple way to give – aggregating your charitable work in one place. That means no longer having to keep up with multiple receipts come tax time – your charitable deduction comes when you make your gift to the DAF account, not from grants you will subsequently. The DAF provider will execute any grants, thus relieving you of check-writing or from bouncing from website to website to make your online gifts.
- Tax savings – particularly compared to a private foundation. DAFs are a unique way to manage gifts of appreciated stock. We go deeper into the tax benefits here.
- Additional privacy – should that be important to you.
Think of the slightly higher fees at community foundations and mission-driven funds as a contribution to the mission, not a cost.
In the webinar, we highlight the three different types of DAF providers – commercial vendors often affiliated with financial institutions, community foundations, and mission-driven (sometimes called “single issue”) funds. Each has its advantages and drawbacks. One advantage the commercial DAFs have over the community foundations and mission-driven funds is that their size and affiliation with large corporate entities enables them to offer a slightly lower fee.
Costs certainly matter, but as with any purchase, higher costs should also equate to higher value. People use community foundations and mission-driven funds because of their own personal alignment with the principles guiding that provider. While the administrative fee at an organization such as DonorsTrust may be slightly higher than the commercial vendor, you can look at that as a contribution to the mission you share.
Not all charities can accept complex assets, but they can all accept a check from a DAF provider!
Donor-advised funds can accepted appreciated stock, closely held private stock, and various types of real property. A DAF can be a charitable beneficiary on a charitable remainder trust or the recipient of IRAs or other finances at the time of your death.
In short, a DAF offers a vehicle for centralizing both simple and complex assets in one tax-deductible place. From there, you have the ability to recommend grants to a host of other organizations – some of which simply aren’t in a position to accept those more difficult-to-handle assets.
Beyond family, DAFs that you or the company fund can be set up for board members of your company or foundation.
Similar to how parents and grandparents fund 529 college savings accounts for their children and grandchildren, you can set up a donor-advised fund that another person advises. This offers a way for the next generation to build up their philanthropic skill set, whether in partnership with you or on their own.
Yet such an arrangement works outside of the family context as well. Perhaps you have a charitable foundation or a company board. As a reward for the board members’ service, set up a donor-advised fund account for each of them so they can make discretionary gifts to worthy causes.
Setting up such an account with a mission-driven fund also offers a way to put loose bounds on the giving while still offering a great deal of freedom to the advisor.
Unlike a foundation, you can “test drive” a DAF. If you find a DAF or a particular provider aren’t for you, grant out the money and move on. Like it? Continue to build your charitable nest egg with that provider.
Foundations require a good deal of work and attorney fees to establish. For some people, a private foundation may be the right step. Before jumping in with such a structure, experiment with a donor-advised account. You may find a DAF offers just the right amount of structure and service at lower cost – and with a team of accountants and program officers built in!
Likewise for annual checkbook givers. Test whether the one gift into the donor-advised fund indeed makes good on the promise of increased simplicity. If not, there is no cost to winding down the fund. Make grants with the funds you’ve contributed and close it out.
My guess is, however, you’ll find the ease of use and the partnership with the provider to be helpful to achieving your charitable goals.
