Donor-Advised Funds 101: A Good Option for Charitable Giving

Charitable giving is important to many of our clients, especially for those who are passionate about specific organizations or causes. However, so many options for giving exist that it can seem overwhelming. Should you give to your alma mater or favorite cultural institution? Organizations trying to eradicate disease, advance medical research or stamp out poverty or other social ills?

Obviously, choosing where to give your money is a very personal decision, especially if you’re seeking to preserve a family legacy. But beyond choosing which causes to support, many of our clients also want to know about how to give. Because they want to be sure that their contributions make a difference, they often ask about donating directly vs. other charitable options such as donor-advised funds or private foundations.

Donor-advised funds, or DAFs, are often a great option. DAFs eliminate the significant work of running a foundation while also maximizing the tax benefits associated with charitable giving. In fact, because private foundations only make sense in rare cases, DAFs are usually an easier and equally effective way to give back. Here’s a quick overview of DAFs and how they work.

What is a donor-advised fund? How do they work?

A donor-advised fund is a vehicle for managing charitable giving that is set up through a public charity such as a community foundation. These funds provide an alternative to direct or foundation giving and are noteworthy for their simplicity. Donations can be made on behalf of an individual, family or organization that opens the fund within a parent charity. Cash, securities, real estate and other types of assets can be contributed to a DAF and subsequently distributed to U.S. 501(c)(3) public charities, schools or places of worship through grants suggested by the fund’s advisor. DAFs cannot be used to fulfill pledges or previous commitments.

How do DAFs compare to direct donations or foundation giving?

While providing less control than starting a foundation or donating directly, DAFs offer other benefits that make them a better choice in many circumstances. DAFs can typically be started with a low minimum initial contribution, while starting a private foundation usually makes sense only if it’s funded in the millions. Startup costs and ongoing expenses and administration will be much more burdensome with a private foundation.

DAFs can provide resources to assist throughout the grant suggestion process, whereas private foundations leave it up to the donors to appoint a board that controls investments and grantmaking. In comparison to making direct donations, DAFs make it easier to give over time by lessening the record-keeping burden for tax purposes.

Who controls donated assets?

IRS regulations require donors to relinquish control over any gift made to a DAF. The fund’s donors can then only make grant suggestions as to where funds should be distributed. As long as a grant suggestion will support a qualified charity and the donor will not receive a personal benefit, the grant suggestion will usually be honored.

How is management handled?

The management burden with DAFs is typically very light, because the majority of the administrative work is done by the host organization, removing many of the burdens of operating a foundation (e.g., record-keeping, staffing and asset management).

DAF account assets can be split among multiple fund advisors or successor advisors, such as additional family members. This approach both extends the longevity of the fund and places ownership of its mission into the hands of more people. Thus, it may be a good option for families that encourage charitable giving. Children can be made fund advisors or successors as long as they are at least 18 years old. All fund advisors and successors can then name their own successors to the fund.

How long do DAFs last?

Technically, there is no limit on the lifespan of a DAF. However, many organizations place a “sunset” on funds from a DAF after a specified amount of time, or the fund’s originator passes away without naming a successor. In such an event, DAF assets are merged into the host organization’s general asset pool.

What are the tax implications?

DAFs offer distinct advantages in minimizing tax liabilities, primarily immediate tax deductions on any amount contributed. Deductions are allowed up to 60% of adjusted gross income (AGI) for cash contributions, and up to 30% of AGI for other types of property such as appreciated securities. If the charitable deduction is limited by AGI, the excess can be carried forward up to five years. By giving appreciated securities to a DAF, the donor avoids capital gains taxes and can take a charitable contribution deduction for the full fair market value of the stock donated (subject to the AGI limitation).

Separating tax deductions from the timing of your gifts or grant suggestions can also be a great way to minimize your taxes. Donating a large sum to your fund and collecting the tax breaks in the current year still allows for the donated amount to be gifted through grants over time. Further, if you have a large tax year, it can make sense to pre-fund several years’ worth of charitable giving that you would have done anyway so as to reap the deductions now, especially in anticipation of lower tax rates in the future.

The bottom line: Consider DAFs a viable giving option

In our experience, DAFs are a good fit for families who want to formalize their charitable giving. If you’re already considering opening a donor-advised fund, some great options include the Dayton Foundation, the Greater Cincinnati Foundation and Fidelity Charitable Gift Fund. As with many other topics we raise in Viewpoints, a discussion with your advisor is a great starting point to find the right solution – both for shaping a philanthropic strategy and finding the best way to give.

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser. Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & 2B filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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