Donor-advised funds: Tax-effectively grow and grant assets to charity
Donor-advised funds (DAFs) are investment and savings tools that allow donors to contribute to a philanthropic account and take an immediate tax deduction. The assets in the account are invested and grow tax-free, ultimately enabling donors to have greater impact on the charities they support with the assets they have saved over a long period as well as in the short term. Donors can recommend grants from their account to qualified public charities at any time.
“Donor-advised funds are one of the hottest topics in the philanthropic community today… For donors, these giving vehicles have minimal costs, are easy to create, provide immediate tax deductions, offer a flexible timeline for giving, and help simplify charitable record-keeping. For nonprofits, they can lead to larger and more consistent donations, and can help simplify transactions.” – Giving USA 2017
A vanguard charitable donor-advised fund account can lead to substantial growth in your client’s charitable impact.1
How to use a DAF
- Contribute a variety of assets in addition to cash. DAF sponsors like Vanguard Charitable have the expertise, infrastructure, and industry contacts to accept appreciated securities and complex assets.
- Contributions are immediately deductible in the year they are made.
- Avoid capital gains taxes on appreciated assets.
- No estate taxes on contributed assets.
- Contributions can grow and be disbursed through multiple grants over time.
- Recommend how contributed assets are invested in the investment options offered by the DAF.
- Recommend exchanges among the investment options.
- Contributed assets grow tax-free.
- Recommend charities to grant to and how much to grant (minimum grant amount applies).
- Can give an unrestricted grant, which enables charities to use the funds where their need is greatest, or designate a specific purpose.
- Determine whether to be recognized for the grant or remain anonymous.
- Specify timing of the grant, whether it be now, later, or on a recurring basis.
- Not required to grant annually at a certain account percentage, although most donors generally do.
- Grants from the account are not deductible; only the contributions to the account are deductible.
- Qualified charities must meet IRS requirements.
- Pass legacy down in a way that reflects donors' philanthropic values and minimizes estate taxes.
- Recommend heirs as "successor advisors" of the account through a succession plan.
Key benefits of a DAF
Benefits to charities
- Strong payout rates. DAFs grant out approximately 20% of their available assets on a yearly basis.1 Private foundations, another long-term giving vehicle, are required by the IRS to meet a 5% annual payout rate.
- Counter-cyclical giving. Because the assets in a DAF have already been earmarked for charity, DAF donors are positioned to quickly issue grants in an economic downturn, when others may be constrained in their ability to give. DAFs can help ensure a steady flow of contributions to charities during these lean times.
- New assets unlocked. DAFs make it easier to contribute appreciated securities and complex assets to charity. Donors can also use a DAF to distribute the value of one large donation, such as real estate, to multiple charities over many years. Because DAFs can receive nontraditional charitable assets, they have the potential to expand the charitable playing field in the US.
- Managing a windfall. Financial windfalls, especially when unexpected, can create a tax headache. With each contribution to a DAF, a donor receives an immediate tax deduction and extra time to decide the final destination(s) of the charitable assets. In the meantime, those assets grow tax-free.
- Legacy planning. Donors often use DAFs to expose their children and grandchildren to charitable giving by providing them with limited advisory privileges. Charities benefit from a younger generation that is philanthropically inclined and has experience with strategic charitable planning.
More on DAFs
The term DAF applies to both the organizations that sponsor a DAF as well as the accounts held by donors.
DAF sponsors are 501(c)(3) public charities, which enable them to facilitate tax benefits for their donors. In return for the tax benefit, donors give up control of the assets they contribute to the DAF. However, donors retain an advisory capacity for how the assets are invested, granted to charity, and passed down to heirs or other beneficiaries.
Grants are not required to be made the same year as contributions. This can be useful to donors who decide to fund a DAF for tax purposes in a given year (for example, because of a financial windfall) but don’t have specific organizations in mind for their grants, or to donors who want to make small, regular grants now and larger gifts in the future.
Many donors use a DAF among multiple giving tools, finding that the DAF's unique features serve as a powerful complement to other forms of giving.
There are three primary types of DAF sponsors:
- National DAF sponsors, such as Vanguard Charitable, which are often affiliated with financial service institutions. These DAFs tend to be cause-neutral, not promoting one cause or charity over another.
- Single-issue DAFs, which focus on a specific charity sector or cause, such as religion or human services.
- DAFs sponsored by community foundations, which typically focus on local nonprofits or causes.
Popularity of DAFs
With their many benefits, DAFs have become the fastest-growing charitable giving tool in the United States.1
Source: National Philanthropic Trust 2017 Donor-Advised Fund Report.