We’ve received a lot of interest around donor advised funds, also known as DAFs, so wanted to share a bit about what they are and their pros and cons.
So what is a donor advised fund?
Today there are more than 728,000 DAFs in the US and grants from them have tripled in the past decade from $7.24 billion in 2010 to $23.42 billion in 2020. A donor-advised fund, or DAF, is an account held through a sponsoring public charity, or 501(c)3 organization, for accepting charitable gifts. They can be funded with cash and securities, as well as other assets. Once a gift has been made, the donor becomes a grant advisor to the DAF. As a grant advisor, you can make non-binding recommendations and the sponsoring charity then directs grants from the DAF to other public charities. DAFs are offered by large corporations as well as community foundations, universities, and individual charities.
The Pros
Donors receive an income tax deduction for contributions when they are made to the fund. This is beneficial because you can make a donation now and receive the tax incentive, but then decide later where the donation will go.
You will incur no capital gains tax on gifts of appreciated assets.
Your investments in a DAF can grow tax-free.
Your DAF will not be subject to estate taxes.
You can direct your DAF to support various charitable organizations.
The Cons
There are often minimum account requirements, though they vary depending on provider.
There are administrative fees as well fees on the underlying investments (trading commissions on stocks and bonds, and operating expenses for mutual funds, etc.).
They are irrevocable, meaning you can’t get the assets back for any reason.
DAFs are not legally required to give away assets which means the donation you make can sit in your DAF indefinitely. This can be beneficial while you decide on where you want to allocate the funds, but this also means that the more than $120 billion currently sitting in DAF accounts is doing just that...sitting in DAF accounts rather than being allocated towards charitable causes.
You may not like the underlying investment options. Although more and more providers are providing ESG and impact options for investments.
The bottom line as with most financial decisions is that it ultimately comes down to your personal situation and what you’re looking for and prioritizing. This Morningstar piece sums things up nicely-
“Whether or not a donor-advised fund makes sense for you will depend on your personal situation. If you want to donate smaller amounts in cash--say, less than $5,000 (the minimum contribution at some donor-advised funds)--and you know exactly which charities you want to donate to, it may make more sense to donate directly than to set up a donor-advised fund account because of the fees associated with them.
But a donor-advised fund account may make sense for you if you want to make a larger charitable donation in a calendar year but defer the payout--perhaps because you want to invest and grow the balance or because you have yet to choose the recipients. It may also be a tax-efficient choice if you want to make an in-kind donation of appreciated securities or other asset types that smaller charitable organizations are not equipped to accept.”