Chances are you may have heard the term “Donor-Advised Fund” or “DAF” and wondered what they are, and whether one might help you to achieve your financial goals. We’re here to break it down for you and answer some commonly asked questions about Donor-Advised Funds.
Q: What is a Donor-Advised Fund?
A: A Donor-Advised Fund or “DAF” is a charitable account that is set up for the sole purpose of supporting charitable organizations.
Q: How Do Donor-Advised Funds Work?
A: You, the donor, make a contribution in order to open the account. You can make contributions to your DAF as often as you like. Once you make the contribution, the charitable sponsor (more on this later!) has legal control over it. However, you, the donor, retain advisory privileges as to how the funds are invested and to whom they are distributed.
Q: What Organizations Serve as Charitable Sponsors?
A: Some common charitable sponsors include Fidelity Charitable, Schwab Charitable, and Morgan Stanley, among others.
Locally, the Pittsburgh Foundation and other community foundations serve as charitable sponsors.
A sponsoring organization must be a public charity that maintains one or more DAF.
Q: What are the Benefits of Donor-Advised Funds?
A: Donor-Advised Funds are easier to administer and less expensive than establishing a private foundation. The accounting, administration, and filings for a DAF are completed by the charitable sponsor, saving you time and resources.
And you need a relatively small amount of money to get your Donor-Advised Fund started – a $500 contribution.
You don’t have to choose a specific charity right away – you can send the money later, at any time, to a qualified charity while the DAF grows tax-free.
Your DAF will track your contributions as well as provide a single tax document which can simplify your record-keeping. In addition, the DAF will also make sure that your donation goes to a qualified charity; one that is registered as a 501(c)(3) organization with the IRS.
DAFs also offer choices as to how your contributions are invested – just as in a 401(k).
Q: What are some of the Downsides of Donor-Advised Funds?
A: Your contribution to the DAF is irrevocable since you receive the tax benefit immediately. So you’ll want to be certain of your intent before you contribute to the DAF.
While you do have the ability to recommend which charit(ies) receive your donation, the charitable sponsor has the final say (although it’s unusual for them to not follow your recommendation as long as you are recommending a qualified charity).
There are fees and minimum donation requirements, as outlined earlier – although they are relatively modest when compared to the cost associated with establishing a private foundation.
Certain types of charities and persons are generally unable to receive distributions from DAFs, including private foundations, certain supporting organizations, as well as donors and their relatives.
There are additional limitations and rules that apply to DAFs, so it is important to compare the use of a DAF to a private foundation or other giving vehicle to make an informed decision. We recommend that you consult an experienced professional for assistance.*
BONUS: Gifts Through Your DAF Make an Impact
The gifts made through your DAF will benefit the charity of your choice. At the Watson Institute, we are grateful to receive gifts through an array of Donor-Advised Funds. Through this support, we are able to serve more than 1,200 children with disabilities each year.
As with any charitable giving subject to U.S. tax law, this is a complicated area and we recommend that donors obtain legal, financial, accounting, and other needed advice.*
Read more on why a Donor-Advised Fund might be worth exploring in 2023!
*The Watson Institute cannot provide such advice. If you do not have a personal advisor and/or legal counsel, we can provide you with information about counsel and advisors in our region.