For those who are charitably inclined, a Donor Advised Fund (DAF) is an easy and flexible tool to facilitate charitable giving. There are numerous DAF’s that are available, with different options and nuances.
This post provides general information on how a DAF works, what to watch out for and points to consider as you make your decision.
How a DAF Works
A DAF is a giving account that you establish with a sponsoring organization – a public 501(c)3 charitable organization. They are offered by some traditional charities, community foundations and investment providers (such as Vanguard, Fidelity etc. through their 501(c)3). Depending on the terms of the sponsoring organization, you may be able to contribute cash, appreciated securities, cryptocurrency, private equity holdings, land or other types of assets to the account.
Once the gift is given, it is irrevocable and no longer belongs to you, but to the sponsoring organization. When the gift is given, you receive a tax deduction for the amount contributed (cash) or current fair market value (land etc).
If the asset given is not cash, then the DAF will sell it (normally at no additional cost to your giving account) to create cash for your account. Once cash is available, you can either recommend gifts to other 501(c)3 charities and/or invest the funds for tax-free growth in the hopes of growing them for future gift grant recommendations.
As the sponsoring organization controls the funds, you are given the opportunity to recommend a gift to a qualified 501(c)3 from your DAF account. The sponsoring organization will conduct due diligence to ensure the funds can be given to the charity, and ensure the gift request aligns with their guidelines. If approved, then the sponsoring organization will facilitate getting the funds to the charity. The DAF sponsor has the final say on whether the gift is made to the charity you are recommending, not you.
It is important to note that the DAF sponsor may limit what investments can be made in the account, as well as where the funds can be given. It is extremely important to understand the DAF sponsor guidelines prior to establishing an account, because once a gift is made, you have no direct control over the funds anymore.
Here are a few other points about DAF’s:
- Gifts from a DAF to a charity can be done anonymously
- You normally can select the name for your giving account. Charities usually see the name of the DAF (unless done anonymously). If I named my account the Frank Smith Giving Account it is pretty clear who is giving the gift. But if I name it the Grace and Peace Giving Account, the ownership is not clear. Choosing a name that reflects your goals and intent is an important consideration
- Tax reporting is simplified. You need to retain proof of your gift to your DAF account, not every gift that is granted to a charitable organization from the DAF
- You cannot receive anything of value/benefit from the DAF sponsoring organization or charities that receive the funds from your DAF. The funds cannot be used to fulfill any binding pledges to a charity
- DAF’s are not able to accept funds from a Qualified Charitable Distribution (QCD)
- Gifts must be made to 501(c)3 charitable organizations
- Most DAF’s have an administrative fee that is assessed on an annual or quarterly basis. If you request gifts be made shortly after funding your DAF, the full annual administrative fee may be charged to your account. Be sure to understand this prior to opening an account
- They may/may not provide investment options to potentially grow the account while you decide where to gift the funds. If you choose to invest the funds, there is normally an additional cost
- They limit what type of assets the DAF will receive, and can limit the type of charities you can recommend gifts to
- Normally there is a minimum initial gift required to establish your DAF, a minimum additional gift amount, a minimum charitable gift grant recommendation and sometimes a minimum annual gift requirement (ie 5% of the DAF must be given each year)
- Can establish a successor to make grant recommendations for the remaining assets after you pass away
When Can It Be Helpful?
There are several scenarios when a DAF may be beneficial. Here are a few to consider:
Lump Sum
A common use is when someone receives a large sum of money due to inheritance, sale of business, bonus etc and desires to give a portion or all of it to charity. As it may be a sizeable amount, the donor may prefer to spread out their gifts over time or need time to consider their options. The donor can contribute the full gift amount to the DAF, receiving the tax benefit immediately, while providing time to make gift recommendations.
Create Family Legacy of Giving
Families can use a DAF to model and encourage their children to follow in their giving footsteps. The parents can create a DAF and donate assets to it and include the children in the gifting process. When they pass away, the children continue recommending grants with the funds their parents donated, and ideally add their own. This can provide the next generation insight into their parent’s generosity and giving preferences, while also encouraging them to give themselves.
Appreciated Securities/Property
A DAF makes it very easy to give away assets that have grown significantly in value, without having to take care of it yourself. Some assets (such as land) can’t be divided up over multiple charities easily, or can be time consuming and costly to sell. If the DAF sells it, the proceeds can be easily divided and distributed, without the hassle.
Bequest
When you pass away, your estate plan is your final act of stewardship. Many times people choose to leave assets to a specific charity(ies), and may not make adjustments to their plan for decades. Unfortunately, some charitable organizations drift from their original purpose and even beliefs over time. Leaving money to a DAF enables a trusted individual(s) to fulfill your giving desires by finding organizations that meet your intent. As there is no deadline to distribute the funds from a DAF, this can ensure the funds are put to good use by charitable organizations who align with the donor’s original intent.
Prefer Anonymous Giving
If you prefer to give discretely (and avoid the mail etc that goes with it), the DAF can send gifts to charities anonymously. Remember that if you choose to give anonymously, you will not be included on any updates for the charity. Balancing the desire for anonymity and keeping in touch with the charity needs to be balanced.
Key Points
As you weigh your options, here are a few points to consider:
Ownership
Once the gift is given to the DAF sponsoring organization, you no longer own it. It is advisable to select the sponsoring organization wisely and recommend grants in a reasonable period of time.
Restrictions
It is extremely important to understand how the sponsoring organization will handle all aspects of your DAF. Some restrict what types of charities can be recommended for grants, require assets to be held for a certain period of time (otherwise a minimum fee is assessed on the assets), require a minimum amount be gifted each year (ie 5% of the DAF value each year) or restrict what types of assets can be given.
Unfortunately, there isn’t a website or other resource that I am aware of to compare all your options. Taking the time to do your research and speaking with a knowledgeable Christian financial advisor can help you make an informed decision.
Costs
When you leave the money in your DAF, you are paying a regular administration fee and possibly investment expenses as well. Those add up, and can mean less money is available for grant recommendations.
Market Declines
One of the main marketing points for DAF’s is to allow the funds to grow tax free for future gifts. Though historically the market has tended to increase over the long term, it can also decline. If your DAF declines in value and there is a need you want to give to, there is less money to do so. This isn’t a deal breaker, but something people tend not to think about.
Give Now Versus Later
When you give to a DAF, you get a tax deduction in the year that you made the gift, but the gift has not arrived at the actual charity yet. Having DAF’s that go on for years means that money meant to support Gospel ministry is not being put to work. I’m a firm believer that we need to give when the Lord provides the resources. A DAF can be a valuable tool providing a donor time to evaluate organizations to recommend grants to, but don’t take too long. As Kingdom Advisors founder Ron Blue says “Be giving while you’re living so you’re knowing where it’s going.”
Final Thought
A DAF can be a great tool to help those who are charitably inclined. With the busyness of life, it can be easy to contribute assets to a DAF and never get around to giving them away. If you create one, be intentional about regularly giving from it. When used appropriately, a DAF can benefit the donor and the Lord’s work.
Points to Consider
- When you give to a DAF, someone else makes the rules and controls the money.
- Be certain to research DAF’s well and ask lots of questions before opening an account.
- A DAF can be listed as a beneficiary on your IRA or company retirement plan. It can be a great way to benefit charity, while reducing the tax bill for your heirs.
- When Jesus returns, how much money that was meant to be given will still be sitting in accounts?
