OCTOBER 04, 2020

Donor-advised funds (DAFs) are one of the simplest ways to protect your charitable intent. These funds originated within community foundations as a way for donors to create individual philanthropic accounts from which they could recommend grants to nonprofit organizations. Today, DAFs have become a wildly popular choice. The National Philanthropic Trust reported that in 2018, 728,563 individual DAF accounts held assets totaling just over $121.4 billion. During that year, donors used these funds to recommend $23.4 billion in grants to qualified charities. 

DAFs now outnumber private foundations by more than five to one and are continuing to grow at a much faster rate. In 2018, the largest grantmaker in the country was the Fidelity Charitable Gift Fund with $5.2 billion in donor-recommended grants.

“Think of a donor-advised fund as your own private foundation,” urges DonorsTrust President Lawson Bader. “You just don’t have to deal with the administrative side of things. It’s cheaper than a foundation, there’s no minimum payout requirement, and you don’t have to solicit proposals.”

Benefits of donor-advised funds

DAFs offer simplicity, cost savings, and anonymity. These funds have relatively few rules and restrictions. Specific advantages include:

1. Tax savings

Donors can take a tax deduction for their contribution in the year they make the deposit into their DAF, even if they do not make a grant recommendation from those funds in the same year. Gifts of cash are tax-deductible up to 60% of adjusted gross income (AGI). Many DAF sponsors that host your fund will also accept gifts such as securities, art, land, and business assets deductible at 30% of AGI.

What’s more, DAFs are subject neither to the excise tax nor the annual payout mandate imposed on private foundations. And contrary to some critiques, DAFs have high payout rates, collectively averaging about 20% a year.

2. Cost savings

The cost of maintaining a DAF is considerably lower than the cost of operating and administering a private foundation. The administrative burden of processing applications, philanthropic planning, and tax, legal, and accounting services is carried out by the sponsoring organization. Sponsors charge DAF holders an annual fee for these services, typically ranging from .5 to 1.5% of assets held in the fund.

3. Enhanced privacy

Donor privacy is an especially important benefit of DAFs. Although the sponsoring organization is required by law to disclose its grants, that disclosure does not include the name of the DAF account from which the gift originated. As the accountholder, you can choose whether your fund’s name and your contact information are disclosed to the receiving charity.

This is a critical factor for individuals who do not want to be inundated with solicitations or who simply want to keep their charitable giving confidential. It distinguishes DAFs from private foundations, which must list their grants in their annual tax filings. Some donors include both foundations and DAFs in their giving strategies, using DAFs to give family members latitude to make their own gifts, to provide younger family members with a low-risk method of philanthropic “training,” or to protect their privacy completely.

Options for opening a fund

You may open a DAF through the sponsoring organization of your choice. If your goal is broad philanthropic giving, your best choice might be a national fund (Fidelity, Schwab, Vanguard, National Philanthropic Trust, etc.) that gives you the leeway to support most tax-exempt charities without geographic or ideological guardrails.

If you have a specific geography in mind for your giving, then a better choice may be a community foundation that focuses on that area and can provide you with the knowledge and experience of both staff and fellow donors—an especially important advantage if you do not reside in the region your DAF supports. You can open a DAF at most national funds and community foundations with a modest contribution.

Some universities also offer alumni and friends the opportunity to open a DAF fund that will be managed within the school’s endowment. These sponsors, however, will typically impose a high minimum amount for distributions, and will also require that some%age of the fund goes to the university. Yale University, for example, mandates that distributions be made in amounts of $50,000 or more, and that at least 50% of the funds contributed must eventually be allocated to Yale.

Mission-driven intermediaries

If your philanthropy is oriented around a specific set of values—religious, philosophical, or ideological—then you may find that a mission-driven intermediary is the better sponsoring organization for your DAF account. Examples of such intermediaries include:

Opening a DAF account at one of these organizations offers you the opportunity to engage in philanthropy with like-minded people. And because they share your philosophical values, these DAF sponsors are far more likely to serve as good stewards of your philanthropic legacy. Their guidelines are clear about the grants they will approve. For example, the National Christian Foundation is forthcoming with prospective donor advisors that staff will “only approve giver-recommended grants to organizations whose purposes and activities align with NCF’s beliefs and values.” 

Considerations for donor intent

A DAF can be an excellent vehicle for protecting your donor intent, but keep these caveats in mind:

1. Remember that you are surrendering legal ownership

Protecting your donor intent with a DAF requires that you be mindful of the policies of the sponsoring organization. Because contributions to DAFs are irrevocable, it is critical that you understand that the sponsoring organization is the legal owner of the funds in your DAF account, and that you merely “advise” on their use.

Donor recommendations are typically accepted, but there have been exceptions. Sponsoring organizations—some responding to increased pressure from left-wing activists or to lists of so-called “hate groups”—always have the option to reject donor recommendations to certain organizations. You should inquire about this practice in choosing a sponsoring organization for your DAF account.

2. Be mindful of succession plans

The succession policies of sponsoring organizations vary significantly, so pay attention to their rules and make decisions that uphold your philanthropic mission. At Fidelity Charitable, a donor can choose to leave a DAF account to one or more family members, or other close individuals. These successors are then able to make donations, recommend grants, and name their own successors. A donor concerned about protecting intent may well prefer another Fidelity optionnaming one or more specific charities as beneficiaries of the account.

At DonorsTrust, each original donor has the option of appointing a successor to advise on the account, but any grant recommendations must align with the original donor’s intent. Either the original or the new adviser may choose a sunset date for the account. If no date is selected, DonorsTrust will close the account within 20 years of the death of the successor. 

3. Choose the right successors

If you want your DAF account to continue to reflect your grantmaking choices, then choose successors who understand that they will be stewards of your philanthropic legacy and whose values and interests align with yours. Discuss your grantmaking preferences with them to assess their willingness to make grant recommendations in line with your wishes. You may want to leave some suggestions in writing or by video, especially if you are planning to recommend a special significant gift in the future. 

4. Beware of potential policy shifts

DAFs have experienced such a rapid rise in popularity that they have attracted scrutiny from philanthropy critics and regulators alike. Suggestions include limiting the life of DAF accounts to seven or 10 years, requiring an annual payout in each account of at least 5%, and mandating the disclosure of grant recipients. Donors considering establishing DAF accounts should monitor potential regulatory shifts to ensure that DAFs continue to be the right vehicle to protect their philanthropic intent.