How Donor-Advised Funds Can Support Your Philanthropy

Mark Wendell |

By Mark Wendell

(Authorship rights attributed to: Stephen Brooks, Charitable Planning Consultant, Fidelity Charitable®)
As we approach year-end, many of us are thinking about all we need to get done between now and December 31st. Compared to thinking about spending time with family and friends over the holidays, organizing our financial and tax situation is not generally first on the list. However, now is a good time to integrate your personal philanthropy into your larger financial plan to potentially increase the impact of your giving and support your favorite nonprofit organizations in 2013 and beyond.

Most Americans still give to their favorite causes via personal check. However, there may be a smarter, more effective way to give. Planned charitable giving vehicles like donor-advised funds have become increasingly popular. Individual donor-advised fund accounts grew 29% between 2007 and 2012[1] – and are an excellent way to increase the power of your personal philanthropy by giving more thoughtfully and oftentimes more tax-efficiently as well.

What is a donor-advised fund?   

A donor-advised fund—or DAF—is a charitable account, at a sponsoring public charity, which donors use to support their philanthropy. A DAF allows donors to approach their charitable giving more strategically by enabling them – with as little as $5,000 to give[2] – to create a dedicated account for giving, and to recommend grants over time to the nonprofit organizations important to them.

There are three basic aspects of a DAF:

  1. Give: Donors make an irrevocable, tax-deductible contribution to the public charity that sponsors the donor-advised fund program. The charity then establishes a DAF account in a name of the donor’s choosing. Donors can make additional, tax-deductible contributions at any time.
  2. Grow: Donors advise the DAF program sponsoring charity on how they would like their contributions allocated among various investment options.  Any investment growth is tax-free.
  3. Grant: The donor is then able to recommend grants from their DAF to other IRS-qualified 501(c)(3) public charities.

The vast majority of DAF donors recommend grants from their DAF on a consistent, ongoing basis, while some also view it more as a longer-term, endowment-like charitable vehicle to benefit a specific charity or dedicate a portion of the DAF to establish a family philanthropic legacy.

DAFs often eliminate paperwork for donors who only need to save tax receipts from their DAF contributions instead of for each grant made to charity and simplify compliance with IRS requirements. DAFs perform due diligence to ensure that the organization that receives the grant is a qualified charity. Sponsoring charities generally assess an annual administrative fee on assets in a DAF.

Donor-advised fund programs are both locally and nationally based and available through community foundations and national charities.  When established in 1991, Fidelity Charitable® was the first national DAF program in the U.S.

Donating assets other than cash

Many DAF programs also have processes in place to make it easy for donors to forego cash contributions and instead donate long-term appreciated securities – either publicly traded (stocks, bonds or mutual funds) or non-publicly traded (certain private stock, business partnership interests or certain other assets). Gifting appreciated publicly traded securities directly to charity typically allows donors to take a full fair-market value charitable deduction for the donated asset, and eliminate capital gains taxes on the appreciation – with those tax savings going directly to the charitable cause.

“When donors work with an advisor to align their charitable giving strategy with their overall financial plan, it’s a win for both the donor and the causes they support,” said Mark Wendell, president of MD Wendell Wealth Partners. “By choosing the right asset to give, the right time and the right charitable planning vehicle, donors often discover they can give more to their favorite charities.”

How a donor-advised fund account can complement a private foundation

Increasingly, many people are complementing their private foundation with a donor-advised fund. Donors cite three main benefits of this complementary strategy:

  • Higher tax deduction limits. The tax deduction limit for gifts of cash to public charity, including a DAF, is 50% of the donor’s adjusted gross income (AGI); for a private foundation, it is 30%. For public charities, the deduction limit for gifts of long-term appreciated securities is 30% of AGI, while the limit is 20% for the same contribution to a foundation. Additionally, a gift of long-term appreciated non-publicly traded securities is valued at fair market value for tax deduction purposes when donated to a public charity, but at basis when donated to a private foundation.
  • Relieving administrative burden. On a practical level, using a DAF for a portion of the private foundation’s grant-making may relieve the foundation of having to do the administration and due diligence on those grants that the DAF sponsor provides.
  • Anonymity. Donor-advised funds also afford more privacy to donors than do foundations. Grants from a DAF can be made without reference to the recommending donor, while foundations must report their grants to the IRS on a publicly available tax return. And because the returns of private foundations are a matter of public record, information about the foundation’s contributors may be revealed.

Make more of a difference

More and more each year, donor-advised funds are meeting an important need for people who want to be more thoughtful and systematic about their giving, and who are looking for ways to maximize their generosity. DAFs bring the power of strategic philanthropy to individuals and families at various stages in their philanthropic journeys and across the wealth spectrum.

In a recent survey, two-thirds of Fidelity Charitable donors said that they give more than they otherwise would because they have a DAF.[3]The growing popularity of donor-advised funds shows that philanthropically-minded individuals are finding DAFs to be a convenient and helpful way to plan their charitable giving, and support a highly engaged approach to philanthropy.

[1] Chronicle of Philanthropy
[2] Different DAF sponsoring organizations have different minimums. $5,000 is the minimum contribution required to establish a DAF at Fidelity Charitable.
[3] IPSOS, an independent research firm, conducted a study on behalf of Fidelity Charitable to better understand our donors 3,00  donors provided input between May and September 2013.