Is a Donor-Advised Fund Right for You?

Donor-advised funds (DAFs) have grown in popularity over the past decade. According to the National Philanthropic Trust 2019 Donor-Advised Fund Report, the sky-rocketing growth has led to nearly double the amount of recommended grants—over $23 billion—to qualified charities over the past five years.

So, what are donor-advised funds, and why are we seeing this spike in growth?

What is a Donor-Advised Fund?

A donor-advised fund is a charitable-giving vehicle that allows individuals and families to make impactful philanthropic contributions and receive sizeable tax deductions. These funds are flexible accounts that can be used for legacy planning. employee giving, or nonprofit grantmaking, all funded with either cash, appreciated securities or other assets.

Once the fund is established, the donor may advise the sponsoring organization as to which nonprofit to distribute the funds to and when, but the donor relinquishes control of the distribution once the DAF account has been setup. In turn, the donor is also not responsible for annual tax filings or other liabilities associated with the DAF account.

Rather, a “charitable sponsor”— a tax-exempt charitable organization, such as the Santa Barbara Foundation—is responsible for managing the donor-advised funds, ensuring all-encompassing regulatory compliance, and administering the funds to appropriate charities.

The DAF Report states that a large portion of this spiked growth is being motivated by a few new charitable sponsors that are using DAFs in more flexible ways, such as facilitating employee giving. These emerging models are more focused on staying in cash with smaller charitable grants, with no regulated minimum. The traditional model, where DAFs are shaped with investment options to withstand lifetime and multi-generational giving, is still an effective philanthropic vehicle.

What are the Benefits of a Donor-Advised Fund?

Donors of DAFs may be eligible to receive five primary tax benefits, as noted below.

1. Income Tax Deduction – Donors receive an immediate income tax deduction in the year of the contributions to the DAF. Donors are eligible to contribute up to 60% of their income, depending on the type of asset contributed to the fund. If a donor contributes more than the tax-deductible limit in a single year, the unused deduction is carried forward until used up for a maximum of up to five additional years.
2. Tax-Free Investment Growth – If a DAF is invested before its distribution, the investment grows tax free and builds overtime, allowing more money to become available for charitable distributions over the life of the fund.
3. Tax-Free Capital Gains – If a donor contributes highly-appreciated assets, such as publicly-traded securities, the donor can completely avoid the capital gains tax on the market growth of those appreciated assets.
4. Alternative Minimum Tax (AMT) – Contributing to a DAF is another way to reduce your tax burden if you are required to pay alternative minimum tax. A taxpayer’s contribution to the fund can reduce their AMT impact.
5. Estate Tax – Donor-advised funds will not be subject to estate taxes.

Types of Allowable Contributions

There are a number of different ways in which a donor may contribute to a DAF. The following list outlines potential types of donations.

• Cash
• Stocks
• Mutual Funds
• Privately-held stock 
• Municipal Bonds
• Pre-IPO shares
• C Corp or S Corp stock
• LLC & LLP Interests
• Cash Value of Life Insurance
• Real Estate
• Annuities
• Private foundations

The Downsides of a Donor-Advised Fund

While there are many benefits to DAFs, there are downsides to this type of investment as well.

Donors can “advise” as to which nonprofit organization should receive a grant from their DAF but cannot control the outcome since they are not the owner of the funds. Donors are able to make recommendations to the charitable sponsor that manages the fund, and although extremely rare, the sponsor can override the recommendation. This scenario typically occurs if the recommended organization is not currently a qualified charity.

Is a Donor-Advisor Fund Right for You?

For many individuals, charitable planning is a top priority. Creating a charitable fund can be a rewarding philanthropic venture, one that can establish a legacy. It can also be a simple means of protecting your charitable assets for an optimal timeframe. For example, “bundling” gifts (combining multiple years worth of donations) into one gift allows taxpayers to meet and exceed thresholds for itemizing in order to claim an income tax deduction in the year of contribution to the DAF. Bundling especially helps in the tax reform era due to the increased standard deduction amount.

If you have any questions on donor-advised funds or other charitable gifting plans, please contact me at esheridan@bpw.com or (805) 963-7811.