Donor-advised funds -- or “DAFs,” as they’re often called -- are philanthropic platforms created at public charities. Once established, these funds enable donors to make charitable contributions and, with them, reap immediate tax benefits similar to other investment funds.
Though DAFs first surfaced in the 1930s, there was no formal structure in place until 1969. Over the last 20 to 30 years, though, DAFs have grown significantly in both use and visibility -- in 2016, Americans contributed more than $23 billion to DAFs, an 18% increase in just two years.
If you’re considering establishing a DAF, it’s essential to understand the ins and outs of these funds. Though many of the benefits mimic more traditional charitable giving options, there are some perks and considerations exclusive to DAFs -- understanding them will help you determine if this is the right route for you and your personal assets.
#1. You Recommend Grants
One of the most unique features of DAFs is that, once they’re up and running, work as a sort of charitable savings for the donor. Funds are contributed and, from there, the donor can make recommendations as to who and what receives future grants -- typically, these recommendations sync with the donor’s personal preferences and personal charities of choice.
#2. Funds are Irrevocable
That said, there’s one direction funds can’t flow once contributions are made -- back to the donor. All personal assets contributed to a DAF are irrevocable. While the donor can make strong recommendations as to charities and nonprofits in line for these funds, there’s no option to withdraw or otherwise take back investments -- from day one, the funds belong to the DAF exclusively.
#3. Investments Grow Tax-free Over Time
As a DAF donor, you’ll receive immediate tax benefits for your contributions. With each contribution, you’ll gain additional tax savings while, at the same time, those funds and assets grow tax-free over time. This enables your assets to “work harder,” and create greater impact once distributed.
#4. Smaller-scale Giving is Welcome
Unlike many charitable funds, DAFs don’t require massive financial commitments. While many DAF structures require a six-figure minimum to enlist an investment advisor, if you’re planning to self-direct the account you can get started for significantly less. This enables givers to grow their charity-intended money tax-free over time, and make a gift when they feel it’s right.
Another perk to lower minimums? People whose income isn’t as consistent can give more in some years and less in others, ultimately working towards a fund goal over time versus in the immediate.
#5. There’s No Set Timing
Technically, DAFs can grow in perpetuity, which is a major distinction from foundations. While foundations must give out at least 5% of their net investment assets each year, DAFs don’t have these requirements -- in theory, a donor could make the contributions and sit on the fund for years or even decades, all while generating the tax benefits tied to charitable giving. Again, the funds belong to the DAF so they will, eventually, be distributed. But, at the same time, benefits will be realized when funding happens, not when the charitable gift it issued.
Ultimately, DAFs offer donors tremendous flexibility in everything from contribution amounts to gift allocations to timing, all while delivering significant tax benefits. For many givers, this is a compelling route to take, ensuring their funds can grow and best serve the charities and nonprofits of their choice. To learn more, schedule a meeting with the Wiseheart Foundation where we can review your charitable giving options -- including DAFs -- one-on-one.