donor advised funds

Should I Open A Donor-Advised Fund (DAF) In 2024?

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Donor-advised funds are an increasingly popular way to give to charity. They are among the easiest and most tax-efficient ways to support charitable causes. You can give to all of your favorite charities with just one donation to keep track of. If you are interested in donating to charity, then opening a donor-advised fund may be right for you.

 

What are donor-advised funds? 

A donor-advised fund, or a DAF, is an account that is established for managing charitable donations on behalf of an organization, family, or individual. Donors can contribute to their DAF account as often as they would like. The donor gets an immediate tax deduction for making a contribution to the fund but they don’t have to choose the non-profit organization to gift the funds to immediately.

The fund is maintained and operated by a section 501(c)(3) organization. This sponsoring organization has legal control over the assets once they have been deposited into the funds. However, the donor generally gets to decide when to send the funds to the non-profit organization.

The first donor-advised funds were created in the 1930s but they were not formally recognized until the Pension Protection Act of 2006. Donor-advised funds are now the fastest-growing form of philanthropy. There are more than 1.2 million DAF accounts as of 2023.

 

How do donor-advised funds work?

Donor-advised funds are a charitable giving account for your family.  

  1. Give: You choose a sponsoring organization and then make a donation to start your donor-advised fund. There is sometimes a minimum amount that you need to donate when you establish a DAF. This donation is irrevocable and you will get an income tax deduction for that year. 
  2. Receive an immediate tax deduction: When you contribute to your DAF, you may be eligible to claim an itemized tax deduction for federal and/or state income tax purposes. The deduction amount will depend on factors such as your income, the type of asset donated, and how long you have owned it. 
  3. Grow your donation tax-free: You may be able to invest your DAF donation and thus your assets can grow tax-free over time.  Although the sponsoring organization controls the money and the investment choices within the donor-advised fund, you can recommend which investments to choose. The assets in the donor-advised fund are then invested and can grow tax-free until you are ready to give them to the charity of your choice.
  4. Grant: Once you are ready, then you can grant some or all of the assets to your favorite charitable organizations. You can support virtually any IRS-qualified public charity.

(Don’t forget to download the Should I Use A Donor Advised Fund (DAF) When Giving To Public Charities?’ flowchart if you haven’t already).

how to donor advised funds work

What are the donor-advised fund rules?

  • The donation is irrevocable, meaning that it cannot be taken back once it has been gifted.
  • Once the donation has been made, it belongs to the sponsoring organization. The donor still maintains advisory and grantmaking privileges. 
  • All grant recommendations must be approved by the sponsoring organization.
  • Donors must not receive personal benefits from the DAF. 

What are the benefits of a donor-advised fund?

  • Immediate tax benefit: You can claim a tax deduction in the year that you contributed the assets to the DAF rather than when the charity receives the money.  For example, if you want to donate $1,000 a month to a charity for 3 years, you could put all $36,000 into the donor-advised fund today. Getting a tax deduction of $36,000 in one year may be more advantageous than three smaller tax deductions. 
  • Allows donation of non-cash assets: You can donate cash, stocks, bonds, mutual fund shares, money in IRAs and 401(k)s, private company stock, cryptocurrencies, real estate, life insurance, and more.
  • Ability to put in your will where you want the money to go after you die: you can make a bequest in your will so that assets in your donor-advised fund are donated to your charities of choice after you die.
  • Not subject to estate taxes: the money in a DAF will not be counted toward your total estate value. 
  • No capital gains: You won’t pay capital gains on assets you put in a donor-advised fund. 
  • You can give anonymously if you don’t want to be named publicly. 
  • Easy record keeping: Having all your charitable donations in one place means you don’t have to keep track of every gift acknowledgment from every charity you support. Simply just save the receipts from your donor-advised fund contributions.
benefits of donor advised funds

What are the disadvantages of donor-advised funds?

  • Minimum donation requirements: There are no contribution limits to how much you can put in your donor-advised fund but some sponsors require a minimum contribution. 
  • Fees: All donor-advised funds have annual fees and administrative costs. These can add up over time. 
  • You cannot revoke a donation. This means that you cannot take the donation back once it has been gifted.

Advantages and Disadvantages of a DAF

AdvantagesDisadvantages
Immediate tax benefitDonations are irrevocable
Allows donation of non-cash assets like appreciated stocksMinimum donation requirements
Not subject to estate taxesFees
No capital gains
You can gift anonymously
Easy record keeping

How do I open a donor-advised fund?

The first step in opening a DAF is to select a sponsoring organization. You can choose between community foundations or financial services companies such as Vanguard, Fidelity or Schwab. Once you have chosen a sponsoring organization, you can set up the donor-advised fund and make your first donation. These contributions are irrevocable which means that you cannot take them back. 

 

What can you contribute to a donor-advised fund?

Your minimal initial contrition could range from $0 to $250,000 depending on the organization and account type you choose. The assets you can contribute to a DAF include:

  • Cash
  • Money in IRAs and 401(k)s
  • Private company stock
  • Stocks, bonds, and mutual fund shares
  • Life insurance
  • Cryptocurrencies.

How much should I put in a DAF?

It depends on your charitable goals and your tax bracket. If you received a big bonus this year, you could lower your taxes by contributing to a DAF. There used to be a  minimum amount that you needed to put into a donor-advised fund, but many DAFs now offer no minimums. Some sponsoring organizations, such as Fidelity or Schwab, require you to make a minimum gift of $50. A financial advisor can help work out the best strategy for you.

 

Tax benefits of donor-advised funds

As soon as donors have made a DAF contribution, then they are eligible for a tax deduction that calendar year. The donor will need to fill out a Schedule A when they do their taxes. Donors can deduct up to 60% of their adjusted gross income for cash contributions and 30% of their AGI  for securities or appreciating assets.

Which sponsoring organization should I choose for a DAF?

When you choose a sponsoring organization for your DAF, it’s important to do your research, compare options and consider your personal financial goals. Here are a few things to consider:

  • Fees: some sponsoring organizations charge administrative fees or require minimum contributions. 
  • Investment options: Each sponsoring organization offers different investment options. 
  • Grantmaking flexibility: look for how easy it is to grant money to a qualified charity.

In the United States, three of the largest and most well-known sponsoring organizations for DAFs are Fidelity Charitable, Schwab Charitable, and Vanguard Charitable. We compare them below.

Fidelity Charitable vs Schwab Charitable vs Vanguard Charitable

Fidelity CharitableSchwab CharitableVanguard Charitable
Minimum initial contribution$0$0 for Core accounts; $250,000 for professionally managed accounts$25,000
Minimum amount for additional contributions$0$0$5,000
Minimum grant to charity$50$50$500
Annual administration feeGreater of 0.60% or $100 (tiered after $500,000)0.60% (tiered after $500,000)0.60% (tiered after $500,000)
Investment fees0.015% to 0.99%0.03% to 0.77%0.03%
Maintenance fee$0$0$250/year if below $25,000

Who controls a donor-advised fund?

Assets in the donor-advised fund are legally controlled by the sponsoring organization. The donor only has advisory privileges over the distribution of funds. The sponsoring organization does have the final say on where a donor-advised fund goes but as long as the donor recommends tax-exempt public charities, then the donor’s advice is typically followed.

 

What’s the difference between a donor-advised fund and a foundation?

A foundation and a donor-advised fund are both charitable giving vehicles. Private foundations are separate legal entities and are generally subject to more stringent tax laws. They are also responsible for their own tax filing and record keeping. However, you do have more administrative control in private foundations and you can grant to organizations other than IRS-qualified, 501(c)(3) public charities. Both have advantages and disadvantages that you should think through before setting one up.

Can you transfer funds from a DAF to a public foundation?

No, you cannot transfer funds from a DAF to a public foundation. DAFs can only make grants to public charities and private foundations are considered private charities.

 

Do you pay capital gains on donor advised funds?

Capital gains on donor-advised funds (DAFs) are a bit nuanced, and the tax treatment depends on several factors. Here’s a breakdown:

  1. Contributions to DAFs:

    • Tax Deductibility: Contributions made to a donor-advised fund are typically tax-deductible in the year they are made. This means you can potentially reduce your taxable income for the year of the contribution.
    • Capital Gains on Contributions: If you contribute appreciated assets (like stocks or real estate) to a DAF, you can usually avoid paying capital gains tax on the appreciation. This is because the DAF itself is a tax-exempt entity.

  2. Investment Gains within the DAF:

    • Tax-Free Growth: Once your contributions are in the DAF, they can be invested for potential growth. Any capital gains generated from these investments are typically tax-free within the DAF.

  3. Grant Distributions:

    • Tax Impact on Distributions: When you recommend a grant from your DAF to a qualified charitable organization, the distributed funds have already received their tax benefits. Therefore, you don’t incur additional capital gains tax when making grants from your DAF.

In summary, while contributions to a donor-advised fund and any gains generated within the fund are generally tax-advantaged, it’s crucial to consult with a tax professional to ensure you fully understand the specific tax implications based on your individual circumstances and the relevant tax laws.

Donor Advised Fund vs Public Foundation

Donor Advised FundPublic Foundation
Start up costsNoYes
Grant anonymouslyYesNo
Annual taxesNoYes
Annual 5% payout requiredNoYes
Maximum tax benefitsYesNo
Grant and admin servicesYesNo
Form 990 requiredNoYes
Fees re-invested into the communityYesNo

Other questions about donor-advised funds:

Who can open a donor-advised fund?

Individuals, families, companies, foundations, and other entities can open a donor-advised fund account.

What is the average size of a donor-advised fund?

According to the National Philanthropic Trust’s 2020 DAF Report, the average size of a DAF was $166,653. In reality, the number is somewhat skewed by larger DAFs, since the median DAF size was $27,548.

Do donor-advised funds grow tax-free?

Yes, one of the benefits of donor-advised funds is that they grow tax-free.

What is the maximum contribution to a DAF?

There are no maximum contribution limits for DAFs.

Can you withdraw money from a donor-advised fund?

No, you cannot withdraw money from a donor-advised fund. Any assets that you transfer to a DAF are irrevocable.

Should I open a donor-advised fund?

If you want to contribute to a charity and receive an immediate tax deduction, then opening a donor-advised fund may be a good strategy for you. 

Which donor-advised fund is best?

Choose a donor-advised fund that has low administrative fees, a good selection of investment funds, and low investment fees.

How long can money stay in a donor-advised fund?

There is no mandatory distribution date. That means that you can leave the money in your donor-advised fund for as long as you like.

Can you get your money back from a donor-advised fund?

No. Once you have made a contribution to a donor-advised fund, it is irrevocable. You cannot get your assets back once they have been gifted to the DAF as they then belong to the sponsor organization.

Are there required annual distributions for donor-advised funds?

No. There are no annual distribution requirements.

What happens to a DAF after the donor dies?

In the event of a donor’s death, the DAF account will be handled according to the terms and conditions of the donor-advised fund agreement. In most cases, the donor would have named one or more successors or beneficiaries to take over the DAF account. The successors will then have the ability to recommend grants to eligible non-profit organizations. If no successor or beneficiary is named, then the sponsoring organization may distribute those assets according to its own policies.

Can a DAF be inherited?

Donor-advised funds cannot be inherited in the traditional sense. However, the DAF can have one or more successors or beneficiaries who can recommend grants after a donor passes away.

Are donor-advised funds a good idea?

If you’d like to make charitable contributions and have more control over your contributions, donor-advised funds (DAFs) may be a great option for you.

Streamline your charitable giving with donor-advised funds in 2024

If you are ready to make a charitable donation now and want to receive an immediate income tax deduction, then starting a donor-advised fund may be the right strategy for you. They are a simple and efficient way to support causes that matter to you. If you’re interested in a comprehensive financial plan, including the best strategy for donating to charity, schedule a free discovery call today.

Best Financial Planner Washington DC

Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.

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District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.

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