A donor advised fund (DAF) is a fund that allows a donor to make contributions and recommend grants to charities of their choice through a charitable sponsor. Essentially, a DAF is a savings account used for the sole purpose of making charitable contributions. The donor can immediately take a tax deduction for the contribution to a DAF, even if the funds are not distributed at that time. These funds are managed by a sponsoring nonprofit organization that invests the assets and distributes the donor’s funds to other charitable organizations at the recommendation of the donor.
Benefits of a Donor Advised Fund
- Donors can use DAFs to reduce tax during high-income years by contributing larger amounts that can be distributed over a longer period of time.
- Contributions can be in the form of cash, stock, real estate, or cryptocurrency.
- Donors can directly contribute publicly traded securities to eliminate capital gains from liquidation.
- Gifts are valued at market value, rather than cost.
- Little to no start-up costs
- No required annual distribution
- Optional anonymity
- Earnings can grow tax-free
How Does a Donor Advised Fund Work?
First, you must find a sponsor organization. Investment companies can be a good resource to find these organizations, and many operate their own organizations to handle DAFs.
Donors are required to make an initial contribution when setting up a donor advised fund. These contributions are tax-deductible and have no maximum limit, though they typically have a minimum required amount. Once a contribution is made, it can grow based on the donor’s investment preferences.
Once the initial contribution is made, the donor may continue to contribute to the fund as they wish. While the earnings are growing tax-free, the donor can suggest specific charities or causes, as well as the amounts to be given and the timing of those gifts. Sponsoring organizations are not required to, but more times than not will follow the donor’s wishes for the donations. If there are no specific charities for the cause requested, the organization will find a similar organization and give to them.
Donor advised funds are becoming more popular, and there are many ways in which donors and nonprofit organizations can benefit from these funds, both now and in the future.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.