As the economy continues to ebb and flow in a post-COVID world, consumers are looking for straightforward financial wins, but often they aren’t sure what moves to make or what tools to use. Most Americans are aware of 401(k)s, even though 40% of Americans do not fully understand the fees and the rules surrounding them.
Which Type of Donor-Advised Fund Is Right for You?
Like 401(k)s, there is another type of account that can bring financial benefits to a large number of Americans and is rapidly growing in popularity. It’s called a donor-advised fund (DAF), which is a tax-deductible financial account for charitable giving.
What a Donor-Advised Fund Can Do for You
A reader might be asking, “How could that be beneficial to me?” Just like a 401(k) makes retirement simpler, a DAF simplifies giving while providing powerful tax advantages and investing options. Here are three consumer benefits donor-advised funds offer:
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- First, donor-advised funds give consumers one place for all their giving (on one consolidated tax receipt), like a checking account but for philanthropy.
- Second, consumers can easily donate stock, cryptocurrency or other assets into their account and avoid capital gains tax while distributing proceeds to any charity.
- Third, because dollars are eligible for tax advantages the moment they hit the account rather than when they are sent to charities, donors can take the time they need to discover high-impact charitable opportunities without worrying about tax implications. Most DAFs allow the money to be invested while it is in the account, and it can grow tax free.
All of this allows for greater opportunity to be smart about your giving.
More than the financial smarts, DAFs help you give more purposefully, which can help you live a richer life. The act of giving is associated with many aspects of psychological and relational well-being, and this type of account enables greater flexibility for donors to participate in giving, even if a donor isn’t sure yet what cause to support.
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Corporate donors are also catching on. DAFs are increasingly being used to support workplace giving programs as an alternative to federated funds (e.g. the United Way) and corporate foundations.
How DAFs Have Improved Recently
In recent years, donor-advised funds have become more straightforward to create and use. Many sponsors now offer low-fee exchange-traded funds (ETFs) as investing options, and because of increases in technology, administrative fees and minimums to open have come down. Additionally, they don’t require sensitive information like Social Security numbers to set up, and each sponsor ensures each charity is in good standing with the IRS. Startups in the space, such as Charityvest, are accelerating this movement to make DAFs more delightful and to lower fees.
It’s no surprise DAFs are growing quickly. In one year alone, from 2019 to 2020, the number of DAF accounts jumped 16.3% to more than 1 million.
At Charityvest, we’ve witnessed success firsthand through our growth over the past three years. We started Charityvest because we wanted to make giving more purposeful, allowing for better planning in how and where people give. Users can make tax-deductible contributions of cash, stock, complex assets or cryptocurrency into their fund, and then direct those funds to over 1.4 million nonprofits in the U.S., while keeping their giving on a single consolidated tax receipt. With the introduction of low-fee ETF portfolios earlier this year, users can invest their fund balance to grow their giving, with all-in fees 25%-50% lower than the leading providers in the DAF space. Simply, the idea was to make giving easier, and more purposeful, and we believe DAFs do that.
The industry is experiencing remarkable growth as individuals and institutions increasingly see DAFs as their preferred way to give and facilitate giving. The opportunity to become more purposeful and streamline giving is a powerful combination. Technology and innovation are pushing these accounts to more people, making tax-smart, easy, thoughtful giving available to everyone who wants to donate to charities, in the same way the 401(k) did for retirement.
Charitable Trade-offs Between Donor-Advised Funds and Private Foundations
Disclaimer
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
FAQs
Number of DAF Accounts Approaches 2 Million
The number of individual DAF accounts rose 2.9 percent from 1,893,762 in 2021 to 1,948,545 in 2022. The compound annual growth rate for the number of donor-advised fund accounts from 2018 through 2022 is 22.6 percent.
When did donor-advised funds become popular? ›
The first donor-advised funds were created in the 1930s, though donor-advised funds were not recognized formally in the Code until the Pension Protection Act of 2006. In the 1990s, donor-advised funds began to grow in visibility and popularity, and today they are philanthropy's fastest-growing vehicles.
What are the drawbacks of donor-advised funds? ›
Drawbacks You cede control of the assets. One of the drawbacks is that although a donor-advised fund allows the assets to be invested and grow in an account tax-free, because you get an immediate tax benefit for the contributions you make, they are irrevocable. (That means you can't get them back, for any reason.)
Should I use a donor-advised fund? ›
You want your charitable donations to be as effective as possible when you give. Donor-advised funds are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity.
What is the loophole of donor-advised funds? ›
What is the loophole of donor-advised funds? The loophole of donor-advised funds (DAFs) is that they allow wealthy people to donate money to avoid paying a capital gains tax and give the donated funds to a nonprofit, providing them with charitable tax advantages.
How popular is the DAF? ›
According to the National Philanthropic Trust's 2023 DAF Report, donors gave $52.16 billion in DAF grants to nonprofits last year—a 9% increase from the previous year. The total amount of donor contributions to DAFs also grew by 9%, meaning that the rising popularity of donor-advised funds is not slowing down.
Who is the largest DAF? ›
But the very largest DAF sponsors now actually have more assets than most of our largest foundations. The largest DAF sponsor, Fidelity Charitable, had just over $35 billion in assets in 2020. Fidelity outranked even behemoth foundations like the Lilly Endowment, the Ford Foundation, and the Hewlett Foundation.
Who owns the money in a donor-advised fund? ›
Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it.
How long can money stay in a donor-advised fund? ›
Donor-advised funds aggregate contributions from multiple donors and aim to democratize philanthropy by accepting contribution bases as low as $5,000. They offer tax advantages of up to 60% of adjusted gross income and can hold funds indefinitely.
Can you remove money from a donor-advised fund? ›
Contribute cash or other assets to the donor-advised fund
You can put in cash, stocks or other investments, such as cryptocurrency or even your ownership in a private business. Note: Contributions are irrevocable, meaning that once you contribute the assets, you can't get them out again.
Sponsoring organizations often require a minimum initial contribution to establish a DAF account, which may range up to $250,000; NPT requires an initial contribution of $10,000. Once your DAF account is established and funded, you can make subsequent contributions in any amount at any time.
What happens to a donor-advised fund at death? ›
What happens to a donor advised fund at death? After death, your DAF can continue carrying on your charitable giving legacy. As stated before, your DAF can be passed on to family or a close friend for them to advise, or even divided to make multiple DAF accounts for each successor.
Do I get a tax deduction for contributing to a donor-advised fund? ›
With a DAF: Donors can receive an immediate income tax deduction for their contribution, with up to 60% deduction of AGI for cash donations and up to 30% of AGI for securities and other appreciated assets (i.e. closely held stock, real estate, illiquid assets).
Which is better a donor-advised fund or a private foundation? ›
While a private foundation can donate to an individual facing hardship as long as the situation meets IRS restrictions, DAF donations must be made to a public or private charity. “You also have privacy if you want it with a DAF, since a DAF donation can be made anonymously," said Van Atta.
Can you pay expenses from a donor-advised fund? ›
Grants from donor-advised funds may cover the cost of memberships if the nonprofit confirms that the full cost is 100% tax deductible. If the cost is not 100% tax deductible, the donor must waive the more than incidental benefits related to the membership.
How many DAFs are there in the US? ›
DAFs held nearly US$230 billion in assets by the end of 2022 and distributed some $52 billion to charities that year. Those are significant sums as giving of all kinds totaled about $500 billion that year. As of 2023 there were about 2 million donor-advised funds, according to the National Philanthropic Trust.
Who is the largest DAF in the US? ›
The largest, Fidelity Charitable, which has assets of more than $48 billion, ponied up nearly $122 million in fees in 2022, according to its tax filings. Critics also contend that DAFs further the “warehousing” of wealth intended for social good.
Who uses donor-advised funds? ›
DAF grants can support qualified nonprofits in arts and culture, the environment and animal welfare, food banks and hunger alleviation, educational and religious institutions, social service organizations and more. All grant recommendations to qualifying nonprofits are approved by the DAF sponsor.
How much money do you need for a donor-advised fund? ›
No Minimum Balance Requirement
There is no minimum balance required to maintain a Donor-Advised Fund account, but if a Donor's account falls below the minimum grant size, the Trustee may request the Donor to make a final grant recommendation or additional contributions.
