A donor advised fund (DAF) is a charitable giving vehicle administered by a public charity created to manage charitable contributions on behalf of organizations, families, or individuals. The giver opens an account in the fund which can be held at a major brokerage firm such as Charles Schwab, Fidelity, or TD Ameritrade. When the giver transfers cash or securities into the fund, he receives an immediate tax deduction and may avoid capital gains on appreciated securities, and he may direct donations of the proceeds to any IRS-certified 501(c)(3) charity at a time(s) of his choosing. Here, in our view, are the primary advantages of a DAF beyond the capital gains avoidance already mentioned:
- The accountholder receives the full tax deduction benefits of his donation immediately, but he may delay the actual granting to his intended charity to when he feels it would have the strongest impact. The level of the tax deduction is up to 50% of adjusted gross income for cash and 30% for appreciated property/investments. There are no taxes on any capital gains or income that occur inside a DAF.
- The accountholder may gift the proceeds from selling securities or tangible properties to charities that are not equipped to receive such items. He may also divide the proceeds among several charities. Instead of having many receipts to compile for his tax return, he need only worry about the one from the DAF.
- While the funds are held in the DAF, the accountholder may invest in either vehicles that are provided by the sponsor or he may hire an advisor to invest in any publicly-traded securities. At both Schwab’s and Fidelity’s charitable organizations, this option is available for account sizes of $250,000 or more.
- The costs and minimum required size of a DAF are far lower than establishing and maintaining a private foundation. In fairness however, a private foundation has the advantages of not being limited to giving only to charitable organizations, and it can be utilized as a means of employing family members.
- A DAF is an excellent way to involve family members in philanthropic decisions.
- When giving through a DAF, the giver may choose to either have his gift known to the recipient or may opt for anonymity.
- A DAF is an excellent companion vehicle to a charitable trust (either remainder or lead) or to a private foundation. It can accept donations from any of these vehicles, and the accountholder can decide when and how to deploy the funds.
- The DAF sponsor can assist the accountholder in researching specific charities to determine if they are worthy of support. Two Websites that are helpful in this regard are guidestar.org and charitynavigator.org.
To compensate the sponsor for the administrative expenses of running a DAF, there is an annual fee that will vary with the size of the account. For both Schwab and Fidelity’s charitable organizations, the annual fee is 0.60% for the first $500,000 and tiers down from there. For those who wish to have their DAF held at TD Ameritrade, American Endowment Foundation (AEF) is an independent donor-advised fund that works with all the major custodians, and they will open new accounts for as little as $10,000. In May of 2013, we were pleased to host AEF’s VP of Development, Laura J. Malone, who answered many questions about DAFs in the two videos below.
DAFs have experienced phenomenal growth in recent years. According to the 2014 Donor Advised Fund Report produced by the National Philanthropic Trust, the number of DAF accounts grew by 6% in 2013 to over 217,000 accounts which granted out $9.7 billion to charities. This is more than half of the $17.3 billion in donations received by DAFs which was a 24% increase from 2012. As of year-end 2013, the total amount of assets held in DAFs was $53.7 billion. The authors of the report calculate the 2013 grant payout rate at 21.5% of account value. This compares quite favorably to the 5% minimum that private foundations are required to give out.
If you would like to learn more about how IFA can help you establish a DAF or assist you with your charitable giving strategies, please give us a call at 888-643-3133.
About the Authors
Mark Hebner and additional IFA employees contributed to this article
Founder and President of Index Fund Advisors, Inc., and author of Index Funds: The 12-Step Recovery Program for Active Investors. He is a Wealth Advisor, with an MBA from the University of California at Irvine and a BS in Pharmacy from the University of New Mexico with a specialization in Nuclear Pharmacy.