What Is a Donor-Advised Fund?

Whether you are a seasoned philanthropist or someone just starting out in your giving, learning to leverage a donor-advised fund (DAF) is one of the most effective ways to amplify your impact on the causes you care about.

So, what exactly is a donor-advised fund? It’s a centralized philanthropic vehicle that helps donors streamline and strengthen their charitable giving while also snagging some tax benefits. Often seen by many as a philanthropic tool mainly for the wealthy, DAFs are increasingly being utilized by more donors as they become more accessible. In fact, donations through DAFs grew by 9% to $52.16 billion in 2022.

By understanding a donor-advised fund, you can transform your philanthropy to the next level. Below, I’ll explain a donor-advised fund—what it is, how it works, why it's beneficial, and how it plays into strategic tax planning and significant social change. 

If you're passionate about supporting higher education, consider becoming a donor at Bold.org to help alleviate the burden of student debt and make a meaningful impact today.

The Importance of Donor-Advised Funds

A DAF isn't a charitable savings account; it's an advantaged, nimble giving tool that complements your desire to give with your urge to save. Once a fund is established, you can snag an immediate tax deduction and decide later which organizations you want to support.

Benefits of a Donor-Advised Fund

When you contribute to a DAF, you receive an immediate, IRS-approved tax deduction and can then recommend grants to as many public charities as you wish. This approach lets you focus your giving, enhancing the financial and emotional rewards of your charitable contributions.

Here are some of the perks DAFs offer: 

• Tax Advantages Right Away: As soon as you contribute assets, you can claim the maximum tax deduction allowed by the IRS for the calendar year in which you contributed.
• Sustained Impact: You can recommend grants from the fund to virtually any IRS-qualified public charity at any time, allowing ongoing support for the causes you’re passionate about.
• Personal Fulfillment: Experience the joy of seeing your contributions make a real impact, helping to shape the future of individuals and communities.

With a donor-advised fund, you can make a charitable gift today for immediate tax benefit while also retaining the flexibility to distribute those funds to your favorite charities over time, across multiple years, to leave a lasting legacy that benefits others for years to come.

For accurate and current details about tax deductions, it’s a good idea to consult a tax professional or advisor to help guide you in your tax-related decisions.

Exploring the Advantages of Using a Donor-Advised Fund for Charitable Giving

Donor-advised funds (DAFs) are powerful tools for philanthropy. By pooling assets into funds managed by private foundations or public charities, you get flexibility, simplicity, and some great tax perks. DAFs help donors centralize their giving and make a more significant charitable impact.

Advantages of Using a Donor-Advised Fund

DAFs offer unique benefits that enhance charitable giving:

1. Simplified Giving: With DAFs, you can consolidate assets into one account with a single manager and recordkeeper. This helps you form and implement a clear, strategic plan for your charitable donations.
2. Flexibility: You have the freedom to recommend grants to qualified charities whenever you want. This eliminates giving deadlines and encourages careful consideration.
3. Tax-Free Investment Growth Potential: The assets in your DAF can grow tax-free, increasing the influence and impact of the gifts over time and ensuring a more significant charitable impact.
4. Legacy Planning: DAFs let you create a philanthropic legacy. You can even appoint successors to manage the fund and make grants in perpetuity.
5. Anonymity: If preferred, donations can be made anonymously, an option always available through direct charitable donations.
6. Tax Efficiency: When you contribute to a DAF, you get an immediate tax deduction, and you can donate both cash or appreciated assets. Plus, any investment growth within a DAF is tax-free, growing the amount you can give.

In summary, maximizing the unique advantages of donor-advised funds can elevate your charitable giving. Making it effective, efficient, and focused on bringing your philanthropic vision to reality—both in the short term and for years to come.

How to Set Up a Donor-Advised Fund

Setting up a donor-advised fund (DAF) involves several key steps that mirror opening an investment account but with a philanthropic twist. 

Here’s how you can get started:

Choosing a Sponsorship Organization 

Opening a DAF requires partnering with a sponsoring organization. These organizations are often community foundations or charitable divisions of financial institutions that manage individual DAF accounts and offer comprehensive fund management services. 

Select a reputable and trustworthy organization that offers DAF services, like Fidelity Charitable, National Philanthropic Trust, or Vanguard Charitable. Thorough research will help you find the best fit for your goals.

Establishing the Fund

Starting a donor-advised fund is much like setting up a bank account. You'll provide personal information, choose a name for your fund, and learn about any associated fees (if applicable). This process can be done online or with your financial planner and usually takes less than 30 minutes to complete. 

Making Contributions

After choosing a suitable sponsoring organization, the next step is to add assets to your DAF. What’s great about DAFs is their flexibility with what you can contribute. While cash is commonly used, many donors also contribute securities or real estate.

Here's a closer look at these types of assets:

• Cash: Direct contributions via check or wire transfer.
• Securities: Donations of stocks, bonds, mutual funds, and other investments can be particularly advantageous, as contributing appreciated securities may yield additional tax benefits.
• Real Estate: Gifting real property such as houses, commercial buildings, or land is also possible.

Important Considerations

It's important to know that contributions to a DAF are irrevocable—once funds are deposited, they cannot be withdrawn. But the upside is that it’s balanced by the benefit of immediate tax deductions for the year in which the contribution is made.

Additionally, there may be specific rules for accepting non-cash assets. These rules often depend on factors such as how easy it is to sell the asset and the costs associated with holding onto it. Before making any non-cash contributions, it's essential to talk to your sponsoring organization first.

Administering Your Donor-Advised Fund

Once your fund is set up and you've added assets to it, you can begin recommending grants from your DAF. This allows you to support initiatives and organizations that matter to you, boosting your philanthropic impact.

Considerations When Choosing Charities to Support

When selecting organizations to support through your DAF, consider these critical factors:

1. Feelings of Alignment with Values: Identify charities that resonate with you emotionally and intellectually. These charities should allow you to give back in ways that match your heart and head. It’s important that you feel good about where your time, talent, and resources are going to contribute to something meaningful.
2. Efficiency & Results: Research how well the organization has achieved its mission and created positive change. Transparency is also key here—make sure they are transparent about how they use their funds.
3. Financial Health: Ensure good stewardship by checking the charity's financial statements and ratios to compare debt levels, assets, and spending.

Using donor-advised funds lets you align your values with practical benefits, so your giving becomes more than a moral exercise. Knowing these advantages can help you make the most out of your charitable efforts, better yourself, and help those in need.

Keep that in mind: as a donor, you strongly influence where grants go. Your giving keeps selected nonprofits afloat and enables them to reshape the current state of nonprofit sustainability. By placing your money where it will have the biggest impact, you help foster a robust and responsive charitable sector.

Managing the Fund

Not only does a DAF provide immediate tax deductions, but it also offers an opportunity for investment and growth. The sponsoring charity will typically provide several investment options from which to grow your donation tax-free over the coming years. This means your charitable contributions can grow which increases your assets so you can support your favorite charities and provide a bigger impact with your philanthropy.

Learning about how a DAF works can sound complicated. Remember that wise giving benefits both you and the charities you support – even if they are your family members. As with all things related to your finances, if you have any doubts, it is always a good idea to consult an independent financial advisor to ensure your donations are consistent with your financial and philanthropic goals.

Navigating Tax Considerations & Regulatory Requirements

When you open a donor-advised fund (DAF), it’s important for you to understand any tax laws and regulations surrounding DAFs to avoid potential tax problems for you or your loved ones. So, what exactly do you need to know? Let’s break down some high-level regulations:

Limitations and Restrictions

• Qualified Charities: Grants can be made only to an IRS-qualified public charity, not individuals or non-IRS-qualified entities.
• No Personal Benefits: Federal regulations state that a grant from a DAF may not confer any 'benefit' on the donor or any 'disqualified person' – that is, the donor or descendants or any entity controlled by the donor. Additionally, the restriction forbids 'quid pro quo' like gala tickets, auction items, or memberships.

Guidelines for Private Foundations

Grants to private foundations are typically not allowed. Before any grant is made, the DAF and granting institution must have performed sufficient due diligence to be satisfied that the grant will be used solely for charitable purposes and not for a private purpose.

Understanding these rules is essential to making the most of DAFs so they comply with IRS rules, maximize your impact, and retain their tax advantages. If you have any questions about forming and administering a DAF, consult a financial advisor or tax professional.

Frequently Asked Questions About Donor-Advised Funds

What is a donor-advised fund, and how does it work?

A donor-advised fund (DAF) is like a charitable investment account. You set it up through a public charity, and when you make a contribution, you get an immediate tax deduction. You can contribute to the fund whenever it suits you and recommend grants based on causes that matter most to you. It’s a flexible and convenient way to handle your charitable giving!

What are the benefits of using a donor-advised fund for charitable giving?

DAFs provide several benefits:

• Tax-free Growth: Gifts grow in value if invested over time, magnifying the purchasing power of your gift.
• Tax Benefits: You receive immediate tax deductions upon making your donation.
• Anonymity: You have the option to give anonymously, maintaining privacy while supporting your causes.
• Simplified Giving: By utilizing a DAF for charitable gifts, you can keep track of and distribute donations to multiple charities easily.

Are there any limitations or restrictions on how funds in a donor-advised fund can be used?

Yes, DAFs come with specific restrictions:

• Charitable Use: Grants must be made to IRS-qualified 501(c)(3) public charities and cannot be used to purchase gala tickets or auction items for a donor’s personal use.
• Professional Advice: Check with your financial advisor or the charitable sponsoring organization to see that your DAF is managed as you wish and in conformity with federal regulations.

Can donor-advised funds support scholarships?

Yes, you can use donor-advised funds (DAFs) to support scholarships, but the funds have to go through a qualified public charity that's equipped to handle scholarship programs, and everything must be in compliance with IRS regulations. Since charitable grants from DAFs cannot be made to individuals or directly to students, you'll need to team up with a qualified public charity like Bold.org to manage the scholarship funds properly. 

Bold.org serves as a platform where donors can work closely with The Bold Foundation Donor team to define the goals, criteria, and selection processes for their scholarships. This partnership gives donors a hands-on approach to their philanthropy while adhering to legal guidelines.

Additionally, Bold.org has partnered with Chariot, a digital payment processor for nonprofits, to make giving from a DAF quicker and more convenient. Do you have questions about using a donor-advised fund on Bold.org? Contact our team using at donors@bold.org.

Feeling inspired to make a difference? Visit Bold.org to learn how to organize a scholarship, become a donor, and change students’ lives today!