Donor Advised Funds: Donate With Confidence
What are they? Why should you have one? Which are best?
A Donor Advised Fund (DAF) is an account held at or within a sponsoring 501(c)3 charitable organization. Individuals, families, or corporations can open a DAF and make charitable contributions into it while maintaining advisory privileges over where the funds should be disbursed to over time. It is important to note that contributions to a DAF are irrevocable, and control of the funds is ultimately held by the sponsoring organization - though it is exceedingly rare for a sponsoring organization to deny a disbursement request so long as the requested recipient is also a 501(c)3 charitable organization in good standing with the US Internal Revenue Service (IRS).
DAFs provide tremendous flexibility for people looking to make charitable contributions. A contribution into a DAF is immediately tax-deductible, but the funds do not have to be distributed to recipient charities right away. This provides an individual the ability to maximize their tax reduction strategies, while also providing time and space to formulate an effective approach to philanthropy.
Additionally, DAFs make it much easier for donors to donate non-cash assets such as stock (both privately held and public securities), property, art, jewelry, and other valuables that many charities are incapable of accepting as gifts. By donating these assets to a DAF and then liquidating them, donors maximize the full value of the asset since they do not have to pay capital gains taxes on the appreciated amount.
Finally, much like a retirement account, funds held within Donor Advised Fund account can be invested in appreciable assets such as stocks and bonds. These investments grow tax free, meaning that when a donor advisor ultimately decides to disburse to charity they may have more funds to donate.
Until recently, Donor Advised Funds were only available to ultra-rich clients of private wealth managers and brokerage firms. Brokerages like Fidelity, Schwab, and Morgan Stanley have typically had minimum contributions of amounts up to $25,000 to open a DAF. As a result, 99% of American households have been unable to access Donor Advised Funds or their significant advantages for charitable giving.
Today, there are numerous new companies that are offering lower-cost DAFs with superior, more modern, and mobile-first technology platforms. As one example, Groundswell, which has raised $15 million in venture funding to build its platform, is offering users a DAF with a $1 minimum contribution - the lowest in the industry. Groundswell has also built a modern corporate philanthropy solution for employees that utilizes DAFs.
Recently, DAFs have come under fire with the accusation that they serve as nothing but tax shelters for the ultra-wealthy. As this New York Times article outlines, there are sensational examples of billionaires transfers hundreds of millions of dollars into Donor Advised Funds, thereby saving tens of millions of dollars in capital gains taxes and reducing their income tax obligations with large charitable deductions - all while failing to distribute those DAF funds to recipient charities who can in turn create positive impact in their communities.
However, similar to recent stories about abuses of Individual Retirement Accounts (IRAs) by billionaires like Peter Thiel, it's clear that well-intentioned tax-advantaged vehicles will always be abused by people with significant wealth.
This does not mean that DAFs are inherently bad. DAFs provide significant tax-advantages and administrative streamlining for donors.
Currently, legislation governing Donor Advised Funds does not require a minimum distribution to charity. This is different that a private foundation, which has a minimum annual distribution requirement of 5% or more.
Creating a similar minimum annual distribution requirement for DAFs is being discussed in Congress, and many suspect that new legislation will close what is perceived by many as a loophole. The ACE Act is one such piece of legislation, and would significantly alter when donors could recognize deductions based on liquidation of non-cash assets and actual distributions to recipient charities.
The term Zombie Philanthropy has been coined to describe funds that are contributed to DAFs but not distributed to charities. In effect, these funds - which have already provided a charitable tax deduction to the donor - have not provided any impact on the social issues tax deductions are intended to promote via charity.
It is estimated by the National Philanthropic Trust that over $100 billion currently sits in Donor Advised Funds. This is money that could provide tremendous support to charities in the community, but that is not otherwise creating impact. That is why many DAF critics have come to refer to DAFs as zombies - lifeless entities with no value.
It is important to note that there is nothing inherently wrong with DAFs. Leveraged appropriately, they provide tremendous tax and administrative advantages to users. However, when utilized inappropriately, they can in fact create "lifeless" philanthropy.
We use cookies to analyze website traffic and optimize your website experience. By accepting our use of cookies, your data will be aggregated with all other user data.