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Dozens of charities may be vying for your financial support. A donor-advised fund lets you put money aside and choose when, where, and how it will be put to work.

Personal finance

Donor-Advised Funds: A Flexible, Tax-Effective Giving Strategy

  • Craig J. Ruffolo
  • 8/7/2017

Donor-advised funds (DAF) are a tax-effective bridge between individual or family values and the public charities actively engaged in building a better world. They offer flexibility to those with intentional giving goals who want to expand their options for what can be given as well as when and how gifts are distributed.

DAFs have experienced renewed interest and tremendous growth in assets in recent years, but they have been in existence in some form since the 1930s. A report from the National Philanthropic Trust says that in 2016 there were 269,180 DAFs holding nearly $79 billion in charitable funds. Let’s look at what makes them so popular, and how they can help you fulfill your vision for a better world.

Greater flexibility in charitable giving

Think of a DAF as a sort of “charitable giving investment account” that is owned and controlled by an independent sponsoring organization whose purpose is to raise and distribute funds to other charities. DAFs are actually charities themselves, with a mission to support the causes of their donor-advisors on a national and/or local level. Some even focus on charities connected to a single issue. Sponsors can be investment companies or they may be independent entities.

A DAF is set up to:

  1. Receive your tax-deductible gifts of cash or other financial assets
  2. Provide regular statements identifying the value of your contributions
  3. Allow you to advise the fund on how to invest, and when and where to distribute the gifts

Distributions are regularly approved to any public charity meeting the 501(c)3 exemption requirements as long as you and your family members do not have direct or indirect control of the entity or receive more than an incidental benefit as a result of the distribution. Qualifying recipients typically include religious charities, educational institutions, arts organizations, environmental causes, and others.

Why choose a donor-advised fund?

Why would someone want to store up charitable funds and direct someone else to distribute them at a later date, rather than giving them directly to the organization?

  • You may want or need to take time to carefully identify appropriate charities to recommend as grant recipients.
  • Your annual income may be irregular but you still want to make consistent gifts to charity.
  • You want to build a fund to sustain a lifestyle of giving in retirement.
  • Compounded growth, over time, helps build a fund that is prepared to execute your charitable vision.

More time to consider your gifts

Those who want to build a better world are often already doing so through their profession or community service, but that may also limit the time available to manage other personal goals. A donor-advised fund can serve the high-performing employee, executive, and business owner by providing:

  • One place to make donations as a result of year-end bonuses or profit distributions, while quickly receiving a current-year tax deduction.
  • One receipt for annual tax purposes, no matter how many grants are made throughout the year.
  • The option to automate regular gifts on different cycles.
  • The option to give anonymously to charities and limit the number of requests you receive.

Easy to open with low initial contributions

Donor advised funds can be used to proclaim your legacy by encouraging your whole family to think strategically and participate in building a better world. Some children even give alongside their parents to a single DAF in support of charities they see as positively impacting their future.

Every DAF sponsor has its own minimums, but the accounts are typically easy to open, often with an initial contribution as low as $5,000. Optional future contributions can often be as small as $500, and grants out of the fund as low as $50.

A DAF is also increasingly employed in estate planning as the primary bucket to receive designated income and estate tax-reducing charitable contributions. Families may want to select a DAF that allows them to distribute remaining funds to specific charities at death or designate other family members to carry on as successor advisors to the fund. DAFs appeal to a wide range of families, their attorneys, and other advisors whether or not the estate is subject to estate taxes because they have simpler administrative rules and lower costs when compared to a private foundation.

How we can help

Our goals-based financial planning process includes a step for quantifying resources to meet your goals. This is where we can help uncover current income or future resources for the charitable purposes you already want to support. If it fits into your plan, our wealth advisors can help you open a donor advised fund account, and when appropriate, help you manage your invested funds and other family financial matters in service of the better world you envision.

  • Craig J. Ruffolo
  • Senior Wealth Advisor
  • CLA Peoria
  • CliftonLarsonAllen Wealth Advisors, LLC