Want to help make a bigger impact with your giving without the administrative hassle? Donor-advised funds, also known as DAFs, offer a middle ground between participating in simple “checkbook charity” and starting your own foundation.
Donor-advised funds are often considered smaller and nimbler cousins of private foundations. They offer many of the benefits of foundations, including the ability to:
However, DAFs require less legal and financial paperwork than private foundations and reduce administrative responsibilities for the donor. Rather than the individual donor, the DAF sponsor (a public charity) handles the fund’s administration, tax reporting, regulatory compliance, and grantmaking due diligence.
Donor-advised funds allow you to contribute cash, stock, real estate, or other assets such as business interests. These contributions can be bunched to combine multiple calendar years’ worth of gifts into one year, which may offer tax benefits if you are close to your standard deduction limit.
To set up a donor-advised fund, the process is usually as simple as completing an application with a fund sponsor. A fund sponsor can be a national or community foundation, an educational institution, a religious institution, or another qualifying 501(c)(3) public charity. Once the account is set up and funded, you or your designee may recommend grants to qualified charities of your choice.
Donor-advised funds may be an attractive option for the next generation of donors. “Younger generations want to engage in family philanthropy but find the formal structure and requirements of a foundation burdensome,” says Stephanie C. Buckley, head of philanthropic services within Wealth & Investment Management, Wells Fargo Bank, N.A. “With DAFs, families can spend more of their time focusing on how to be strategic with their philanthropy rather than administrative tasks. In fact, we are witnessing the second or third generation converting existing foundations to DAFs more frequently than ever before.”
There can be other positives as well. No board meetings and much less paperwork for donors can allow more time to focus on the engaging parts of philanthropy, like meeting grantees and evaluating impact. DAFs also provide many families with opportunities to introduce their children to financial literacy and philanthropy at the same time.
Donor-advised funds are gaining popularity for other reasons as well, including:
Contributions to a donor-advised fund may offer several tax benefits, including potentially higher income tax deductions (up to the full fair market value, subject to adjusted gross income limits), avoidance of capital gains taxes on appreciated assets, and tax-free growth potential of assets held in the DAF.
Of course, there are some considerations to keep in mind when determining whether to open a donor-advised fund, including:
Irrevocable donations: After contribution, funds can only be granted to qualified charities and cannot be withdrawn or used for any other purpose.
Underlying costs/fees: There are often ongoing investment management and administration fees. Other ancillary fees may apply.
Grantmaking restrictions: DAF grants can be made only to eligible 501(c)(3) organizations recognized as public charities by the IRS. In addition, when the DAF makes a grant, the DAF advisor cannot accept goods or services, such as tickets to a gala.
Before you develop a strategic plan for your family’s giving, we suggest you talk to your team of advisors, who can help you explore the most appropriate approach for your unique objectives.
Source: I.R.C. Section 170
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Donations are irrevocable charitable gifts. The sponsoring organizations maintaining the fund have ultimate control over how the assets in the fund accounts are invested and distributed. Donor Advised Funds donors do not receive investment returns. The amount ultimately available to the Donor to make grant recommendations may be more or less than the Donor contributions to the Donor Advised Fund. While annual giving is encouraged, the Donor Advised Fund should be viewed as a long-term philanthropic program. Tax benefits depend upon your individual circumstances. You should consult your Tax Advisor. While the operations of the Donor Advised Fund and Pooled Income Funds are regulated by the Internal Revenue Service, they are not guaranteed or insured by the United States or any of its agencies or instrumentalities. Contributions are not insured by the FDIC and are not deposits or other obligations of, or guaranteed by, any depository institution. Donor Advised Funds are not registered under federal securities laws, pursuant to exemptions for charitable organizations.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
Wealth & Investment Management (WIM) offers financial products and services through bank and brokerage affiliates of Wells Fargo & Company. Bank products and services are available through Wells Fargo Bank, N.A.
