The Ultimate Guide to Donor-Advised Funds: Making Charitable Giving Easy and Impactful

What Is a Donor-Advised Fund?

A donor-advised fund (DAF) is like a charitable investment account that you set up to support the causes you care about. When you contribute to a DAF, you get an immediate tax deduction, and the assets in the fund can be invested to grow tax-free over time. This means you have the flexibility to give to your favorite charities on your own schedule—whether that’s right away or years down the road.

In a nutshell, a DAF lets you separate the decision of when to donate from where to donate. This can make your giving more intentional and less rushed, especially if you've had a good year financially and want to take advantage of tax benefits while still having the time to thoughtfully choose which charities to support.

How Do Donor-Advised Funds Work?

Here’s how donor-advised funds work in three simple steps:

1. Contribute to Your DAF: You make an irrevocable contribution of assets to your DAF—this could be cash, publicly traded securities, or even non-cash assets like real estate or shares in a private business. When you contribute, you get an immediate tax deduction for the fair market value of your gift.
2. Invest and Grow: The money you contribute can be invested in different ways, giving it the chance to grow tax-free. This growth can mean more dollars available for charitable giving down the line.
3. Recommend Grants: You can recommend grants from the DAF to IRS-qualified public charities whenever you’re ready. The DAF provider takes care of all the administrative work, making sure the funds get where they need to go and handling any necessary paperwork for you.

Tax Advantages of Donor-Advised Funds

One of the main reasons DAFs have become so popular is because of the tax benefits they offer:

• Immediate Tax Deduction: You get an immediate tax deduction when you make a contribution to your DAF. For cash donations, this deduction can be up to 60% of your adjusted gross income (AGI), and for appreciated securities, it can be up to 30% of your AGI.
• Capital Gains Tax Savings: By contributing appreciated assets like stocks, you avoid the capital gains taxes you’d owe if you sold the assets first. This means more of your money can go directly to the causes you care about, instead of being eaten up by taxes.
• Tax-Free Growth: Any growth on the investments in your DAF is tax-free. The longer you let those funds grow, the bigger the potential impact when you make your charitable contributions.

Flexibility and Strategic Giving

Donor-advised funds are super flexible, which is why they’re so popular among people who want to make a difference. Here are some of the ways a DAF gives you more control over your giving:

• Separate Tax and Giving Decisions: You can donate to your DAF when it makes the most sense for you from a tax standpoint—maybe during a high-income year—and then decide which charities to support later, giving yourself time to think it through.
• Family Involvement: A DAF is also a great way to get your family involved in giving. You can name successors to your fund, allowing your children or grandchildren to continue supporting causes that matter to them, helping to build a tradition of giving.
• Privacy: If you prefer, you can make grants anonymously through a DAF. This means you can contribute without attracting too much attention or being added to mailing lists.

How Donor-Advised Funds Compare to Private Foundations

If you’re thinking about setting up a private foundation, it’s worth considering how donor-advised funds compare:

• Lower Costs and Fewer Headaches: Unlike private foundations, DAFs come with very little administrative work. You don’t need to manage tax filings or oversee grant distributions—the DAF provider takes care of all that for you.
• Lower Minimum Contribution: Donor-advised funds usually have much lower minimum contributions compared to private foundations, making them accessible to a wider range of folks.
• More Privacy: Private foundations have to disclose their grants publicly, but donor-advised funds offer complete privacy if that’s important to you. You decide whether your name shows up on grant letters.

Making the Most of Your DAF

Here are some strategies to help you get the most out of your donor-advised fund:

• Bunching Contributions: With recent changes in tax laws, many people are finding it makes sense to “bunch” their charitable contributions. This means giving a larger amount to a DAF in one year to surpass the standard deduction threshold, and then making grants over several years.
• Include Non-Cash Assets: If you have appreciated securities or other non-cash assets, you can contribute these to your DAF. Not only does this help you make a bigger charitable impact, but it also means you avoid capital gains taxes.
• Involve Your Family: A DAF can be a powerful tool for creating a shared family mission around philanthropy. By involving your kids or grandkids, you can help them develop a sense of generosity and build a legacy of giving.

Who Should Consider a Donor-Advised Fund?

If you’re someone who wants a flexible, tax-efficient way to manage your charitable giving, a donor-advised fund could be a great fit. Here are some scenarios where a DAF might make sense:

• You Want to Maximize Your Tax Deductions: If you’re in a high-income year or have experienced a financial windfall, contributing to a DAF can help you take advantage of significant tax deductions.
• You Want to Simplify Your Giving: Keeping track of multiple charitable donations can get complicated. A DAF centralizes your giving, making it easier to manage and track.
• You Want to Create a Legacy of Giving: If you’re interested in creating a culture of giving in your family, a DAF can help. You can appoint successors and involve younger family members in grant-making decisions, helping to pass on your values.

Getting Started with a Donor-Advised Fund

If you’re thinking about opening a donor-advised fund, there are a lot of providers out there—community foundations, financial institutions, and national DAF sponsors. Each one has its own minimum contribution requirements and fee structures, so it’s a good idea to compare options and choose one that fits your goals.

The process is simple—you set up the DAF, make your contributions, get the immediate tax benefits, and then recommend grants whenever you’re ready. Since the administrative burden is so light, you can focus on what really matters: making an impact on the causes you care about.

DAFs make it easy to be thoughtful and intentional with your giving—making the whole experience more rewarding. If you’d like to explore whether a donor-advised fund is right for you, reach out to your Allworth financial advisor for more personalized guidance.