Donor-Advised Funds: The Basics and Benefits

A donor advised fund can benefit both you as a contributor and the causes you care about. Everyone seems to be getting on the bandwagon. Should you?

Mar 12, 2014 at 5:25PM

Donor-advised funds, or DAFs, have been growing steadily right through the economic recession. In recent years, the number of DAFs has grown to more than 200,000, totaling more than $45 billion -- a figure that includes more than $13 billion in contributions and $8 billion in grants, according to the National Philanthropic Trust's 2013 Donor-Advised Fund Report.

So what are DAFs, and how can they benefit you as a contributor as well as the causes you care about? Read on for more.

Donors Renaissance

Donors: From a painting by Lorenzo Lotto. Photo source, Flickr user: Karen vidalia_11

The basics
In any given year, you can set up or contribute to a DAF, which will qualify for a tax deduction only in that year. In effect, rather than making a donation directly to a non-profit, you make it to the fund and then decide its allocation at a future date. The tax-deductible amount of contributions can be up to 50% of your adjusted gross income. Although the fund investments can grow tax-free, there are fees involved, and no guarantee of increase on those investments. Once you have given to the fund, it then is managed by a nonprofit (IRS 501(c)3) sponsor organization, and you cannot make a personal withdrawal from it. Instead, you "advise," or provide direction to the sponsor organization, on where to give grants.

According to Sara Montgomery, a philanthropic specialist for Wells Fargo Private Bank, there are distinct advantages for people who contribute to these funds:

  • They are not difficult to create and do not require the involvement of an attorney.
  • They provide a good tool for tax planning.
  • They create a structure for allocating funds for future giving, without a lot of administration.
  • They are more flexible than private foundations. Those require a certain amount of payout every year, as well as more reporting, and they tend to have higher administrative costs.
  • They offer the opportunity for anonymity, since gifts come directly from the fund.
  • They can reduce the urgency to find the right charitable cause or nonprofit within a certain timeframe. You make the contribution in the year you choose and then decide disbursements on your own schedule.
  • They promote proactive giving, gift strategy, and planning.
  • They allow you to have a good response to requests for donations, as you can refer to your preconceived plan.

Some donor-advised sponsor organizations require a minimum investment of only $5,000 or $10,000; others will require greater amounts. The fees are generally set on a sliding scale based on the total assets invested. Check with sponsor organizations about these specifics before deciding on which you will use. Once you have decided to start or contribute to a fund, the sponsor organization will help you set it up and transfer assets; they usually make that process fairly quick and trouble-free for the donor.

Four types of sponsor organization
You have choices when it comes to sponsor organizations. They can be with a financial firm, can be "independent" (although some of these collective funds have specific social aims), can connect to your religious denomination, or can be localized to your community.

  1. Financial firms have charitable arms that sponsor DAFs. Some examples are Fidelity Charitable, Schwab Charitable, Wells Fargo Philanthropy Fund, and Vanguard Charitable.
  2. Independent sponsoring organizations are not affiliated with a particular charity or financial institution. Some of them are geared toward addressing specific aspects of social change, which will be quite evident if you visit their Web pages. These include the National Philanthropic Trust, the American Endowment Foundation, Just Give, and Donors Trust.
  3. Religious groups have sponsoring organizations. While some of these are national, like the National Christian Foundation, Lutheran Community Foundation, and the Christian Legacy Foundation, others are local, like the Jewish Federation of Greater Atlanta. 
  4. Community foundations are found in almost every community in America and tend to fund nonprofits within their surrounding geography. These include large ones like the Boston Foundation and the Silicon Valley Community Foundation, but also many smaller ones. There is probably one where you live. DAFs are a core purpose for a community foundation, so they are particularly helpful with both setup and, later, helping you with the granting process from your fund.

Donor-advised funds require some diligence and attention, especially at the outset. It will be helpful for you to know some of the limitations and potential problems with DAFs, which I will cover in a future article. If you are a skillful donor, you can feel the benefits while making a real difference in the causes you care about. Donor-advised funds are vehicles for getting both of these done.

And don't forget about your retirement
Social Security plays a key role in your financial security. In our brand-new free report, "Make Social Security Work Harder For You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Fool contributor Mark Ewert is in no position to give investment advice, so he sticks to charitable giving and philanthropy. His new book, The Generosity Path: Finding the Richness in Giving, is a resource for anyone who wants to be a more skillful charitable giver.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers