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: 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.