What are Donor Advised Funds and how do they work?

A donor advised fund (DAF) is a separate account of a sponsoring charitable organization. They can be set up at a wide variety on sponsoring organizations including various large existing charities as well as financial firms such as Fidelity, Schwab, and Vanguard. From this account, donors recommend grants to other charitable organizations. Most DAF programs have the ability to accept appreciated securities as donations. When you contribute a donation (of appreciated securities or cash) to your DAF you get the full appreciated market value of the asset as a tax deduction, in the year of the donation. Upon receiving the gifts the DAF sponsor liquidates the donated assets tax-free and invests the proceeds in a variety of investment options. Generally the donor gets to recommend how the assets are invested among a number of investment choices. Over time the donor can recommend grants to IRS qualified charities and the DAF sponsor distributes cash grants to these recommended charities. Grants may be made over many years into the future even if a large donation was made in just the first year. These DAF accounts are quite easy and cheap to set up. Schwab and Fidelity’s donor advised fund programs require a minimum initial contribution of only $5,000, minimum additional contribution amounts of $500-$1,000, and minimum grant sizes of only $100.

Advantages of using a Donor Advised Fund for your Charitable Giving:

1. An immediate tax deduction of the full appreciated value of the securities donated. You avoid paying any capital gains tax on the sale of the asset. This is much more tax efficient than contributing cash to your charities. You get to give the full appreciated value of the securities to your charities rather than the smaller after-tax proceeds. Make sure you have held the appreciated asset at least a year before donating.

2. Simplification. You making one donation of appreciated securities to your DAF, and then you get to grant multiple smaller amounts of cash to each of your favorite charities. This is much easier administratively than donating smaller amounts of appreciated stock separately to each of your charities (some of which may not accept securities). You only need one tax substantiation letter using a DAF, versus multiple letters if you are donating separately to each charity. DAF’s make it easy to contribute appreciated securities to them. You can also automate your giving from this account on a monthly or other regular basis to your favorite charities. The DAF sponsor does all the administrative and recordkeeping work, and sends the checks to the charities for you.

3. Post-donation appreciation may increase the size of your grants. Since you may donate to your DAF in one year and may grant the money to your charities several years later, any appreciation of the investments during that time will result in larger donations to your favorite charities. Assets in your DAF account can grow faster because they appreciate free of taxes.

4. Good Estate Tax Planning. All donations made to a DAF are removed from the donor’s estate immediately. A large donation to a DAF in the current year may provide many years of future giving to charities and immediately reduces potential estate taxes. Simply planning to give the same amounts directly to charities each year from the donor’s estate provides no shelter from potential estate taxes.

5. Low Minimums, Costs and Ease of Use. As described above many of the programs such as those at Fidelity and Charles Schwab have very low minimums for contributions and donations. They are easy to set up and use and they typically have no startup costs.

6. Ability to donate now and get the tax deduction, and decide where to give later. These funds allow you time (years if you wish) to research and decide where you wish to give.

7. Create a legacy and start a family tradition of philanthropy. DAF’s allow you to get your kids involved in helping pick out the charities and try to teach and inspire them about philanthropy. It is possible to assign your children as successor advisors and extend the grant-advising privilege to them after your death.

8. No minimum distribution requirements or legal red tape like separate tax returns (unlike foundations which must distribute 5% of assets annually and file separate tax returns). Private foundations must pay excise taxes of 1%-2% of net investment income annually, and DAF’s do not.

9. Privacy. Gifts from donor-advised funds can be made anonymously. Private foundations must make their tax returns available to the public, and sometimes families get inundated with requests because of that.

Disadvantages of Using Donor Advised Fund’s:

1. Administrative Costs. While dramatically lower than a private foundation, the DAF sponsors all charge some sort of administrative fee to run the program. These administrative charges cover the cost of keeping track of all the accounts and donations, and distributing the grants. Schwab and Fidelity charge a .60% administrative fee for the first $500,000 in the plan and the fees drop to only about .20% for accounts with $1.5 million or more. These fees have been cut significantly over the past several years. The underlying investment fund options charge a typical expense ratio of about .50-.65%. Other DAF sponsors may charge significantly higher fees that this.

2. Donations are Irrevocable. Once you donate the money to your DAF you can’t get it back. You are still in control of it, but it can only be donated to charities and given away. Only donate what you are sure you won’t need yourself or for other purposes.

3. Restrictions. You can’t use a grant from your DAF to make good on a personal pledge to a charity. You also can’t donate to a charity with the expectation of any personal gain or benefit (concert tickets, etc.). In some DAF’s the investment choices are somewhat limited.

4. No Income to You. DAF’s are not a technique if the donor wants income for themselves or their family from the donated asset. If income is a priority, the donor should consider other vehicles such as a Charitable Remainder Trust.

5. No Ability to Hire Staff. Since all of the administrate work is done by the sponsoring organization, the donor themselves cannot hire family members to do the work as they might with a private family foundation.

Keith Tufte

According to Giving USA in 2009 Americans donated more than $307.75 billion to their favorite non-profit organizations and charities. The majority, approximately 75% of charitable giving was attributed to individuals. Charitable foundations and other corporate giving amounted to 17% of total funds donated. Online giving accounted for 67% of all dollars donated in 2010. The online charitable giving channel is rapidly becoming the method of choice for how to donate.

Individuals make charitable giving decisions based upon a variety of factors. Among the leading recipients of money for charity are Human Services Organizations, Environmental and Animal Welfare Organizations, Arts and Cultural Organizations, and Disaster Relief Groups. The last category is one where recurring gifts are less frequent. Whether through online portals, mobile text campaigns, or direct charitable giving, these donations are an appeal in a time of need that elicit and immediate, although fleeting, emotional response. So then, how can individuals maximize their charitable giving to non-profit organizations and create a lasting relationship with the recipient? Will a values-based charitable giving create a stronger tangible benefit to the donor?

The preeminent philosopher Maimonides lists his famous Eight Levels of charity. According to the medieval scholar the highest level of giving is to form a partnership with a person in need enabling the recipient to overcome the necessity to rely upon others. Importantly, the concept of an ongoing partnership is raised. This is a deeply personal connection to the individual or organization in need and not a one time, sterile, or non-personal gift. A two way relationship is created whereby the charitable giving donor is simultaneously being uplifted because the action is not for selfish reasons, but a reflection and outward example of living according to ones values. In the context of Abraham Maslow, this exemplifies a life in harmony and a donor who is self-actualized.

When deciding upon which non-profit organization to donate to and determining how to donate realize that it is crucial to take responsibility for ones actions. Philanthropy is a perfect vehicle to experience and enhance ones true purpose. The highest return on charitable giving will be achieved by developing an ongoing and daily relationship with a charity that is consistent with your core values and beliefs.

One can achieve any dream or goal by insuring that their daily actions are consistent with their core beliefs. The individual is assured of success because positive life changes are in harmony with their value system and motivated by their desire to aid their favorite charity or non-profit through a charitable giving program. As the individual encounters daily success they begin to realize that they are in control of their life, able to make proactive and positive decisions, and gain self-confidence.

As the individuals are presented with appeals for charitable giving they think carefully about how they can and will make a difference in the lives of others, and by doing so, how they too will benefit and be truly inspired.

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The origins of the word philanthropy go all the way back to the story of Prometheus. According to ancient Greek mythology, Zeus thought man much too backward and primitive to share one of the most important resources the gods had: fire. Without fire, man literally lived in the dark, a cave-bound existence without the ability to create warmth, cook, or fashion tools. Zeus looked out on the pitiful lot of humans and decided to destroy them.

The Titan Prometheus, however, had taken a liking to humans. He saw great promise in them, and believed they were destined to do great things. All they needed was a head start, a little boost. He believed that fire would change their existence, so he shared that gift because of his philanthropy, his love for man. It didn’t turn out all that well for Prometheus though as Zeus had him chained to a rock and had his liver plucked out daily by an eagle, which grew back each night. Many years later, Prometheus was rescued by Hercules, who was on his way to another adventure.

This concept of charitable giving was taught by Plato in some of the earliest organized educational efforts in human history. Later of course, like much of Greek culture, this charitable giving became a custom in the Roman world. Julius Caesar himself was much beloved by the Roman citizenry because of his philanthropic efforts to make Rome a better place for all of its citizens. This idea of private charitable giving for the public good found its start, and was here to stay.

Of course, the spread of Christianity throughout the west entrenched the concept of charitable giving. The Apostle Paul wrote to the Corinthians that charity was the highest virtue attainable by Christians. This echoed Jesus sentiments when he told his disciples that loving one’s neighbor was only second to loving God. Charitable giving was now entrenched in one of the world’s major religions.

The Dark Ages would see less emphasis placed on charitable giving. With the relative unity of Greek and Roman culture gone, the world became tribal, and people viewed one another as rivals rather than neighbors. The focus was on conquest rather than philanthropy.

The Renaissance, however, saw a rebirth of classical ideals and philanthropy was among them. As philosophers like Sir Francis Bacon mused on goodness, the idea of charitable giving was central to the concept. Even in government, the term commonwealth was born, focused on the idea that the government’s efforts, whether military, legislative or economic, were all undertaken to foster the common good.

During the 18th and 19th centuries, which saw a drastic division in economic status in both England and America, the notion of nobles oblige the obligation of nobility and the privileged became popular. While many had become quite wealthy either through land holdings or through becoming industrialists, the idea was that there was an obligation among those who were blessed with wealth to engage in charitable giving to benefit their fellow man. Just as they had been blessed, they believed they too had to bless others.

Large private foundations were born during this era through the charitable giving of men like John D. Rockefeller and Andrew Carnegie. Carnegie, in fact, left the vast majority of his wealth to the city of Pittsburgh for use in public projects. History often depicts these men as robber barons, but their charitable giving was unmatched in their day.

It is doubtful that we will ever stop loving our fellow man or engaging in charitable giving. Something within us cries out to do so. Our history is rich with illustrations of charitable giving and it is incumbent upon us to continue that wonderful tradition.

Has anyone ever asked you what you would do if you had all of the money in the world? Most commonly, people respond with, “I’d buy a bigger house or travel.” This is often followed by, “I’d donate more money to charity.”

People who are charitably inclined usually are living a rich, full life. We all have some affinity to a specific charity we like to support. As a Financial Life Planner, I have come to learn that charitable giving is an important goal for most people. Yet most of us don’t have a process for funding this goal.

A simple way to meet your charitable goals is to contribute to a Donor Advised Fund (DAF). A DAF is like a holding account created by a sponsoring charity that holds contributions from various donors and manages the charitable donations. The DAF will send you a quarterly statement of your contributions, along with a gift receipt for tax purposes. These contributions can then be distributed to qualifying charities at some point in the future.

You can usually deduct the full value of the charitable gift – whether it is appreciated stock (avoiding capital gain), or cash. The deduction is subject to adjusted gross income limitations. The gift is irrevocable and is also separate from your estate. Any income or growth in the fund is not tax deductible BUT is exempt from taxes. Once the gift is made, you can recommend how the donation is invested, through asset allocation strategies. You can name successors to the account, who then can manage the fund and make grant recommendations. This provides for a legacy of giving that can last for many generations.

You can get your kids or spouses involved and create your own account title. I know families who have semi-annual meetings with their kids and grandkids to discuss where the grants should go. What a great way to introduce philanthropy to kids!

The DAF accounts can be set up with as little as $5,000. You can support multiple charities with a single donation, usually with as little as $100. When you are ready to recommend to the DAF to make a gift to a specific charity, you just fill out a form and mail it to the DAF. The donation from the DAF can be anonymous, or can have your name identified as the donor.

What part do philanthropy and charitable giving play in your value system? Think about causes and organizations you would like to help. Most people that give to charity are happier and healthier. They experience a sense of satisfaction of helping people or specific causes.

John Templeton wrote: “Happiness comes from spiritual wealth, not material wealth… Happiness comes from giving, not getting. If we try hard to bring happiness to others, we can not stop it from coming to us also. To get joy, we must give it, and to keep joy, we must scatter it.”

Please note: This article is for informational purposes only and should not be construed as individualized investment advice.