Donor-advised funds: legacy without the limits and burdens
This blog post is part of a year-long series that examines key concepts in our glossary of philanthropy services terms.
If impact investing were a popularity contest, then the winner would be the donor-advised fund (DAF), a charitable vehicle that is sponsored by an IRS-registered 501(c)(3) public charity, which administers the accounts.
The DAF is the fastest-growing and most popular charitable vehicle in the U.S., according to the National Philanthropic Trust. As the trust’s 2016 Donor-Advised Fund Report explains, grants from DAFs to charitable organizations grew nearly 17% to a new high of $14.52 billion in 2015; and contributions to DAFs totaled a record-making $22.26 billion that year, making the charitable assets under management in all donor-advised funds total $78.64 billion.
And the popularity should come as no surprise, as a DAF can accept both liquid and illiquid assets, allows donors to gift anonymously, and unlike foundations, does not require a 5% payout per year. Plus, donors may obtain an immediate tax benefit¹ when contributing to a DAF and can submit grant recommendations to the sponsoring charity when they are ready to disburse funds.
DAFs versus private foundations
Families who want to establish or continue a legacy of giving while supporting causes that reflect their values often decide to accomplish this by creating private foundations. To be sure, foundations can be a great way of fostering positive social and ecological change, especially with tools such as mission-related investments (MRI) and program-related investments (PRI). Just look at all of the good work that the Bill and Melinda Gates Foundation and Rockefeller Foundation have done worldwide and continue to do, such as the Gates Foundation’s dedication to improving education and the Rockefeller Foundation’s dedication to helping the environment.
Yet forming and maintaining a private foundation is not for everyone. Indeed, some families may find that managing a foundation can become burdensome and more complicated than they imagined, due to issues such as difficult board dynamics, inconsistent board activity, complex tax rules and reporting, and even waning interest in philanthropy. Faced with these difficulties, it may be tempting to throw in the towel on philanthropy . . . but instead consider a DAF, which may help make your philanthropy more efficient and more effective.
What are the benefits of DAFs?
Converting a private foundation to a DAF has the potential to lower costs and reduce administrative burden and stress. In addition to the benefits outlined above, DAFs require no tax returns or reporting, with no excise tax on net investment income, and donors also feel the relief of better income tax treatment on contributions.¹
Furthermore, if families want to create or maintain private foundations, they can use a DAF to complement their foundations’ efforts. For example, a DAF is a way to gift to program areas outside of a foundation’s mission, outsource international grant-making, accept illiquid assets, or make grants anonymously.
With DAFs’ benefits in mind, it is no wonder that the National Philanthropic Trust’s 2016 Donor-Advised Fund Report predicts continued growth in DAF grant-making and a rise in payout rates. For families seeking to foster a legacy of giving, DAFs can be an indispensable component of strategic philanthropy.
¹NOTE: Please consult with a tax professional to review and clarify any tax ramifications.
Investing involves risk, including the possible loss of principal and fluctuation in value. This information is for educational purposes only and is not intended to be investment advice or a recommendation to buy or sell a specific investment.