A donor-advised fund (DAF) is an easy and tax-efficient way to support your favorite charitable organizations. The DAF will serve as a charitable investment account that allows tax- deductible donations of cash, stocks, or non-publicly traded assets.
To open a DAF, a donor makes an initial contribution of cash or non-cash assets to the sponsoring organization. These contributions are then invested and grow tax-free under the management of the sponsoring organization, while donors become eligible for an immediate federal income tax deduction upon contribution. Later, when the donor wishes to make a donation using the fund, they will suggest a charity to the sponsoring organization, who then disburses the gift as a grant. Donors are not limited to the contributions and grants they can make, and they have the option to set up recurring grants. Once the assets are gifted to the account, they belong to the sponsoring organization and are irrevocable, meaning they cannot be taken out by the donor.
There are three primary types of donor-advised funds. The first is Community Foundations, which are independent charitable foundations catered to residents of a specific area. The second type is National DAFs, which are affiliated with financial services providers. The third are single-issue organizations, or institutions that create programs supporting specific identities, faiths, or causes.
Donor-advised funds have increased in popularity due to their tax advantages, accessibility, and distinctions from private foundations. Donor-advised funds require less maintenance and administrative work. Unlike private foundations, which have complete control over their donations, DAFs are managed by the sponsoring organization. Additionally, donations made by private foundations require public reporting, unlike DAF contributions. Furthermore, when a donor contributes a non-cash asset to a DAF, it is immediately liquidated, simplifying the process for nonprofits to receive the gift without brokerage coordination.
