A donor-advised fund is a private fund set up by an outside organization to handle philanthropic contributions on behalf of an individual, group, or other entity.
An Explanation of the Donor-Advised Fund
A major reason for the rise in popularity of donor-advised funds is the donor's ability to exercise extensive discretion over the ultimate use of their philanthropic contributions while still benefiting from the advantages of simplified administration.
Businesses can provide this service to customers at lower per-transaction expenses than would be incurred if the money were handled privately. Donor-advised funds facilitate a high volume of charity transactions while simultaneously pooling contributions from many donors.
Donor-advised funds also have several tax benefits. Donors who contribute to a donor-advised fund, as opposed to a private foundation, can deduct up to 60% of their contributions in cash and up to 30% of their donations in appreciated assets from their federal income taxes.
Donor Advised Fund Sponsors and Their Varieties
Sponsors for donor-recommended funds come in a wide variety.
Foundations For Communities
Around one thousand community foundations in 2020 supported donor-advised funds. These businesses were the first to provide an alternative to cumbersome private foundation formation and inefficient checkbook donations, earning them the title of "pioneers" in the donor-advised fund industry. Donors interested in supporting local initiatives are the community foundations' normal target audience. Employees that are well-versed in regional volunteer efforts are hired.
DAFs Nationwide
In 2020, there were around 55 nationwide donor-advised fund organizations. A few of these groups, like the Vanguard Charitable Endowment Program, the Schwab Charitable Fund, and the Fidelity Giving Account, are the philanthropic arms of for-profit financial service providers.
Most other major national sponsors of donor-advised funds are not in the banking industry. The American Endowment and the National Philanthropic Trust are two such organizations.
Charity Organizations
Funding for national and international organizations working on a specific subject or location is a common emphasis for public foundations. Consequently, the staff at public foundations frequently have specialized knowledge to assist donor-advised fund holders in identifying issues that resonate with them. For instance, the Peace Development Fund manages donor-advised money from people all over the Americas interested in bringing about fundamental social change. 10
Investment Permissions
Non-cash assets, including cheques, wire transfers, and cash holdings from a brokerage account, are sometimes accepted by donor-advised funds alongside cash and cash equivalents. Individuals and corporations may benefit more from donations of non-cash assets due to the larger write-offs that might result from such gifts.
Exemplification of a Pledge Account
Among the aforementioned national organizations, Fidelity Charitable has a fund called the Giving Account. You may donate to it tax-free, and you don't have to use Fidelity Investments or even have a minimum amount.
Make regular contributions to the causes you care about, whether they're close to home or halfway across the world. The funds in your account are invested under your instructions and accrue tax-free growth until you make a distribution, albeit they are always subject to lose if your chosen investments perform poorly.
Reviewing The Pros and Cons of Donor-Advised Funds
The immediate tax savings are the greatest benefit of donor-advised funds. You get an instant tax deduction regardless of whether you distribute the fund's assets to a qualified charity right once or allow them to grow tax-free.
The management of the account is entirely within your control. Unlike conventional charities, donor-advised funds can accept non-cash assets, including art, real estate, and other collectibles. To avoid paying capital gains tax, you can deduct the stock's current market value rather than its initial cash basis.
Challenges To The Effectiveness of Donor-Advised Funds
Donor-advised funds have been criticized for several reasons, the most common of which are that they are designed to assist the rich in avoiding paying taxes and may be used as a dumping ground for unneeded assets.
Some have accused them of "warehousing money" and others of engaging in "philanthropic fracking." 14 Whereas private foundations must distribute at least 5% of their assets yearly, donor-advised funds are not subject to such limits.
Notable donor-advised funds typically own many complicated, illiquid assets like real estate, Bitcoin, and art. They are valued at the amount that it costs to get them. Capital gains tax is due on any sale following price appreciation.
Private Foundations vs. Donor-Advised Funds
A private foundation is a nonprofit established by a person, family, or business to carry out specific charitable goals. Donor-advised funds and private foundations are both ways to donate to charity; however, private foundations are subject to more stringent tax rules.
Private foundations have more leeway in managing their assets and deciding which organizations to support through their grants than donor-advised funds.
