The Charitable Advantage of Donor-Advised Funds

2020 was a great year for charitable giving. Despite a worldwide pandemic, financial turmoil and historic unemployment rates, charitable donations surged as donors sought to make a difference in a world fraught with uncertainty. And not only did donors surpass expectations in terms of gifts, but the number of them also grew.

According to a new report by the Fundraising Effectiveness Project (opens in new tab), the overall number of donors increased by 7.3% over 2019. This showed a renewed interest in supporting the work of nonprofits and gave hope back to organizations struggling to keep their doors open.

One vehicle that took the spotlight was donor-advised funds (DAFs). Not only are they a widely popular giving tool among new and old donors, but they are reportedly (opens in new tab) the fastest-growing vehicle for charitable giving. And in 2020, DAF account holders gave out more money, more frequently than ever before, increasing grantmaking support for all charities in the first six months of 2020 alone. “DAF grants to charitable organizations increased 29.8% by dollar value in the first six months of 2020 compared to the first six months of 2019. This growth rate is nearly double the 16.7% for the prior period for the same DAF sponsors,” according to National Philanthropy Trust’s recent survey (opens in new tab).

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The simplicity of a DAF within the context of tax rules is its greatest feature. Funding your DAF account reduces your tax liability by allowing you to take an immediate tax deduction for that contribution. Current rules allow for one to deduct up to 60% of AGI for cash contributions and 30% for appreciated stock as well as receive fair market value for the contribution of assets. Compared to what one can deduct for the same gifts to a private foundation (30% and 20% respectively), it is no wonder that DAF accounts are surging in the U.S. Additionally, funds in your DAF account can be invested and grow over time, thus enhancing (tax-free) the gifts that will ultimately be made to an operating charity. Other reasons financial advisers are high on including a DAF in one’s overall financial portfolio include:

• Creating a legacy DAF that can help reduce estate taxes.
• Funding a DAF while approaching retirement so one could get the tax deduction while they were still making a high income.
• Creating an account for children to give separately and “learn” how to be a strategic giver.
• Using a DAF in connection with another operating charity to meet the unique 2020 and 2021 100% AGI tax deduction made possible by the CARES Act.

With a record number of new and newly funded DAF accounts, there may now be uncertainty about how to proceed. Many opened a DAF for the tax breaks, but now are unsure what to do with it. If you fall in this category or are thinking of opening a DAF and wondering what’s the best way to utilize your fund, keep reading.

1. Remember why you opened a DAF

You took advantage of an immediate tax deduction for your contribution, but now you have the ability and time to decide how and where you want to make gifts. Remember, by receiving that deduction, you no longer have legal rights to your account but merely advisory privileges. But the purpose of a DAF is to be actively charitable, not to take a tax deduction and let the money merely sit there.

Take advantage of investment opportunities and plan out how and where you wish to make grants. Perhaps you want to build up over several years to make a major gift or find out from your favorite charity if and when they have cash flow issues and use your DAF account to help them bridge that gap.

2. You don’t have to be older or wealthy to start a DAF

DAFs are relatively cheap to set up. DAF providers charge a modest administrative fee that can range from less than 1% to 3% depending on the kind of provider you are using (commercial bank vs. community foundation vs. “mission-driven”). Investment fees can be higher at the commercial banks, and many DAF accounts offer zero-commission funds where DAF money can be invested. And if you’re younger, there are options for you as well. To aid the next generation of philanthropists, programs like the Novus Society (opens in new tab) at my organization provide DAF accounts to those under 40. These accounts offer lower minimum contribution requirements and allow young professionals to expand their charitable futures.

3. Plan Future Giving

A DAF is a great way to start planning for your charitable future. Think of it as a saving account for philanthropy. A DAF allows you to involve your family and children during your lifetime, ensuring your charitable legacy and the trend of giving continues. DAFs surpassed expectations in 2020, and both donors and donations grew significantly. But it isn’t over, and people are still in need. It’s extremely important that we keep up the effort to give charitably and help others. New or old, wealthy or not, take advantage of your charitable vehicle.

As we continue our journey into this new year, we have endless opportunities to contemplate our 2021 giving goals and strategies to make a change in a world full of uncertainties. And while we do, we must remember the necessity of adding perspective to our principles and making decisions that align with our personal goals.

Among power shifts, political realities, economic fluctuations and overall uneasiness, the charitable sector is a fundamental part of society, and each and every one of those charitably inclined is a powerful source. Despite what we feel about what is happening around us, we are creating a history of our own.