What is a Donor Advised Fund (DAF)?

A Donor Advised Fund (DAF) is a type of charitable account, hosted by a public charity, designed to facilitate and optimize charitable donations. DAFs grant donors an immediate tax benefit upon contribution, allowing them to recommend grants to their preferred charities over time. As a result, DAFs have become an increasingly popular method for individuals and families to streamline their philanthropic endeavors while maximizing tax advantages.

Advantages of Donor Advised Funds (DAFs)

DAFs offer key benefits, including the ability to contribute various assets (e.g., cash or appreciated stock) and receive immediate tax benefits, even without specifying recipient charities. Donors can contribute to their DAF at their convenience, such as during high-income years, and recommend grants later. The charitable assets within a DAF can be invested, allowing for tax-free growth and potentially increased philanthropic funds. Donors have the flexibility to contribute and recommend grants as they see fit.

Another advantage of DAFs is the option to invest in sustainable or impact investments. Many DAFs provide investment opportunities that align with the donor's values and objectives, including impact investing. Individuals and families can use their DAF to support businesses and initiatives that generate measurable, positive outcomes in areas like clean energy or societal challenges, combining charitable giving with potential financial returns.

Considerations for Donor Advised Funds (DAFs)

DAFs can be integrated into a comprehensive investment strategy, allowing individuals and families to use DAFs for charitable donations and other investment vehicles for additional financial goals. DAFs are simpler to establish than private foundations, offering a more accessible platform for multi-generational philanthropy.

Donors can make grant recommendations, but the final decisions rest with the DAF sponsor, although generally as long as the organization that you're granting to is a registered 501c3 organization, then there should not be an issue. But overall, it's important to choose a sponsor aligned with your values and who can fulfill your specific needs in terms of investment options, grantmaking, and advisory services.

Beyond choosing a sponsor, additional considerations include: 

1. Purpose: What are your philanthropic goals? Defining your mission can help direct your Donor-Advised Fund (DAF) towards the causes you care about most.
2. Funding Source: Consider what assets you'll contribute to your DAF. This can be cash, securities, real estate, or even privately held assets in some cases. Different sponsors have different rules for what they'll accept.
3. Tax Considerations: As mentioned, contributing to a DAF provides immediate tax benefits, and different types of assets offer different tax advantages. It’s essential to consider this in your overall tax planning.
4. Legacy Planning: If you'd like your DAF to continue beyond your lifetime, consider the succession plan. Will you designate a successor advisor or recommend that the remaining balance goes to a specific charity?
5. Minimum Contribution and Balance Requirements: Different sponsors have different requirements regarding initial and subsequent contributions and minimum account balances. Choose a sponsor whose requirements align with your giving capability.
6. Grantmaking Strategy: Consider how you'll want to distribute grants from your DAF. This includes the types of charities you want to support, the size of your grants, and the frequency of your giving.
7. Privacy: Donations from DAFs can be made anonymously if the donor prefers. If privacy is important to you, consider this feature when setting up a DAF.
8. Advisory Services: Some DAF sponsors offer advisory services to help you with your grantmaking strategy. If you think you'll benefit from these services, consider choosing a sponsor who offers them.

Criticisms of Donor Advised Funds (DAFs)

Donor-Advised Funds (DAFs) have drawn some criticisms despite their growing popularity. For example, critics argue that DAFs lack a legal payout rule, unlike private foundations, which are subject to a 5% annual payout requirement. This can result in charitable funds remaining dormant within a DAF for extended periods. However, DAF grant payout rates tend to exceed those of private foundations by three to six times.

Additionally, there's concern about the "warehousing" of charitable dollars, as donors get immediate tax benefits without an obligation to distribute funds to charities promptly. However, DAFs can be effective tools for long-term philanthropic planning, allowing donors to build up funds over time for significant future donations. Moreover, critics highlight a lack of transparency and accountability because DAFs can give anonymously, making it hard to track the flow of money. However, this anonymity can be beneficial for donors who prefer to give without public recognition, and the sponsoring organizations are still subject to regulatory oversight.

Conclusion

Donor Advised Funds (DAFs) provide a cost-effective and efficient means for donors seeking to streamline and enhance their charitable giving. By incorporating a DAF into a broader investment strategy, individuals and families can align their philanthropy with their values and objectives, supporting their overall financial goals. While DAFs can be a great tool for charitable giving, it's always a good idea to consult with a finance professional or philanthropic consultant when setting one up to ensure it aligns with your overall financial and philanthropic strategy.

Impact is our ethos: At Fire Capital Management, we seek out opportunities that provide both financial and social returns. We’ll work with you to develop an impact strategy to help you focus your giving on the causes that you care about and to build your legacy, from the way you invest to the way you give.
Get started on making the impact that's important to you.

Looking for more detail on Sustainable and Impact Investing terminology? View our ESG Investing Definition Glossary.