BDQ #8: What Is a DAF? (Hint: ‘D’ Stands for Donor)

Donor advised funds (DAFs) have certainly had their share of headlines recently. Proposed regulations seemed designed to limit investment options and impose excise taxes. Then an extended comment period and a public hearing fueled speculation that this could spell the end of the fastest growing segment of American Philanthropy – or maybe just level the playing field for private foundations by limiting some of the advantages of DAFs. That came atop years-long – and largely baseless – fretting that DAFs are a tax shelter, somehow allowing the wealthy to warehouse vast sums of money and keep it from being used for charitable purposes, and the looming threat of legislative proposals that could radically revamp the landscape for DAFs and community foundations.

With all the noise, it’s been easy to lose sight of one the most important players in the DAF story, namely, the donor. In fact, while the charitable beneficiary is the raison d'être for a DAF, the donor is the most important player because, it goes without saying, there would be no DAF if it weren’t for the donor. 

Research indicates there may be as many as two million DAF accounts in the country holding assets of nearly $250 billion. Year in and year out, contributions to DAFs continue to grow faster than the rate of philanthropy in general. Let’s consider some of the reasons why DAFs have become so popular and how donors are likely to continue to use DAFs, come what may.

Tax Advantages:

• Immediate Tax Deduction: Donors can claim immediate income tax charitable deductions for their contributions to the DAF in the year they donate (and carry them forward, if needed), even if they haven’t yet decided which charities to support.
  
  
• Bundling Deductions: Many donors no longer itemize their deductions every year, and therefore receive no benefit from the charitable deduction. However, a DAF can allow donors to make large charitable contributions in years when they do itemize and then distribute their contributions over years when they do not itemize.
  
  
• Tax-Free Growth: Assets donated to a DAF can be invested and grow tax-free, allowing donors to stretch their charitable dollars further.
  
  
• Donating Appreciated Assets: Donating appreciated assets like stocks to a DAF allows donors to avoid capital gains taxes while still receiving a tax deduction for the full fair market value.
  
  
• Complex and Other Assets: Some DAF sponsors can provide additional expertise to facilitate and administer contributions of complex and other assets.

Flexibility and Convenience:

• Time to Decide: Unlike direct contributions to a charitable organization, donors can take time to research and choose which charities they want to support later, after they’ve made their tax-deductible charitable contribution. This can be helpful if donors are unsure about which cause to donate to right away.
  
  
• Consolidated Giving: Donors can consolidate multiple charitable contributions into one DAF contribution, simplifying record-keeping and tax filing.
  
  
• Streamlined Grantmaking: The DAF sponsor handles the administrative tasks associated with grant distribution, freeing donors to focus on their philanthropic goals.
  
  
• Wide Range of Charities: Donors can support a broad range of qualified public charities through a DAF, including international organizations in some DAFs.

Other Advantages:

• Privacy: Donors can choose to remain anonymous when making grants to charities from their DAF.
  
  
• Legacy Planning: DAFs can be a helpful tool for involving families (and in some cases future generations) in charitable giving.

Of course, DAFs also have some drawbacks, and it is important that donors understand and evaluate them. Donors should be fully cognizant of the fact that when they make a charitable contribution to their DAF they are, in fact, making an unrestricted contribution to the sponsoring organization. The donor’s only involvement is to offer recommendations as to how the funds are used. This fact can become obscured because, in practice, the sponsoring organization almost always accepts the donor/advisor’s recommendation. Another drawback is the potential fees associated with account management and investment. Making a charitable contribution directly to a charitable organization can reduce or eliminate these costs allowing the full value of the contribution gift to go to work for the charitable cause.

Nevertheless, for many donors, the advantages of a DAF outweigh the disadvantages.