Donor-advised funds (DAFs) have gained significant popularity as tool for charitable giving over the past 20 years. Despite the benefits of using one, the concept is still unfamiliar to the average person.
Here are five important things to know about this philanthropic tool.
Donors can advise in three easy steps.
A donor-advised fund is just that—a fund of which donors advise grant administration. DAFs are administered by a sponsoring organization, or a public non-profit that is a tax-exempt 501(c)(3). Donors manage their account with three easy steps.
- First, donors make an irrevocable contribution to their fund of personal assets ranging from cash, stock, and illiquid assets. Donors immediately receive the maximum tax deduction that the IRS allows.
- Next, donors choose how to invest contributions to their DAF account, where assets can grow tax-free. Investment allocations range based on personal risk tolerance and giving horizons.
- When the time is right, donors recommend grants to a variety of charities. The initial contribution is irrevocable; the donor relinquishes ultimate control over how that contribution is spent. However, sponsoring organizations nearly always adhere to donor recommendations.
A time-tested tool of nearly a century
DAFs emerged in the mid-1930s as a giving vehicle within Jewish Federations and Community Foundations. It wasn’t until the 1990s, when national sponsors began to house donor-advised funds, that they became a major vehicle for giving.
The primary types of donor-advised fund sponsors are national non-profits, single-issue non-profits, and community foundations. However, with the introduction of philanthropic platforms, financial institutions such as banks and wealth management firms are emerging as a fourth provider.
Growing at explosive rates.
As national sponsoring organizations gained popularity in the 1990s, donor-advised funds became a more mainstream philanthropic vehicle. Ever since, DAFs have grown exponentially.
Over the past decade, the number of DAF accounts has increased by 295.27% and the annual contribution amount has increased by 297.0%. DAFs now make grants to non-profit organizations at higher rates than private foundations.
DAFs currently have over $121.42 billion in assets in 2019. By some estimations, this could increase to $1 trillion by 2030.
Advantageous for tax and impact purposes
DAF accounts are a strategic tool for both tax purposes and social impact.
When donors contribute to their fund, they receive an automatic tax receipt. Those assets are then able to grow tax-free as they are invested, which means donors can grant more to the charitable organizations they care about.
Donors are able to receive a deduction of up to 30% of adjusted gross income (AGI) for gifts of mutual funds, appreciated security, real estate, and other assets.
The future of democratized philanthropy
2020 has marked a shift in DAF accessibility as major commercial providers are eliminating contribution minimums. The introduction of automated processes drastically lowers administration costs, and thus enables financial institutions to remove traditionally high barriers to entry.
This shift to digital, enabled by philanthropic platforms, is transformative in enabling donor-advised funds to become more accessible to the average donor.