Donor-Advised Funds
/A donor-advised fund, in its simplest form, is an account within an IRS-designated public charity through which a donor can distribute their philanthropic giving on a timeline of their choosing. Giving through a donor-advised fund (often referred to as a DAF) allows the account holder flexibility to take a charitable deduction for their gift of cash, appreciated stock or other noncash assets in the year in which the gift goes to the DAF manager, but take their time in determining how to distribute those charitable funds while those funds are invested and potentially earn interest. DAFs are usually held at community foundations or for-profit fund managers like Fidelity (which set up legally separate — but functionally indistinguishable — public charities like Fidelity Charitable to manage funds allocated to DAFs).
When the DAF account holder wants to make a donation, they direct the fund manager or community foundation to make a grant to the nonprofit that the DAF holder wants to support. In many cases, this can be done via a secure web portal or email. The fund manager or community foundation then makes the donation and handles all paperwork and administration related to it. The fund manager or community foundation will also create periodic reports and account statements for the account holder.
Over the past several decades, DAFs have become increasingly popular with both the moderately wealthy and the extremely wealthy who might have otherwise set up private foundations, but find the ease of set-up, low administrative costs and other benefits described below to be a better fit for their needs. DAFs are also increasingly popular with donors of more modest assets who give at least a few thousand dollars each year and enjoy the convenience and community learning touted by fund managers. In the larger landscape of social justice and donor transparency, DAFs are the subject of considerable critique for “warehousing charitable resources” and there are growing calls for legislative reform of DAFs.
Why Donors Use DAFs
There are some very good reasons people giving a few thousand dollars or more each year to charity take advantage of donor-advised funds. DAFs are a simple and affordable alternative to setting up a foundation to make grants easily and efficiently.
The community foundation or fund manager that hosts your DAF will do the administrative work of giving for you — they send the checks, handle all grant paperwork, and keep track of your giving. They also conduct due diligence to ensure the organizations you want to fund are eligible to receive tax-deductible contributions. Compared to setting up a private foundation, using a DAF can save you a lot of time, effort and expense.
Beyond simplicity in comparison to setting up a private foundation, there are many other compelling reasons to use DAFs:
Professionally managed assets grow tax-free. Assets held in a DAF are invested along with other assets held by the hosting organization, which means the investments are professionally managed as part of large investment portfolios. These investments grow tax-free.
Availability of giving advice. Especially in the case of community foundations, staff have specialized philanthropic knowledge and expertise to share with DAF holders. They can help you create a giving plan, research nonprofits, create grantmaking strategies and more.
Connections to a community of donors. Community foundations often create networking opportunities and educational events for DAF holders. Many also host giving circles and pooled funds, and can connect DAF holders to other donors with shared interests and priorities.
The anonymity option. DAFs allow donors to make grants anonymously or with recognition — it’s up to the donor. Since the fund manager sends the checks, the checks bear the name of the fund manager. If a donor wants to give anonymously, there is nothing to tie their name to the gift. Many donors attach their name to their fund account so grantees know who gave, but often don’t provide any contact information, which makes it increasingly difficult for nonprofits to form relationships with their supporters. Fidelity Charitable says that “the vast majority” of their DAF holders choose to disclose their names and addresses to grantees, but many nonprofits report that they are finding it increasingly difficult to connect with donors who give through DAFs.
Tax deduction now, giving plan later. DAFs are especially attractive when the donor has assets to give but doesn’t have the time to think clearly about their charitable objectives. For this reason, a DAF is often appealing to someone who has had a windfall or big liquidity event. Using a DAF, you can take the tax deduction now and decide where to donate when you’re ready. What you put into a DAF is tax-deductible just like any contribution you would make to another 501(c)(3) nonprofit.
Ease of donating noncash assets. Unlike most of the nonprofits you ultimately might want to support with your contributions, almost all DAF managers provide services that make giving appreciated stock and other noncash contributions much easier.
Pros and Cons
There are a lot of upsides to DAFs for the donor. But there are also downsides for both the donor and the nonprofit sector as a whole.
Adding to the “warehousing” of charitable funds. You could just make gifts directly, now. One argument for doing this is that there are pressing needs now, so why not give immediately instead of placing assets in a fund to give over time? One recent study indicated that $1 out of every $8 given to American nonprofits went to DAFs — that’s money sitting in an account, not going to the change you want to see in the world. The Latino Community Foundation made the choice not to host DAFs because “we don’t want to create more spaces for people to sit on assets versus liberating that capital to support communities of color,” LCF’s CEO, Jacqueline Martinez Garcel, told IP. The National Philanthropic Trust conducts an annual study of the growth of DAFs of all types, which might help you decide what kind of DAF manager fits your objectives.
DAF contributions are irrevocable. Once you direct assets to the DAF, you cannot reallocate the assets to noncharitable purposes, and legally, the DAF manager controls them. The only thing you can do with funds in a DAF is make grants to charitable organizations. Grants you request be made through your DAF will actually be grants from the fund manager or community foundation that hosts your DAF. That is, when the nonprofit receives the check, it will be a check from the fund manager or community foundation.
Limitations on usage. Most DAF managers limit contributions to 501(c)(3) organizations*, and most also impose other rules, mostly aimed at ensuring the donor does not receive any “personal benefit” directly linked to the donation. Many say you may recommend a grant that satisfies a personal pledge to the nonprofit, but the DAF sponsor cannot make any reference to the existence of the pledge when it makes the grant. DAF distributions may not be used for events the donor will attend, auctions, galas, tickets for events or memberships. Another common limitation is that many DAF managers will not allow gifts to new organizations with no track record of audits and other financial documentation. Some DAF managers are now placing limits on what kinds of organizations they will fund. Horizons Foundation, an LGBTQ community foundation, will not distribute grants to organizations that advocate against queer rights and justice. Schwab Charitable announced in 2019 that it would not distribute grants to National Rifle Association-affiliated charities.
Fees. Any DAF is going to be a lot less expensive than operating a private foundation, but DAFs are not without some costs. Every community foundation or fund manager that hosts DAFs has varying fees, services or priorities.
Taking Action
Setting up a donor-advised fund is usually quick and easy — that’s the point! But the donor should first do some homework to make sure they pick the DAF manager that fits their interests.
Consider your DAF manager options. A donor can open a DAF account at a community foundation or for-profit charitable fund manager. Some specialized intermediaries like Tides and Rockefeller Philanthropy Advisors also manage DAFs. The fund manager or community foundation invests the assets and manages the investment, so you may want to ask about choices in how the funds are managed.
The main question is whether you want to go with a big finance-industry fund manager like Fidelity Charitable — the largest grantmaker in the country, making grants on behalf of more than 150,000 DAF holders — or a community foundation. A community foundation will typically charge higher fees but provide more personalized service and/or philanthropic expertise and investment options that are aligned with your giving priorities. For example, a social-justice-minded community foundation likely has socially responsible investment portfolios that DAF holders can choose from, perhaps even tailored for impact investing in priority communities or on priority issues. While most community foundations focus on geographic areas, there are a growing number that focus on identity-based communities, such as Jewish community foundations and LGBTQ community foundations.
Get clarity on services, limitations and fees. Not all fund managers offer the same level of service to DAF holders, and they sometimes differ on details such as minimum required contribution to open a DAF or minimum grant amount. Be sure to read the fine print regarding limitations on how you can direct your funds, whether it is the possibility of funding new nonprofits without a strong financial track record, political work or nonprofits where there might be questions about tangible or intangible benefits you might receive.
Do the homework. Research a few community foundations and fund managers to find the right fit for you. Here are some tips:
See Inside Philanthropy’s GrantFinder pages on the issues you want to prioritize in your giving. Note any community foundations mentioned as having expertise in those issue areas.
Read IP’s profiles of community foundations you are considering.
Look at the websites, annual reports and DAF brochures of community foundations you think might be a good fit. What services do they offer to DAF holders? Do they create a sense of donor community for DAF holders you want to be a part of? Does their mission align with your priorities? You can choose where to make grants from your DAF, but you might have a bigger impact on an issue or community you care about if you put your DAF at a community foundation that has expertise in that area.
Don’t forget to look at the details, like administrative and investment fees and any minimum requirements for initial contribution, balance or grant amount.
Once you have narrowed down your list, talk to someone at the community foundation or fund manager/s you are considering. If it is hard to connect with an actual person, it might not be the right DAF manager for you. Ask any further questions, and see if you’re getting the kind of information and service you’re looking for.
Consult your financial and tax advisors to be sure you’re making the right choice for your situation.
Think about how much to start with. An important decision is how much you want to put into your DAF as your initial contribution (perhaps with input from your financial or tax adviser). Do you want to do a bit of a test run with a small amount before depositing an irrevocable large amount? Or are there pressing tax considerations that make an immediate large deposit into a DAF the smart choice? Check in with the community foundation or fund manager you’ve selected for your DAF, and they will walk you through their process for next steps.
Once you’re ready to start making grants, check out our issue pages on the issues you care about for tips and information about impactful nonprofits in each area.
*While public charities that manage DAFs are technically allowed to give to 501(c)(4) organizations (“social welfare” organizations that are allowed to engage in a broad range of lobbying and election-related activities, unlike most nonprofits that are c3s,), most community foundations and financial management firms prohibit distributing DAF funds to c4s. A limited few DAF managers do facilitate such political giving of this sort. If this is something you’re interested in, be clear about your interests before signing on with a particular DAF manager.
