A donor-advised fund (DAF) is a trust account set up for individuals to deposit assets for charitable donations over time. The trust account is owned by a charitable organization, and individual donors can make contributions to the DAF as often as they’d like. Donors may make an initial contribution ranging anywhere from $0 to $250,000 and can then recommend grants to the fund for charitable organizations whenever they so choose.
What can a Donor Contribute to a DAF?
Donors have the flexibility to decide what asset to donate when making an irrevocable contribution to a DAF, including assets such as:
- Cash,
- Stocks, bonds, and mutual fund shares,
- Money in IRAs and 401(k)s,
- Private company stock,
- Cryptocurrencies,
- Life insurance.
What is a Charitable Organization’s Role in the DAF?
The charitable organization, also known as the sponsoring organization, maintains and operates the trust account. The charitable organization has legal control over all contributions made to the DAF. However, donors retain privilege on how the donated funds are distributed or invested.
The charitable organization must be a 501(c)(3) organization, as classified by the IRS. Private foundations, political groups, crowdfunding campaigns, and other organization that do not qualify as 501(c)(3) organizations are not eligible to receive donor-advised fund grants.
What are Benefits and Drawbacks to Donating to a DAF?
Donors experience multiple benefits when contributing assets to a DAF. First, donors receive an immediate tax deduction the same year a contribution is made to a DAF. The funds donated can then be invested for tax-free growth. Additionally, donors do not pay capital gain taxes on assets given to a DAF, and those assets are not subject to estate taxes. Instead, putting money in a donor-advised fund can reduce the size of a taxable estate. Finally, donors can choose to withhold their identity when donating assets to avoid those donations becoming public knowledge.
On the other hand, there is one main drawback when donating to a DAF. Since the charitable or sponsoring organization has legal control over all contributions made to the DAF, donors lose the freedom to exercise the choice of how the donated funds/assets are used.
