Saturday Finances—Charitable Giving: DAF

Making donations through a charitable fund

one way to give

Here's an interesting idea!  Pay it forward

DAF: Donor-Advised Fund

What is a "donor-advised" fund?

A donor-advised fund is a charitable giving vehicle administered by a public charity that is created to manage charitable donations on behalf of organizations, families, or individuals. 

Schwab, Vanguard, T. Rowe Price & Fidelity all have charitable foundations. 

How does it work?

A donating individual or organization opens an account in the fund and deposits cash, securities, or other financial instruments.

The donating party surrenders ownership of anything that is put into the fund, but retains advisory privileges over how their account is invested, as well as how their account distributes money to charities.

How is it different from donating directly to an organization?

In a donor-advised fund, the donor only advises the sponsoring organization.  The donor does not retain absolute administrative control over its charitable distributions.  The donor states preferences and makes recommendations, but the fund makes the charitable grants based on the preferences of the donor.  

What are the advantages & disadvantages to giving through a DAF?

  • Flexibility.  Some charities are not set up to receive gifts of securities.  If you use a DAF for charitable donations, select charities that can receive securities (e.g., stocks, bonds, mutual funds, etc.).  DAFs can administer cash donations, as well as donations of securities.  
  • Value.  With a DAF, a donor can donate shares of stock that may appreciate in value and exceed the original cash price of the shares.  The donor spends less, but gives more.    
  • Ease.  Say, you want to donate 100 shares of valuable stock.  It may be a gigantic hassle to directly donate 5 shares each to 20 of your favorite charities.  It's a lot easier to donate 100 shares of a stock to a DAF, then make 20 different recommendations for charities.  DAFs will adhere to the donor's recommendations, in most cases.
  • Convenient tax write-off.  Current U.S. tax law allows the donor of appreciated assets to get a tax deduction for the market value of the donation and avoid capital gains taxes.  This makes donating appreciated assets to a charitable fund more attractive than selling the assets and donating cash.  The biggest criticism of donor-advised funds is that they can serve as financial holding pens for the assets of people who want to grab a tax deduction, but have no immediate plans for any actual charitable giving.  The charitable impact is zip if the fund does not grant the money to nonprofits.  It's up to the donor to get the assets moving and stipulate which charities are to receive the donations.  
  • Greater benefit.  Charities may receive more through donations of securities than what an individual might be willing to contribute via check or credit card.  Again, this gets back to asset appreciation. 
  • Giving through a DAF is like having your own personal philanthropic foundation without the costs associated with running a private foundation.  
  • Erosion.  Fees associated with DAF accounts vary.  Look for low-cost, no-load funds or best-in-class performers.  As with any investment decision, do your homework and look closely at all of the hidden fees.  By the time a donor distributes money to a charity from a donor-advised fund, some of the assets will be chipped away by fees.  
  • Anonymity.  Because contributions to a donor-directed foundation are not required to be made public, individuals and corporations may choose to remain anonymous.  Donors have the same option with direct donations. 

More info on DAFs

be smart • do your homework • invest wisely

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