Since its inception in the 1930s, donor-advised funds (DAFs) have become a more popular means to assist charitable causes for philanthropic people and families wishing to donate to noble causes while optimizing tax benefits. DAFs were legalized in the 1960s, and their popularity has multiplied over the years. The extraordinary convenience and flexibility that DAFs provides make them one of the fastest-growing source of charitable giving. According to the National Philanthropic Trust, DAF grants reached a record $34.67 billion in 2021 and are expected to rise in the future. If you’re planning to open a DAF account any time soon, this article will provide you with everything you need to know about DAFs.

What are Donor Advised Funds?

Donor-advised funds are different than simple charity giving. They are charitable investment accounts to increase investments bound for charity without additional taxes. With a donor-advised fund, you can donate assets that can be liquidated to charity. There are many types of donor-advised funds, including cryptocurrency, mutual funds, stocks, properties, private equity, and retirement funds, to name a few. You can gift, grow, or grant one. These assets become irrevocable when gifted to a sponsor organization for charity purposes.  However, if you wish to grow your charitable assets, you can invest these assets in the donor-advised fund for the long term.

DAF assets are exempted from capital gains, estate, and other taxes, making it a tax-free charitable investment. Once you establish a DAF account, you can nominate grants to reputed charity organizations.

How to Set Up a DAF Account?

To set up a donor advised fund, the first step is to choose a credible public charity sponsoring organization that works in compliance with the internal revenue code section 501(c)(3). These organizations are typically exempted from federal income tax on charitable assets. Well-known DAF providers like Crewe Foundation uphold the highest standards in charity and social work and efficiently and effectively use your charitable assets.

Once you’ve chosen a trustworthy organization, you will typically follow these steps to set up a DAF account:

1. Go through the DAF account setup form, fill it out, and put your signatures wherever required.
2. Nominate your assets or transfer them to the DAF account. As mentioned above, these assets include any cash, stocks, real estate, or other assets you want to invest in.
3. If you want to grow your charitable assets, you can opt for selling and reinvesting the assets without any additional taxes.
4. Once you have nominated an asset for charity, you can grant them to a charity of your choice.

Most donor-advised funds are funded with cash and stocks, but they also help donors give their valued belongings like vehicles, boats, and life insurance policies to charity. The sponsoring organization manages the fund on behalf of the donating individual or entity. When a donor gifts assets to sponsoring organizations, they legally lose ownership and control of the assets.

However, they can still keep influence over how funds are invested and when they’re distributed to charities.

6 Things You Need to Know about DAFs

It is important to note that a central entity does not evaluate DAFs. You will need to do your research to find one, and it is best to choose a DAF you are comfortable with or one linked to causes you are passionate about.  If you are thinking about giving through a donor-advised fund, here are six key points you need to understand to make an informed decision.

1. Donation to a DAF has Numerous Tax Advantages

Donating assets to a DAF gets you a charitable deduction. This usually offsets any tax liability if you sold the asset and then donated the money.

A good tip for getting a charitable deduction is to give appreciated long-term assets to charity. You can donate the cash to the DAF if you sell depreciated assets for tax losses.

2. You Can’t Revoke a DAF Donation

You can deduct DAF donations permanently from your taxes. A foundation or financial service company like Schwab, Vanguard, or Fidelity becomes the legal control and owner of the donated assets. Remember, they call these accounts donor ‘advised’ funds because they honor your grant requests.

However, there’s a chance they’ll deny a grant request due to certain underlying reasons.

3. A DAF grant can be anonymous

A calamity, pandemic, or war-hit area may make you want to act and give, but you don’t want to be added to another mailing list. Those who don’t want public disclosure of charity or organizations and fund-raisers contacting them can make their DAF grants anonymous. Moreover, you don’t have to report your individual DAF grants to the IRS with a DAF account.

4. DAFs let you give internationally

Although most DAFs are set up to help with domestic giving, a few offer international grants. Those not set up to send grants internationally tend to partner with registered intermediary organizations that can process grants overseas. By giving through an intermediary, you can minimize the risks and become a part of an international disbursement mechanism so you can reach more people worldwide.

5. You can Start Giving with a Small Amount

Many people believe that setting up a DAF account is a millionaire fad. However, this is not true! There are various DAF account types, and you can choose the one that best suits your investment and charity-giving capabilities. For example, some sponsor organizations let you can set up a DAF account with a minimum amount of $5,000. DAFs also have minimal overhead and could be an attractive option for establishing a charitable foundation.

6. You can Invest and Grow Your Charitable Money

You may donate to your fund whenever it is financially beneficial, determine how it is invested, and then leverage invested assets to maintain charity giving over time. During this whole procedure, your fund’s investment development and growth are fully tax-free.

Final Thoughts

A DAF allows donors to begin with a lower investment, pay minor overheads, and receive higher tax benefits while directing grants to their preferred charity. DAFs are growing increasingly popular due to the changes in tax legislation which exempts donors from paying additional taxes on their assets. More and more people and organizations are now using DAFs to gift anonymously or worldwide. DAFs allow donors to choose their type of account and amount of control over the assets. New donors can use the above information to choose the right organization and type of DAF account for future giving.