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The Many Benefits of Donor-Advised Funds

August 17, 2015

donorI'm fortunate to work with many clients who have achieved a level of wealth that allows them not only to provide for their family after they are gone, but to give back to society as well. By setting up a charitable giving vehicle, my clients know that they are creating a legacy that will outlive them. Yet it can be difficult for many clients to choose a charity. Legal fees and other startup costs can make the process even more difficult.

For many clients, a donor-advised fund (DAF) provides a great option. DAFs allow individuals to establish a charitable account without having to immediately select a charity. What's more, a donor-advised fund can provide funding to multiple charities. It also provides a large tax incentive since any donation given to a donor-advised fund is tax-deductible. For those who are considering a private foundation, a DAF may offer lower costs of operation and fewer regulatory headaches.

Donor-advised funds have experienced a dramatic rise in popularity in recent years. According to The Chronicle of Philanthropy's annual rankings of the 400 charities that collect the most from private sources, four out of the top 10 charities are now donor-advised funds, with Fidelity Charitable, a DAF, coming in a close second to United Way Worldwide.1

Contributions to a donor-advised fund are tax-deductible, held in your account until you're ready to distribute funds to the charities of your choice. The process can be broken down into three steps:

  1. You make a contribution to a fund (often a community foundation or financial institution) and receive an income tax deduction.
  2. The fund holds the donations until you decide to distribute them.
  3. You can choose to distribute funds in a lump sum or to divide them up over time. You can also decide if you want to donate to one or multiple charities.

Many of my clients also find that creating a donor-advised fund is an excellent entry point for discussing philanthropy and legacy building with their children and grandchildren. By involving them in the process, children and grandchildren can help decide when and where the money is used and get to enjoy the amazing feeling that comes with making a meaningful change in the world.

1 - Holly Hall, "Shaking Up the Ranks of America's Big Charities," The Chronicle of Philanthropy, October 19, 2014.