A donor advised fund (DAF) is a type of giving vehicle that allows donors to make charitable contributions and receive an immediate tax deduction. Donors can then recommend grants from the fund to their favorite charities over time. DAFs are often established at community foundations or commercial sponsors, such as banks or brokerage firms.
The benefits of using a DAF include the ability to:
- Make a difference now and into the future; donors can recommend grants from their fund at any time, even if they haven’t yet decided which specific charities will receive funding. This makes it easy for donors to support their favorite causes both now and in the future.
- Maximize tax benefits; contributions to a DAF are typically tax-deductible in the year they’re made. And, because the fund is a separate legal entity, donors can avoid paying capital gains taxes on appreciated assets that are donated to the fund.
- Simplify giving; DAFs can help donors streamline their charitable giving by consolidating all of their gifts into one fund. This makes it easier to track donations and manage grantmaking.
DAFs vs. Private Foundations
There are several key differences between donor advised funds and private foundations, including structure, cost, and tax implications.
Donor advised funds are typically much less expensive to set up and maintain than private foundations. They also offer more flexibility in terms of how and when donors can recommend grants. Private foundations, on the other hand, tend to have more stringent rules and regulations.
When it comes to taxes, donor advised funds offer several advantages over private foundations. Contributions to a DAF are typically tax-deductible in the year they’re made. And, because the fund is a separate legal entity, donors can avoid paying capital gains taxes on appreciated assets that are donated to the fund.
Who Manages a Donor Advised Fund?
Donor advised funds are typically managed by community foundations or commercial sponsors, such as banks or brokerage firms. The organization that manages the fund is responsible for investing the assets and making sure that all grants comply with IRS regulations.
How to Set Up a Donor Advised Fund
There are a few different ways to set up a donor advised fund. The most common method is to work with a community foundation like Crewe Foundation or a commercial sponsor like Fidelity. This can typically be done online, over the phone, or in person.
Some organizations also allow donors to set up their own donor advised funds. However, this option is usually only available to those who have a significant amount of money to contribute. And, it’s important to note that setting up and managing a private donor advised fund can be a complex and time-consuming process.
If you’re interested in setting up a donor advised fund, we recommend talking to a financial advisor or tax professional to learn more about the best option for your unique situation.