Not all DAFs are Created Equal

Question: Can you explain what a Donor Advised Fund is (DAF) and how it might simplify and optimize my charitable gifting?

Answer: Many of us are accustomed to making direct gifts or donations to charitable organizations with cash, credit cards or checks. Donor Advised Funds, or DAFs, are another way to fulfill your philanthropic aspirations while maximizing your tax savings. Legacy planning for today and the future is part of wealth planning. For this reason, we incorporate DAFs and the many benefits they may offer when working with clients in a holistic manner. Several of the advantages of DAFs include simplified recordkeeping, ease of making contributions, and a wonderful way to include your family in charitable planning while creating your legacy.

Established in the 1930s, DAFs have become increasingly popular in recent years. After the 2017 Tax Cuts and Jobs Act nearly doubled the standard itemized deduction, growth in establishing DAFs soared and isn’t slowing down. In fact, the National Philanthropic Trust reported that grant-making from DAFs to qualified charities totaled more than $25 billion in 2019 – a 93% increase since 2015.

Deciphering DAFs

Simply put, a DAF is a charitable savings account that allows you to donate without needing to immediately choose the recipients. This not only allows you to receive a tax benefit the same year you make the donation, the gifted funds can grow tax-free until you provide instructions for the completed gifts to be made to qualified charitable recipients. To capitalize on these benefits, donors often opt for a bunching strategy – they make a sizable contribution to a DAF that they can then distribute to qualified charities across several years.

Getting Started

There are over one million 501(c)(3) public charities in the U.S. and only about 1,000 of them are considered DAF sponsor organizations. These sponsors typically fall into one of three categories: community foundations, single-issue nonprofits, or national nonprofits. No matter which type of sponsor you opt for, you’ll want to keep the following points in mind to make sure you choose a DAF provider that fits your needs.

1. The cost of establishing and managing a DAF vary from one program to another. Administrative fees typically cover operating expenses for managing accounts as well as reviewing and distributing grants; these are charged in addition to fees on the underlying investments. 

2. DAFs differ in their minimums and ongoing contribution amounts. For instance, while Raymond James Charitable allows you to open a DAF with $10,000, some programs may require you to start with $100,000 or more. Lower minimums may allow more flexibility when requesting distributions or adding to the account.

3. Investigate investment options. The “donor advised” part of a DAF means that you, as the donor, have input as to how your donated funds are managed. But that involvement varies from one program to another. Depending on how much flexibility you want, consider asking potential DAF sponsors questions like, “Could my family or financial advisor select and manage assets within my DAF?” 

4. Another tip is to examine the performance of any investment strategies offered by a DAF program. Be sure to ask if you are limited to proprietary branded funds or if there are other choices.

5. Know your limitations. Organizations must meet certain criteria established by the IRS to benefit from a DAF donation. However, certain DAF programs may have additional limitations. For instance, some may restrict grants within a single community. Faith based, educational and medical sponsors may require you to direct a portion or all of your DAF funds to their in-house programs.

Since DAF contributions are irrevocable, it’s important to confirm the level of flexibility you want from your sponsor, particularly if you might be relocating or if your giving intentions might evolve in the next few years. DAFs allow you to recommend grants to your favorite charities over time, so you can effectively pre-fund years of giving strategies with appreciated investments.

Our family established a DAF years ago to build a platform for us to share values and beliefs with our children and grandchildren. Each year around the holidays we ask for recommendations on what organizations they’d like to designate as recipients and what causes are important to them. It’s been heartwarming to hear what causes and concerns are top of mind for everyone. Sharing this process is a valuable gift for our family as well as the organizations that ultimately receive the funds. 

Donor Advised Funds aren’t just for the rich and famous. You can start a tradition of efficient and streamlined gifting with relative ease and reasonable minimum dollar amounts. DAFs allow many more of us to make a difference. Stay focused and invest accordingly. 

The opinions expressed are those of the writer as of October 10, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. There is no guarantee any particular investment strategy will be successful. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Donors are advised to consult their attorneys, accountants, or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised fund for federal and state tax purposes. 

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie.