Introducing: Pass-Through Donor Advised Funds!
Our July 2023 article, “Making Change with Donor Advised Funds,” highlighted that Donor Advised Funds (DAFs) are gaining rapid popularity as charitable tools in philanthropy. DAFs allow donors to receive an income tax deduction each time they contribute to the fund but can separate the grantmaking activity to a later timeframe. Traditionally, at Community Foundation of Lorain County, the timing for grantmaking activity has coincided with our endowment schedule.
Like our other types of endowment funds, a donor’s contribution to a DAF follows a distribution policy of up to 4.5% annually, allowing the principal to continue into perpetuity so donors can have a tremendous financial impact both now and long into the future.
We are pleased to introduce a new opportunity for donors to have pass-through DAFs at Community Foundation of Lorain County. These DAFs are not bound by the endowment model, enabling them to utilize a more significant portion of their existing principal for immediate grantmaking strategies.
Pass-through DAFs are ideal for donors who want to make a significant charitable impact, most typically with appreciated stocks they may have in their portfolio. However, they do not have explicit, short-term strategies for using what they intend to donate. These donors need more time to be ready to commit to a specific giving plan that would justify preserving their DAF account for the long-term endowment model.
Below are two charts to illustrate some of the main differences between the Endowed and Pass-Through DAF options, where a donor begins with $10,000 and adds $1,000 to their DAF annually while estimating a 7% annual return on investment.
Let’s assume that in Bob’s strategy, he is consciously trying to grow his endowed DAF while making current grants so he can use the future annual distributions as his giving when he retires in 15-20 years. That way, he can maintain more of his retirement income for personal needs. In the endowed model, the grantmaking capacity each year is intentionally structured at 4.5% of the DAF balance to preserve the principal. This investment strategy allows the DAF to grow to $21,500 over the 10-year term while granting a cumulative balance of $6,250 over that same timeframe. Through the power of endowment, Bob has increased his $19,000 in total donations to $27,750 in total charitable capital.
Let’s assume in Janet’s strategy, she was gifted $10K of stock when her mother passed away and wants to put that money to a charitable purpose. She wants to take a little more time to figure out what organizations may best honor her mother’s memory and feels rushing the decision wouldn’t be responsible. She has also decided to add some of her money annually to honor her mother further. In the pass-through model, Janet structures her grantmaking to be $1,500, exceeding the endowment percentage and slightly surpassing the annual additions. You will see the investment capabilities of the DAF have allowed the DAF to grant out a cumulative balance of $13,500 while still maintaining a balance of $11,100 for future grantmaking needs. The combined benefits of the investment returns and the elongated grantmaking strategy have allowed Janet to convert her mother’s $10,000 gift and her own $9,000 additional donations into $24,600 of charitable capital.
Initiating a DAF at Community Foundation of Lorain County can start with a minimal contribution of $100 and begin making grants once the principal reaches $10,000. Ultimately, donors use their DAFs for various reasons, timeframes, and in more ways than we can discuss in this article. Whether you intend to have a DAF with a “life” of approximately 2 to 10 years, for long-term, sustainable grantmaking that may last for generations, or a hybrid of both, we are here to help.
Our Estate Planning Guide, available for free download, simplifies the estate planning process by breaking it into smaller, more manageable pieces. Also, please explore Donor Advised Funds and various other giving strategies on our Donor Learning Portal