Making Change with Donor Advised Funds

While Donor Advised Funds (DAFs) are one of the fastest-growing charitable tools in the world of philanthropy, many donors do not fully understand what they are or how they work.

In it is simplest form, a Donor Advised Fund (DAF) is a fund created by a donor with the help of a non-profit sponsoring organization, like the Community Foundation of Lorain County or other non-profits. There are over 1.2M DAF accounts all over the country. These accounts have been authorized by Congress and recognized by the Internal Revenue Service for years, allowing donors to receive an income tax deduction each time they contribute to the fund. While the DAF is held at the sponsoring organization, the donor is still advising on how that money goes out to their charities of choice.

The decision to create a DAF rather than making direct gifts to the donors’ favorite non-profits is often driven by a need to separate the tax benefit from the benefit of making the charitable gift.   For instance, Bob, a donor, may get a significant bonus at work. While he wants to do something generous with those dollars, the bonus may be much larger than what he usually gives to his favorite organizations. Therefore, he may use the DAF to get the charitable deduction today but use those dollars to support his favorite organizations for the next three years or more.

Another benefit to a DAF is when a donor may want to donate stock and split that donation among various favorite causes that matter over an extended period.   Often, smaller non-profits cannot accept stock. Hence, the burden of that gift acceptance falls on the Community Foundation, allowing the other non-profits to receive the gifts after Community Foundation has liquidated the stock.

In the 11 years I worked with DAFs at American Endowment Foundation, I saw many donors use their DAF as a charitable savings account. They would add to their DAF annually and take a charitable tax deduction. They were looking to grow that fund over time to ensure they had the charitable giving capacity to use once they retired. After their retirement, they would make grants out of their DAF instead of drawing from what may be an income that was significantly lower than before retirement.

While DAFs are often compared as being similar to Private Foundations, they are different in many ways. One of the most distinct differences is that DAFs can be created for smaller dollar amounts than private foundations, which usually cannot be created with less than $250,000. Instead, Donor Advised Funds can be started at almost any donated dollar amount. In the case of Community Foundation, you can begin to make grants out of your DAF once the balance has reached $10,000.

If you would like to learn more about how to use a Donor Advised Fund (DAF) to further your charitable giving, please call me. If you already have a DAF somewhere other than the Community Foundation of Lorain County, we would be happy to discuss how we can be your charitable back office to help you consider a broad range of local giving opportunities, including Connect to a Cause, our 12-hour crowdfunding campaign, held on September 21st.

Please visit our Donor Learning Portal for more information about ways to give. You can also download a FREE copy of our Estate Planning Guide to help explain the estate planning process by breaking it into smaller, more manageable pieces.