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What is a Donor Advised Fund? The Complete Guide

Mar 25, 2024

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Donor advised funds (DAFs) are a highly popular charitable giving vehicle for individuals and families looking to make the most out of their donations, but what is a donor advised fund, exactly? And how can opening a donor advised fund help you maximize your philanthropic impact? 

In this article, we will walk you through donor advised funds, including some important donor advised fund rules and potential tax benefits and advantages for donors. 

Continue reading to find out if opening a donor advised fund may be right for you.

Key Insights

  • Donor advised funds (DAFs) allow donors to make tax-deductible contributions to support the causes most important to them. 
  • DAFs can offer tax advantages, flexibility in the types of assets you may contribute, and a simple way to make a difference. 
  • DAFs can facilitate multi-generational giving by allowing families to establish a philanthropic legacy and involve younger generations in charitable decision-making.
  • DAFs empower donors to strategically allocate their philanthropic resources by offering the flexibility to research and evaluate charitable organizations before making grants.
  • Donors may be eligible to receive immediate tax deductions for contributions to DAFs.

Table of Contents

What is a donor advised fund, and how does it work?

A donor advised fund is a charitable giving vehicle that enables individuals, families, or organizations to make contributions to a centralized account that is eligible for a charitable tax deduction. From there, they can recommend how those funds should be distributed to nonprofits or charitable causes. DAFs operate like a philanthropic bank account held and managed by a sponsoring organization, typically a community foundation, public charity, or financial institution.

Here’s how they work:

  1. Donors contribute assets to the DAF. Contributable assets will vary depending on the sponsoring organization. At Greater Houston Community Foundation, contributable assets include cash, publicly traded stocks, bonds, other securities, securities, business interests, life insurance policies, real estate, and many other appreciated assets.
  2. Those assets grow tax-free. Your contributions can be invested and may have the potential to grow tax-free and increase your overall giving power, allowing for growth while deciding which charities you wish to support. Then, you can take your time deciding where you want those funds to go.
  3. Support the causes that matter to you most. Whether you know exactly what kind of impact you want your funds to make or you’re seeking strategic guidance, you can use DAFs to make gifts to any IRS-qualified public charity. 

Because donor advised funds are managed by the sponsoring organization, they offer donors a level of privacy and anonymity. Grants can be made anonymously or in the name of the DAF sponsor, rather than the donor’s name. These accounts give you significant flexibility in both contributions and distributions, as you can give to a donor advised fund as little or as often as you would like, and time your distributions to make maximum community impact. 

What are the benefits of a donor advised fund?

Although there are many benefits involved in opening a DAF, the advantages that matter to you will depend on your financial situation and the philanthropic strategy you are pursuing.

Some of the most common benefits of donor advised funds include:

  1. Flexibility for donations. There is flexibility in both types of assets and size of contributions. Donor advised funds allow you to donate when it makes the most sense, as well as which assets make the most sense. At Greater Houston Community Foundation, you can donate a variety of non-cash assets, which is often the most tax-advantaged way to give. 
  2. Eligible for charitable tax deductions. One of the primary advantages of a DAF is the tax deduction donors could receive when they contribute to the fund. By donating to a DAF, donors are eligible for a charitable tax deduction, thereby reducing  their taxable income for the year of the contribution.
  3. Tax-free growth. Assets in a DAF can be invested and can grow over time tax-free while you decide which charities to support. This tax-free growth means that donors can potentially increase the impact of their giving by allowing the assets to appreciate before recommending grants.
  4. A simpler way to give. Charitable giving can take up a lot of time in your already full schedule. Because they are managed by a sponsoring organization, DAFs don’t require that you spend significant time managing them — or that you keep exhaustive records of the transactions, just the records of your initial contributions. 
  5. 24/7 access. Our donors can access their funds and make grants at any time they choose via DonorSphere, a secure online donor portal. This intuitive, modern platform gives you the ability to customize and generate reports on your giving history. Additionally, DonorSphere provides real-time integration with CharityCheck and GuideStar reports to support your charitable research efforts.
  6. Freedom in how you distribute philanthropic dollars. Because you can distribute funds in the future, you can respond effectively to emerging needs or crises, ensuring their philanthropic dollars are allocated to organizations and causes when they can make the greatest impact. Whether supporting ongoing programs, responding to urgent needs, or funding innovative projects, donors can leverage the flexibility of donor advised funds to align their giving with evolving priorities and maximize the effectiveness of their philanthropy.

It’s a well-known sentiment that we are better together. This is especially true when it comes to our philanthropic impact. With Greater Houston Community Foundation as your philanthropic partner, you gain access to both our specialized team of industry experts and our broad network of like-minded leading philanthropic individuals and families, local Houston nonprofits, and charitable businesses — all working together to develop a greater Houston.

In addition to these benefits, donor advised funds can act as an essential tool for estate planning, as they may have additional tax benefits for reducing capital gains or estate taxes, and provide privacy for those who value the anonymity of their donations. 

Who benefits from a donor advised fund?

While donor advised funds can be powerful tools for anyone trying to make an impact, there are a few specific groups who may benefit from opening one, including:

  1. High-net-worth individuals and families. DAFs provide a structured and strategic approach to charitable giving and foster a collaborative way for families to engage in strategic philanthropy. 
  2. Professional advisors. Professional advisors, such as wealth managers or estate planners, can assist clients in establishing and managing DAFs, better-integrating philanthropy into their overall financial planning strategy.
  3. Corporations and businesses. Corporations can maximize their impact by partnering with a community foundation for their donor advised funds. Corporate philanthropic partnerships can also include employee engagement programs, disaster relief funds, and corporate scholarship funds.
  4. Your community. Investing in a donor advised fund is more than just a financial decision; it’s a commitment to supporting the communities close to your heart. By engaging with a local community foundation like Greater Houston Community Foundation for your DAF, you’re not only investing in your local community but also making a meaningful impact on causes that matter to you. Your support enables nonprofits to address critical needs and drive positive change, enriching both the Houston community and any other community you hold dear.

Donor advised funds are a great way to make a difference for your community while making smart financial decisions. Whether you’re a financial advisor looking to partner on your high-net-worth client’s philanthropic and estate planning, or a parent looking to lay the foundation for a child’s experiences in youth philanthropy, engaging with a local community  foundation to open a donor advised fund can be a powerful thing. 

How do donor advised fund tax deductions work?

Here are a few key items to remember about deductions related to donor advised funds:

  1. Contributions to a DAF are eligible for a tax deduction in the year in which the contributions are made. 
  2. The donor is eligible for these tax deductions for the contributions to the DAF itself, not for the subsequent grants made from the DAAF to individual charities.
  3. Assets in the DAF appreciate tax-free.
  4. Once funds are in the DAF, donors no longer own the assets, and the sponsoring organization is responsible for managing and disbursing the funds according to the donor’s recommendations.
  5. Contributions are eligible for charitable deductions to the maximum extent provided by law. Donors should consult their tax advisors to determine the eligible amounts.
  6. Donations to a DAF from an estate qualify for an unlimited estate tax deduction.

While partnering with an organization to open your donor advised fund can provide insight into the tax implications of your contributions, it’s essential to remember that individual financial situations may vary. It is always advisable to consult with a qualified tax professional who can offer personalized guidance tailored to your specific circumstances and objectives. 

Greater Houston Community Foundation cannot provide tax or legal advice.

Should I open a donor advised fund vs. a charitable trust?

Deciding whether to open a donor advised fund or a charitable trust will depend on, among other things, personal financial circumstances, philanthropic goals, and estate considerations. Individuals and families that create charitable trusts often also have donor advised funds, as charitable trusts are often part of more complex and legacy-oriented giving strategies. 

Some reasons you might want to create a charitable trust in addition to a donor advised fund include: 

  • Your estate is large enough to be subject to estate taxes.
  • You’re paying high capital gains taxes on appreciated assets.
  • You have beneficiaries for whom you would like to provide income for a period of years or their lifetime.
  • You already have a donor advised fund and are looking for ways to deepen your philanthropic impact.

Charitable trusts are both a powerful giving vehicle and an essential part of legacy planning for any high-net-worth family, but are not a replacement for donor advised funds, which are an invaluable, high-impact and low-stress way for you to make a difference in your community today. 

Open a donor advised fund with Greater Houston Community Foundation

Donor advised funds are powerful and flexible tools that can offer you a convenient way to maximize your philanthropic impact while being eligible for significant tax benefits. Donor advised funds are an essential component of any strategic charitable giving strategy for individuals, families, or corporations interested in making a difference. 

We deliver a high-touch experience to all donors. By choosing Greater Houston Community Foundation as your philanthropic partner, your donor advised fund guarantees access to knowledgeable philanthropic advisors who possess an exceptional understanding of the region and have extensive connections within the philanthropic sector.

Working with Greater Houston Community Foundation means getting closer to your community, whether you’re interested in opening a donor advised fund or starting a scholarship fund. Continue reading about how donor advised funds made a difference for our partners, call us at 713-333-2210 or reach out directly to talk about starting a fund today. 

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