As the economy continues to ebb and flow in a post-COVID world, consumers are looking for straightforward financial wins, but often they aren’t sure what moves to make or what tools to use. Most Americans are aware of 401(k)s, even though 40% of Americans do not fully understand the fees and the rules surrounding them.
Which Type of Donor-Advised Fund Is Right for You?
Like 401(k)s, there is another type of account that can bring financial benefits to a large number of Americans and is rapidly growing in popularity. It’s called a donor-advised fund (DAF), which is a tax-deductible financial account for charitable giving.
What a Donor-Advised Fund Can Do for You
A reader might be asking, “How could that be beneficial to me?” Just like a 401(k) makes retirement simpler, a DAF simplifies giving while providing powerful tax advantages and investing options. Here are three consumer benefits donor-advised funds offer:
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- First, donor-advised funds give consumers one place for all their giving (on one consolidated tax receipt), like a checking account but for philanthropy.
- Second, consumers can easily donate stock, cryptocurrency or other assets into their account and avoid capital gains tax while distributing proceeds to any charity.
- Third, because dollars are eligible for tax advantages the moment they hit the account rather than when they are sent to charities, donors can take the time they need to discover high-impact charitable opportunities without worrying about tax implications. Most DAFs allow the money to be invested while it is in the account, and it can grow tax free.
All of this allows for greater opportunity to be smart about your giving.
More than the financial smarts, DAFs help you give more purposefully, which can help you live a richer life. The act of giving is associated with many aspects of psychological and relational well-being, and this type of account enables greater flexibility for donors to participate in giving, even if a donor isn’t sure yet what cause to support.
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Corporate donors are also catching on. DAFs are increasingly being used to support workplace giving programs as an alternative to federated funds (e.g. the United Way) and corporate foundations.
How DAFs Have Improved Recently
In recent years, donor-advised funds have become more straightforward to create and use. Many sponsors now offer low-fee exchange-traded funds (ETFs) as investing options, and because of increases in technology, administrative fees and minimums to open have come down. Additionally, they don’t require sensitive information like Social Security numbers to set up, and each sponsor ensures each charity is in good standing with the IRS. Startups in the space, such as Charityvest, are accelerating this movement to make DAFs more delightful and to lower fees.
It’s no surprise DAFs are growing quickly. In one year alone, from 2019 to 2020, the number of DAF accounts jumped 16.3% to more than 1 million.
At Charityvest, we’ve witnessed success firsthand through our growth over the past three years. We started Charityvest because we wanted to make giving more purposeful, allowing for better planning in how and where people give. Users can make tax-deductible contributions of cash, stock, complex assets or cryptocurrency into their fund, and then direct those funds to over 1.4 million nonprofits in the U.S., while keeping their giving on a single consolidated tax receipt. With the introduction of low-fee ETF portfolios earlier this year, users can invest their fund balance to grow their giving, with all-in fees 25%-50% lower than the leading providers in the DAF space. Simply, the idea was to make giving easier, and more purposeful, and we believe DAFs do that.
The industry is experiencing remarkable growth as individuals and institutions increasingly see DAFs as their preferred way to give and facilitate giving. The opportunity to become more purposeful and streamline giving is a powerful combination. Technology and innovation are pushing these accounts to more people, making tax-smart, easy, thoughtful giving available to everyone who wants to donate to charities, in the same way the 401(k) did for retirement.
Charitable Trade-offs Between Donor-Advised Funds and Private Foundations
Disclaimer
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
FAQs
Number of DAF Accounts Approaches 2 Million
The number of individual DAF accounts rose 2.9 percent from 1,893,762 in 2021 to 1,948,545 in 2022. The compound annual growth rate for the number of donor-advised fund accounts from 2018 through 2022 is 22.6 percent.
When did donor-advised funds become popular? ›
The first donor-advised funds were created in the 1930s, though donor-advised funds were not recognized formally in the Code until the Pension Protection Act of 2006. In the 1990s, donor-advised funds began to grow in visibility and popularity, and today they are philanthropy's fastest-growing vehicles.
Why are donor-advised funds bad? ›
Disadvantages of DAFs
8 DAFs often carry many hidden fees of which donors are unaware, similar to 401(k) plans. Critics, therefore, contend that the financial industry and its wealthy clients, rather than charities, are the real beneficiaries of DAFs.
What are the disadvantages of DAF? ›
Cons of Donor Advised Funds
Reduced giving: There is no requirement for DAF fund managers to distribute their assets immediately. This means that funds donated to DAFs might not be used for charitable purposes immediately. This could lead to reduced giving impact over time.
What is the loophole of donor-advised funds? ›
What is the loophole of donor-advised funds? The loophole of donor-advised funds (DAFs) is that they allow wealthy people to donate money to avoid paying a capital gains tax and give the donated funds to a nonprofit, providing them with charitable tax advantages.
What is the average payout rate for DAF? ›
The DAF payout rate for 2022 was 22.5%.
NPT calculates payout rate as this year's grants divided by last year's year-end assets. The payout rate has exceeded 20% every year on record, and the average payout rate between 2018 and 2022 is 24.8%.
Who is the largest DAF? ›
But the very largest DAF sponsors now actually have more assets than most of our largest foundations. The largest DAF sponsor, Fidelity Charitable, had just over $35 billion in assets in 2020. Fidelity outranked even behemoth foundations like the Lilly Endowment, the Ford Foundation, and the Hewlett Foundation.
What is the 2024 National Study on donor Advice funds? ›
The 2024 National Study on Donor Advised Funds includes information about DAFs from 2014 to 2022, covering aspects such as account size, age, type, succession plan, donor demographics, contributions, grants, payout rates, and grantmaking speed. The report represents the most extensive independent study on DAFs to date.
Can you get your money back from a donor-advised fund? ›
All DAF donations made via The Giving Block are non refundable. We are not able to give refunds if you changed your mind, sent the wrong amount, or made the wrong decision.
What are the cons of DAF? ›
Make DAFs work for your nonprofit
But, nonprofits should note some of the potential downsides, like a lack of transparency and accountability, potential for inactivity and adherence to donors' preferences and recommendations.
According to the NPT report, there was $229 billion sitting in the coffers of DAFs in 2022. Donors gave nearly $86 billion to DAFs, versus $45 billion to private foundations.
What are the benefits of a foundation vs DAF? ›
While a private foundation can donate to an individual facing hardship as long as the situation meets IRS restrictions, DAF donations must be made to a public or private charity. “You also have privacy if you want it with a DAF, since a DAF donation can be made anonymously," said Van Atta.
How much does the DAF system cost? ›
Features: Easy to install Accurate dimensions Quality-tested Price Range:Rs 10 Lakh - 50 Lakh.
What is the efficiency of DAF? ›
High removal efficiency: DAF can remove up to 90% of suspended solids and other contaminants from wastewater. Flexibility: DAF can be used in various applications and can treat a wide range of wastewater types. Small footprint: DAF systems require less space than other wastewater treatment processes.
How popular is the DAF? ›
According to the National Philanthropic Trust's 2023 DAF Report, donors gave $52.16 billion in DAF grants to nonprofits last year—a 9% increase from the previous year. The total amount of donor contributions to DAFs also grew by 9%, meaning that the rising popularity of donor-advised funds is not slowing down.
Who uses donor-advised funds? ›
DAF grants can support qualified nonprofits in arts and culture, the environment and animal welfare, food banks and hunger alleviation, educational and religious institutions, social service organizations and more. All grant recommendations to qualifying nonprofits are approved by the DAF sponsor.
How much money do you need for a donor-advised fund? ›
No Minimum Balance Requirement
There is no minimum balance required to maintain a Donor-Advised Fund account, but if a Donor's account falls below the minimum grant size, the Trustee may request the Donor to make a final grant recommendation or additional contributions.
