Creating a Donor Advised Fund | What You Need to Know
Donor advised funds, a strategy for charitable giving, have grown rapidly in popularity with an estimated $141 billion in assets, according to the 2018 Giving USA study. So how do you assess if the donor advised fund is the right fit for your charitable needs?
We aim to answer basic questions for you on donor advised funds and how to get started here.
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How do donor advised funds work?
A donor advised fund is a charitable account that a 501c3 sponsoring organization has legal control over while the donor retains advisory privileges. They operate through a simple structure:
You can create a fund at the sponsoring organization of your choice and can add other authorized individuals to use the fund. Minimum balance requirements and fees will vary across sponsors, ranging from no minimum requirement to over $100,000.
The Signatry has no minimum required balance.
Contribute & Invest
A variety of assets can be contributed to a donor advised fund for granting and investment purposes. Publicly traded securities, wire/ACH, credit/debit cards are all popular options. Complex assets such as business or real estate interests could also be placed in a donor advised fund.
Investment pool options may be offered at some sponsors in order to maximize generosity.
When you are ready, you can make grant recommendations through the fund. Some donor advised funds include options such as setting up recurring schedules for grants to even further simplify the giving process.
The fund provides one simple place to manage and support favorite charities and provide a single receipt at tax time.
What are donor advised fund advantages and potential tax benefits?
A primary tax advantage of a donor advised fund is a tax deduction is received in the year you make a charitable contribution to the fund, even if the funds are not granted out in that same year.
A donor advised fund is considered a public charity, so any deduction is equivalent to a gift directly to a charity or church. For those who may not itemize their tax return deductions, donor advised funds can be used to bunch contributions in a charitable year in order to maximize income tax deductions.
Other common tax benefits include:
- Capital gains tax is often avoided for assets contributed to a DAF. Learn more about asset-giving here.
- Because contributions to donor advised funds are completed gifts, DAFs are not subject to estate taxes and any investment growth in a DAF is not taxable to the donor.
What should I look for before I start a donor advised fund?
As you choose the best donor advised fund sponsor for your needs, make sure you look at these key areas:
One of the most overlooked areas when choosing a donor advised fund is to ensure your values align with the organization you choose.
Because a donor has advisory privileges on the fund, grants are subject ultimately to the sponsoring organization’s approval. Look for an organization who you are confident will align with your beliefs.
The most meaningful impact occurs when you are part of a like-minded community as you give alongside others supporting similar organizations and causes. Think about where and what you want your legacy associated with.
Fees and Minimums
When choosing a donor advised sponsor, be sure you understand which types of fees and minimums may apply. Potential fees and minimums could include:
– Monthly administrative fee. These can often be on a tiered basis based upon assets held in the fund.
– Investment management fee. These apply to funds that may be invested in the donor advised fund investment options.
– Minimum grant size. A certain minimum dollar amount may be required for grants.
– Minimum fund balance. Some organizations will require a minimum balance to open a fund and some may also charge an additional fee if a minimum balance is not maintained.
If you wish to recommend involving your financial advisor in your charitable planning, research what options are available.
– Can they be added to the fund to view and support activity?
– Are there minimum balance requirements for an advisor to manage the assets? $250,000 is the industry average minimum fund balance before advisors can manage assets.