DAFs in the United States
Donor-Advised Funds are rapidly rising in popularity.
From 2019 to 2020, the National Philanthropic Trust reports there was a 20% increase in the number of DAF accounts registered at national charities. As of 2020, there were 864,099 active accounts.
The report also found that over 10% of U.S. giving in 2022 was done via a DAF, at nearly $50 billion dollars!
DAFs are so valuable because you can:
- Take an immediate tax deduction upon donation
- Enjoy tax-free growth, thereby amplifying the financial value of your gift
- Use one fund to donate to multiple charities
- Give on your own time – you decide when and to whom your donations go
Not to mention, if you exceed the 2022 tax-deductible giving limits for a DAF (up to 60% of your adjusted gross income (AGI) when donating cash or 30% when donating non-cash assets), you can roll that tax deduction to the next year for up to five years. So if you give more than you’re able to deduct from your AGI, DAFs allow you to carry that excess amount forward to reduce your AGI and save on taxes in future years.
Most people use DAFs to give to a charity of their choice, whether it be an environmental cause, education, or a religious institution. As long as the charity is a registered IRS-qualified public charity (501c3), you should be able to support it through your Donor-Advised Fund.
You can open a DAF with the help of your financial advisor. Be sure to discuss your charitable goals with your advisor ahead of time. That way, they can ensure your preferred charities are already approved by the DAF you want to use. Doing so will help you avoid any unnecessary hassle.
What is a DAF, Exactly?
Think of a DAF as a charitable investment account.
You can open a DAF at virtually any major investment company such as Fidelity Charitable, Vanguard Charitable, The National Philanthropic Trust, or Schwab Charitable.
DAFs usually offer flexibility and allow you to contribute various assets, including cash, investments, real estate, and sometimes even cryptocurrency. They will usually charge a fee for each transfer into the account. For instance, Fidelity Charitable charges $100 or 0.6% (whichever is greatest) for the first $500,000 of donations to its fund.
Even with fees, donating to DAFs can still be a financially savvy move. Many wealthy individuals use DAFs to avoid the expensive costs and legal implications of establishing their own charity or foundation.
When your money is pooled in a DAF at your financial institution, you can “recommend grants,” meaning distribute cash to a charity as you choose. Nowadays, you can recommend a grant with the click of a button on your financial institution’s online account, and they will send you an email confirmation once the funding goes through.
Here’s a visual overview from Kitces on how these accounts work.
How DAFs Work
Once you’ve opened your DAF with the help of your financial advisor, you can contribute appreciated assets, stocks, collectibles, cash, and more into the account.
The funds can sit in the account for as long as you’d like and grow tax-free.
DAFs are designed to accommodate strategic giving, and one excellent strategy is “bunching” donations to DAFs.
Say you can’t itemize your donations each year because the standard deduction is so high ($12,950 for individuals and $25,900 for married couples filing jointly in 2022). You can decide to frontload three years’ worth of contributions to your DAF, take the tax deduction, then spread the grants out over the set period.
You’re still giving at the same cadence, just taking advantage of the tax benefits.
Another excellent application for DAFs is creating a family tradition of giving. Let each member of the family research and recommend a set amount of donations every year, and get your family involved in giving intentionally on a regular basis.
Whatever money you donate during a given year is tax deductible, so if you have the means, be sure to donate to the limit of your personal annual deduction.
