What Is a Donor-Advised Fund? How Donor-Advised Funds Work
Here's how donor-advised funds might help you cut your tax bill and give back to the community.
What is a donor-advised fund?
A donor-advised fund, or DAF, is an account where you can deposit assets for donation to charity over time. The donor gets a tax deduction for making contributions to the donor-advised fund. A sponsoring organization manages the account; you recommend how to invest and where to donate the assets.
Who qualifies for a donor-advised fund
You don’t have to be wealthy to get into a donor-advised fund; some have no minimum initial contributions.
You can contribute different kinds of assets to a donor-advised fund, such as:
Cash.
Stocks, bonds and mutual fund shares.
Private company stock.
Cryptocurrencies.
Life insurance.
What is the benefit of a donor-advised fund?
In addition to providing financial support to charities, donor-advised funds can provide more immediate income tax deductions for donors, as well as potentially reduce capital gains taxes and estate taxes.
A tax deduction. You can claim a tax deduction in the year you contribute assets to the donor-advised fund rather than in the year the contribution goes to the charity. For example, if you typically donate $100 a month to charity ($1,200 a year), you could essentially prepay for, say, five years’ worth of donations by putting $6,000 in a donor-advised fund now. The donor-advised fund would use the money to disburse $100 a month to the charity as usual, but you would get a $6,000 tax deduction this year instead of a $1,200 deduction every year for the next five years. Getting a giant deduction in one year could be worth more than a smaller $1,200 deduction every year for the next five years.
Helps avoid capital gains tax. You won’t pay capital gains tax on assets that you put in a donor-advised fund, and if you donate assets that are worth more than what you paid for them, you typically can deduct the current market value of the asset rather than what you originally paid for the asset.
Possibly lower estate tax. Few people have to pay estate taxes, but if you’re one of those few, putting money in a donor-advised fund can reduce the size of your taxable estate.
How to invest in a donor-advised fund
Here's how to do it.
1. Compare donor-advised fund sponsoring organizations. There are many different kinds of sponsoring organizations. Commercial donor-advised funds, for example, are run by nonprofit arms of national financial-services firms. We highlight three of them in the table below. As it shows, donor-advised funds make money from fees.
Fidelity Charitable | Schwab Charitable | Vanguard Charitable | |
|---|---|---|---|
Minimum initial contribution | $0 | $0 for Core accounts; $250,000 for professionally managed accounts | $25,000 |
Minimum for additional contributions | $0 | $0 | $5,000 |
Minimum grant to charity | $50 | $50 | $500 |
Annual admin fee | Greater of 0.60% or $100 (tiered after $500,000) | Greater of 0.60% or $100 (tiered after $500,000) | 0.60% (tiered after $500,000) |
Investment fees | 0.015% to 0.99% | 0.03% to 0.86% | 0.03% to 1.23% |
Maintenance fee | $0 | $0 | $250/year if below $15,000 in March |
2. Contribute cash or other assets to the donor-advised fund. You can put in cash, stocks or other investments, such as cryptocurrency or even your ownership in a private business. Note: Contributions are irrevocable, meaning that once you contribute the assets, you can’t get them out again. Also, you can recommend but ultimately do not necessarily control how to invest and where to donate the assets.
3. Claim your tax deduction on your taxes. You’ll need to itemize your taxes to get the tax break. That means filling out Schedule A when you do your taxes and making sure that your itemized deductions exceed the standard deduction to get the most bang for your donated bucks. (Learn more about deciding whether it's worth it to itemize on your taxes this year.)
4. Help your donation grow. The assets in a donor-advised fund can be invested until they’re ready to be donated to the charity. Although the sponsoring organization controls the money in the donor-advised fund and the investment options you choose from, you get to recommend which investments to use.
5. Pick charities to support. That’s the goal of the entire process. You can support pretty much any IRS-qualified public charity. Typically, the entity that sponsors the donor-advised fund is responsible for checking out charities to ensure that the money goes to a legit one.
