Donor-Advised Funds…A Method to Grow Assets Tax-Free and Contribute to a Cause!
For decades, charitable donations have been a foundational principle in our society, which enable individuals in a community to contribute to a cause. However, most individuals are unaware as to how they can make this contribution without navigating the cost, complexity, and regulatory oversight associated with traditional charitable structures. Here, donor-advised funds (DAF) offer an appealing alternative.
Although DAFs remain relatively unknown to the public, DAFs have existed for nearly a century. In 1931, the New York Community Trust was credited with establishing the first ever DAF. While the legal definition for a “donor-advised fund” did not appear in the Internal Revenue Code until the enactment of the Pension Protection Act of 2006, early federal tax reforms, such as the Tax Reform Act of 1969 and the Tax Reform Act of 1986, laid the groundwork for the creation of DAFs, allowing donors to seek more efficient, flexible, and accessible alternatives to private foundations.
Today, the Internal Revenue Service defines a donor-advised fund as, “a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes a contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.” Sponsoring organizations are responsible for administering the DAF, investing the contributed assets, and the disbursement of grants to qualified charities. The three primary types of DAF sponsoring organizations are: (1) Community foundations; (2) national sponsoring organizations; and (3) single-issue or faith-based organizations.
Why would someone choose a DAF? One of the most compelling advantages of DAFs lies in their combination of tax efficiency and flexibility in charitable planning. According to the National Philanthropic Trust, donors who contribute to a DAF can claim immediate tax benefits, including:
- Being able to receive immediate tax deductions following a contribution based on the fair-market of an asset (such as cash, non-cash assets, or property).
- Avoid capital gains tax on contributed long-term appreciated assets.
- Tax-free growth of contributed assets within the DAF.
- Donors may deduct up to 60% of their adjusted gross income for cash gifts and up to 30% for gifts of appreciated securities with any unused deduction eligible for a five-year carryforward. DAFs are also particularly effective for managing tax liability following a financial windfall, such as in the event of an inheritance, liquidity event, or sale of a business.
To establish a DAF, a donor typically makes an initial contribution ranging from $5,000 to $25,000. Contributions may be made in cash, non-cash assets, or property, all of which are managed by a sponsoring organization. The sponsoring organization invests the contributed assets, allowing for tax-free growth within the fund, while the donor receives an immediate charitable tax deduction at the time of contribution. After the fund is established, the donor may recommend grants to qualified charitable organizations, which the sponsoring organization then disburses as grants. There are generally no limits on the number of contributions or grants a donor may make, and donors may also establish recurring grants to nonprofit organizations of their choosing.
On a final note, DAFs continue to experience significant growth, both in terms of donor-participation and the amount of assets contributed. Using data from 2024, the DAF Research Collaborative reports that the total number of DAF accounts reached a record high of 3.56 million, with total assets valued at $326.45 billion. Contributions made to DAFs totaled $89.64 billion, while grantmaking distribution to nonprofits and charitable causes reached $64.89 billion. On average, individual DAF accounts held approximately $91,611.
If you have questions regarding DAFs, or if you would like guidance on whether a DAF is appropriate for your charitable or tax planning goals, please contact one of the attorneys at Revis, Hervas & Goldberg, P.A. today.
