Donor Advised Funds 101


The Chronicle of Philanthropy released  their annual rankings of America’s largest beneficiaries of nonprofit philanthropy, known as the Philanthropy 400. The top recipient of funds from individuals, foundations, and corporations in 2016 may come as a surprise. United Way? Catholic Charities? Nope. The Fidelity Charitable Giving Fund topped the list at $4.6 billion.

The Fidelity Charitable Giving Fund houses philanthropic funds known as donor-advised funds (DAF).  DAFs provided by brokerages like Fidelity, Charles Schwab, and Vanguard are becoming increasingly popular giving vehicles for major donors.

What is a donor-advised fund?

Donor-advised funds (DAF) are defined by the IRS as “separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization.

What does this actually look like?
You are a donor. $5,000,000 comes into your checking account overnight via completely legal means. Congratulations!

You want to give the money to nonprofit organizations in your community, but don’t know which organizations and how much you want to give just yet. You meet with a Certified Professional Accountant (CPA) and they advise you to open a DAF.

Then you inform Fidelity you are prepared to invest the full five million in a DAF. The Fidelity Charitable Giving Fund, a 501(c)(3) organization, opens DAF on your behalf. These funds, and any subsequent contributions, will remain in the DAF until you direct them to be granted to a non-profit organization (NPO).

What are the donor advantages of using a DAF?

Tax Planning
Contributions to 501(c)(3) organizations, which include DAFs, are tax-deductible. Parking money in a DAF is an easy way to reduce taxable income in a given year, allowing the donor time to decide to which organization they want to give.

According to Charity Navigator, 31% of year-end giving occurs in December. This up is partially due to holiday season giving, but largely a result of donors determining the most advantageous tax strategy based on their year-end income. As DAFs become a more popular giving vehicle, this number may decrease because donors are given a tax deduction when money it transferred to their DAF.

Donation of Illiquid Assets
Many NPOs do not accept assets like art, vehicles, or privately held stock as gifts. DAF providers are set up to sell these assets and convert them into cash for giving.

Are there concerns about the rise of DAFs?

Foundations, by IRS law, are required to annually distribute 5% net investment assets annually in the form of grants or eligible administrative expenses. DAFs are exempt from this rule.

Critics argue there is a disincentive for DAF providers to encourage their clients to distribute their funds to NPOs. The more assets the sponsoring organization has under management, the more money they make. Payout rates (% of total assets leaving DAFs) has been decreasing since 2008, as DAFs have taken off as a giving vehicle.

Are there benefits to NPOs?

The jury is still out on whether DAFs provide a benefit to nonprofit organizations. The limited time and lack of data do not allow one to draw conclusions about benefit to the NPO sector as a whole.

More Information
National Philanthropic Trust – What is a Donor-Advised Fund

The Economist – A philanthropic boom: “donor-advised funds”

B elmore

Brian Elmore
Financial Analyst, Ann & Robert H. Lurie Children’s Hospital of Chicago Foundation
Brian is a Financial Analyst at the Ann & Robert H. Lurie Children’s Hospital of Chicago Foundation. He manages the financial framework around philanthropic funding of pediatric medical research initiatives. Prior to Lurie Children’s, Brian worked at PwC, performing financial statement audits of insurance and financial service companies. He is originally from the Philadelphia area, graduated from the University of Pittsburgh, and is a licensed CPA in the State of Illinois. Since moving to Chicago in 2013, he has become active in advocating for legislative transparency and social justice in city and state politics. Brian is a year-round cyclist, loyal supporter of the Philadelphia Phillies and Flyers, and frequenter of live music shows across this fine city.