Updated: Feb 25
by Brian Elmore
Donor-advised funds continue to become more popular, so here is a brief primer on how they work, why donors use them, and how they could benefit your organization.
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?
$5,000,000 comes into your checking account overnight via completely legal means. Congratulations! But you don’t eat avocado toast, so you are rich, own a home, and have no student debt.
You want to give the money to nonprofit organizations, but don’t know which organizations and how much you want to give just yet. You meet with your financial advisor (remember, you are a rich millennial) and they recommend you 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) Sponsoring 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.
What are the donor advantages of using a DAF?
Contributions to 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.
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. DAF have no required payout rule, meaning donors can stash money in the fund as long as they wish.
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.