Through the Keyhole: A Quick Peek at Donor-Advised Funds
Q: What is a donor-advised fund?
A: A donor-advised fund (DAF) is a charitable investment account that must possess three characteristics, according to the Council on Foundations. It must: be identified as a separate fund with reference to the contribution of the donor; be owned and operated by a sponsoring organization; and allow the donor to provide advice with respect to the fund’s investments or distributions. Donors open a fund by making a contribution of cash or assets to the public charity that administers the fund, and they receive an immediate tax deduction.
Q: How are these funds offered?
A: Community foundations, commercial financial services firms, and nonprofits such as universities offer and administer DAFs. These organizations set their own policies for issues such as minimum donations, percentage of donations that must go to the sponsoring charity, and the size and frequency of distributions.
Q: Are they a new philanthropic option?
A: The Internal Revenue Service says donor-advised funds have existed in some form since the 1930s. During the 1990s, for-profit financial investment firms began to establish affiliated nonprofit organizations to maintain donor-advised fund accounts.
Q: What has caused these funds to become more popular in the last decade?
A: There are a number of possible reasons for their recent popularity. Donor-advised funds are more readily available from commercial firms and nonprofits, and some of the funds require as little as a $5,000 contribution to set up. They offer the donor an immediate charitable deduction on federal income tax with the ability to defer the decision about how the funds will be put to use for charitable causes. In addition, donors today are more likely than they were in the past to be interested in providing input as to how their donations should be used, and this type of fund gives them that right while requiring few, or no, administrative steps on their part. Because the contributions are handled by the charitable organization, the donor can choose to remain anonymous.
Q: Can the donor decide to withdraw assets from the fund?
A: No. New contributions can be made to the fund, but they cannot be withdrawn. The fund manager or public charity controls and invests the funds. The donor does retain the right to recommend grants from the account to the charitable organizations of his or her choice.
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