Donor advised funds (DAFs) are a simple and flexible charitable giving tool within the reach of many Americans. We partner with individuals to assist them in achieving their philanthropic goals. 175+ families have established funds with us. It’s easy to open you own DAF for as little as $5,000 and with no set-up fees!
The information below describes how these funds are set up, their advantages and disadvantages, costs, tax implications and family considerations surrounding DAFs are also included, as is a comparison of DAFs to private foundations.
Americans are currently experiencing the greatest transfer of wealth in history. An estimated $59 trillion will pass from an aging generation to younger generations by 2061, including $21 trillion destined for charities. At its peak, between 2030 and 2045, 10 percent of the total wealth in this country is expected to change hands every 5 years.
This massive transfer of wealth between generations presents significant challenges for many Americans who now own these assets, for their heirs and for the charities who will be beneficiaries of this wealth. And in the face of this transfer there is evidence that many families are not fully prepared to successfully navigate this intergenerational movement.
You, like most parents, have high hopes and dreams for your children and grandchildren. You hope to see them create loving relationships, achieve professional success, and make productive contributions to society. You want to see them grow up as caring, generous adults with deeply held philanthropic values.
Family philanthropy provides opportunities for family members of all ages to experience the joy of giving. It also allows them to understand the meaning of the family wealth. It is a powerful tool to help family members learn to work together and prepare before the wealth transition. Family philanthropy is a key component to helping families create a legacy that will survive more than three generations.
Charitable giving is an easy subject to avoid, especially given the complexities that can be involved. Before pushing the subject to the sidelines, you owe it to yourself and to your family to consider DAFs. With minimums starting at $5,000, these funds are within the reach of many charitable-minded Americans.
DAFs are the fastest-growing, most popular form of planned giving in America, outnumbering private foundations nearly ten to one. As evidence of their increasing popularity, consider these statistics, according to the 2020 DAF report by NPT.
A DAF is simple: You contribute cash or a wide range of other liquid or illiquid assets to a public charity that sponsors donor advised funds (Hudson Community Foundation). This public charity is called a sponsoring organization. Minimum contributions vary by sponsoring organization but can be as small as $5,000. You receive several tax benefits from making the contribution, including:
You retain the privilege of advising the sponsoring charity on important matters affecting the fund, including investment management, grantmaking, and appointing the person or persons responsible for taking over as successor after you are gone. The sponsoring organization does all the legal, philanthropic, and accounting work. This allows you to focus your energy on grantmaking functions, although even this activity can be delegated to others, if you so desire.
Typically, you recommend which charitable organization will receive grants, when such grants will be distributed, and the amounts. However, the sponsoring organization has the final approval on the grants because certain guidelines must be followed, such as making sure that the contributions go to qualified nonprofit organizations. Although some sponsors are more restrictive than others, there are 1.5 million nonprofit organizations registered in the country, so finding a qualified charity should seldom be an issue for you.
Investment choices vary among sponsoring organizations. For example, Hudson Community Foundation is an independent sponsor that allows your financial advisor to manage DAF assets in an open architecture as a brokerage relationship or a managed account capacity. Other sponsors require you to select from the investments offered through the sponsoring organization’s program and investment platform. At the opposite end of the spectrum, some sponsoring organizations may give donors no choice with regard to investment platform or investment strategy.
Two approaches can be used when granting money from your DAFs: endowment or non-endowment. In most cases, it is up to you to decide how they will grant the money, although some community foundations require donors to choose one or the other.
Endowment – The distinguishing characteristic of an endowment is planned longevity of the fund. You contribute assets to a DAF and a pre-selected charity or charities to support. Your financial advisor would invest assets in an endowment manner to generate a reasonable, real, long-term rate of return, five percent for example. Grants are distributed in accordance with pre-determined spending policies, with any additional earnings or losses credited to the fund. The goal is for the fund to continue in perpetuity, matching predictable income and grants each year. This appeals to many donors because it creates an endowed family legacy for charitable giving and enables giving to a cause the family holds dear for years into the future.
Non-endowment – You contribute assets to a DAF and grants to the charities as much or as little as you want each year. There is no five percent minimum distribution requirement. The fund can last for a short or a long time, and you can support several favorite organizations and causes or focus on one.
As you explore whether a donor advised fund might be appropriate, consider both the advantages and disadvantages. Let’s begin with the advantages:
Low Contribution Minimums ($5,000 and up). This makes it an affordable tool for most charitably inclined people.
Easy Setup: There are no complicated legal documents. A short form is typically all that is necessary for you to create a fund.
Cost Efficiency: Legal or accounting fees are typically not required to start a fund, with the exception of complex and illiquid assets. Fees vary by fund size. Charge to the fund on an annual basis, quarterly, a tiered administration fee. Fees start at 1% and decrease to .25% on larger amounts. Investment management fees are extra depending on the investment program of the financial advisor you choose.
Simplicity: Charitable giving can be complex, but with DAFs, you have just a few decisions to make. These include which assets to contribute, overall investment management, grantmaking, and successor appointment.
Tax Benefits: An immediate and maximum income tax deduction subject to annual AGI limits on the type of assets contributed with five-year carryover.
Flexibility: With a DAF, your tax deduction decision is separate from your grantmaking decision. There is no minimum annual grant distribution requirement as is true for private foundations. You can make grants on your own convenient timetable.
Grantmaking Support: Offer access to professional philanthropic support, and information on various charities and how to choose charities for grants.
Donor Recognition: Provide letterhead stationery.
Visibility Choice: With DAFs, clients can give anonymously or with full recognition.
Legacy of Family Philanthropy: A DAF that is set up and managed as an endowment will continue grantmaking in perpetuity.
Educational Benefits. DAFs that involve both parents and children in grantmaking can be a rich training ground to pass on family values and establish a tradition of family philanthropy.
An easy decision-making structure: The donor is involved in all decision making, unlike a private foundation whose board must be consulted, which can be a time-consuming process.
An alternative to a bequest: A straight bequest to your favorite charity is always an option, but a DAF offers you and your family the flexibility of an ongoing legacy.
The ability to receive donations from private foundations: Private foundations must distribute five percent of assets yearly and, if they have not decided on a specific charity, they could give the five percent to a DAF for later decision making.
Compatibility: DAFs work well in conjunction with other charitable giving strategies, such as charitable remainder trusts, charitable lead trusts, private foundations, bequests, and insurance policies. In addition, private foundations can set up a complementary DAF, thus giving the donor choice of which strategy works best. The private foundation that wants to terminate can roll its assets into any DAF.
When considering DAFs, there also exist some potential disadvantages:
Lack of Absolute Control: Unlike a private foundation where the donor has absolute control, the donor’s role in a DAF is advisory while the sponsor has final authority. However, depending on the flexibility of the DAF sponsor, the donor is likely to realize most of the benefits of the private foundation without the cost, taxes, lack of privacy, and compliance hassles of a private foundation.
No Income: DAFs are not a technique to be used if you want income from contributed assets.
No Staffing: DAFs lack the ability to hire staff, as is possible with a private foundation.
DAFs can only support qualified charities. This is an IRS requirement.
Although private foundations have long been considered the gold standard of family philanthropy, DAFs offer some distinct advantages to both small and large donors. Primarily, DAFs are simple to start and run, and have grantmaking as their main focus. Private foundations allow you to have more control and visibility, but more work and cost are involved.
You should weigh the following factors when choosing between a private foundation and a DAF:
Size of initial contribution. Opinions vary, but most experts agree that private foundations don’t make economic sense for less than $5 million. A donor can set up a DAF with as little as $5,000.
Administration fees. Fees for a private foundation can range up to three and a half percent, whereas administration fees on DAFs are typically less than one-half of one percent.
Desire for control. A wealthy donor, particularly an entrepreneurial one, often likes the control that a private foundation offers. In addition, there may be opportunities for family members to work in the foundation and to be paid by the foundation. Expenses for family meetings to do the foundation governance and grantmaking can be covered. Attorneys, CPAs, and investment brokers all can be handpicked. However, a key question is how will the foundation run after the initial donor is gone?
Visibility. All private foundations are public record. In contrast, DAFs are totally private.
Tolerance for complexity. If a family cannot deal with the tax, legal, compliance, and financial matters required of a private foundation, a DAF makes more sense.
Functionality of the family. How well does the family function in terms of its decision- making capabilities? If the family is not strong in this area, grant making may be all the family can handle and a DAF may make more sense than a private foundation.
A DAF can be a solution if you…
• …are experiencing an extraordinarily high-income year.
• …will be selling a highly appreciated asset in the near future
(closely held stock, real estate, a business, or something else).
• …want to support several charities through one substantial gift.
• …want maximum flexibility to change the charitable beneficiaries over time.
• …want to involve a spouse, children or grandchildren in charitable giving.
• …are currently making cash gifts to numerous charities but would benefit by giving appreciated assets instead.
• …are experiencing fluctuating income but want to maintain a steady level of charitable giving.
• …are concerned about the complexity or lack of privacy of a private foundation.
• …want to support a charity but is not confident with the organization’s investment management capability.
• …want to keep your charitable giving confidential.
• …wish to support a charity but wants to ensure that the gift is used as he or she intended.
Is important to keep in mind that not all sponsoring organizations operate in the same way. Here are some questions to ask:
What assets will the sponsor accept and hold in addition to cash and marketable securities?
At Hudson Community Foundation, we accept closely held securities (C-Corp, S-Corp), limited liability arrangements, real estate, life insurance policies, and more.
What investment flexibility does the financial advisor maintain?
At Hudson Community Foundation, financial advisors can manage investments, regardless of fund size, in an open architecture with the broadest choice of independent products.
What is the minimum value required to set up fund?
$5,000
What restrictions exist on grants, for example geographic restrictions, minimum grant amount?
None for geographical, minimum is $250 grant amount.
What fees apply for administration, investment management, and account maintenance?
Varies depending on fund size.
Personalized donor support versus a call center?
Yes, A friendly donor interface – no call center.
Letterhead stationery with fund name?
Yes
Personalized grantmaking services?
Yes, professional nonprofit staff.
Recognition options ranging from anonymous to full recognition?
Yes
Ability to succeed over multiple generations?
Yes
Independent statement of account status?
Yes