How do donor-advised funds work?

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If you want to support your favorite causes and charities, but also have more flexibility and control over your donations, you might consider using a donor-advised fund. A donor-advised fund, or DAF, is a type of charitable account that allows you to make tax-deductible contributions, invest them, and recommend grants to nonprofits over time. In this article, we'll explain how donor-advised funds work, what are their benefits and drawbacks, and how to choose the best one for your philanthropic goals.

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Daniel Jones

Chief Purpose Officer at Stewardship

1 What is a DAF?

A DAF is a special account that you can open with a sponsoring organization, such as a community foundation, a public charity, or a financial institution. You can contribute cash, stocks, real estate, or other assets to your DAF, and get an immediate tax deduction for the full amount. The sponsoring organization then manages the DAF on your behalf, investing the funds according to your preferences and charging a fee for their services. You can advise the sponsoring organization on how much, when, and to which nonprofits you want to make grants from your DAF, but they have the final say on the distribution.

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Daniel Jones

Chief Purpose Officer at Stewardship
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In the UK Donor Advised Funds are the fastest growing vehicle for philanthropy, providing similar tax advantages to their US counterparts as well as the UK’s Gift Aid scheme that repays tax paid by the donor directly to the fund. DAFs come in all shapes and sizes, with some providing digital accounts to self-manage monthly and one-off giving through to highly specialised services to establish a philanthropic fund to distribute ￡ millions to good causes across multiple generations.

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2 What are the benefits of a DAF?

Donor-advised funds (DAFs) offer several advantages to donors, such as tax efficiency and flexibility. Contributions to DAFs can be deducted in the same year they are made, regardless of when grants are given to nonprofits. This can help reduce taxable income and plan giving strategies. Plus, donors can avoid capital gains tax on appreciated assets donated to the DAF. The flexibility of a DAF allows donors to make grants at any time, without any minimum or maximum limits. Donors can also name successors or beneficiaries for the DAF, ensuring that their philanthropic legacy continues after death. Additionally, DAFs provide convenience by simplifying record-keeping and reporting with one account for all charitable donations. Online tools and resources provided by sponsoring organizations, such as research, advice, or networking opportunities, can also be accessed through a DAF. Furthermore, donors can collaborate with other donors or experts through their DAF.

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3 What are the drawbacks of a DAF?

A DAF can also have some limitations and challenges, such as fees that vary depending on the size and type of your DAF, and the services and features offered by your sponsoring organization. Additionally, you must relinquish some control over your funds when you donate them to your DAF; the sponsoring organization has the legal authority and responsibility to oversee and approve your grant recommendations. Furthermore, you must balance your desire to make an immediate impact with your long-term vision and goals. Critics argue that DAFs can delay or reduce the flow of funds to nonprofits that need them urgently or create a gap between donors and beneficiaries. To ensure effectiveness, you should monitor and evaluate the outcomes of your grants as well as communicate with the nonprofits you support.

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Daniel Jones

Chief Purpose Officer at Stewardship
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In our experience the payout rate of a DAF is primarily dictated by the donor, which is why good, early consultation is essential to create and structure the fund with a clear purpose and focus to distribution. A good DAF will work with clients to help them craft a giving strategy that reflects their passions and motivations for giving, the impact they hope to achieve through their philanthropy and to put in place the right team to manage the Grantmaking at an appropriate and considered pace.

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Evelyse Carvalho Ribas

Law | Creativity | Digital Assets | Global Strategic Solutions at Scale Private & Public Funding | AI, SaaS, Blockchain, Smart Contracts Foreign Lawyer (UK) | Qualified in Portugal & Brazil
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In my experience as a legal counsel advising on cross-border charitable giving, Donor Advised Funds (DAFs) offer enticing perks like tax deductions. But let's be real: DAFs also have drawbacks. Depending on the legal framework, once you donate to a DAF, you lose control over how the money gets distributed. I've heard many donors express concerns about the sponsoring organization holding the reins, potentially diverting funds from causes they care about. So, while DAFs seem like a win-win, depending on the legal framework, they might not align with the donors' philanthropic vision in the long run.

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4 How to choose a DAF?

When choosing a DAF, there are many factors to consider. You should look for a sponsoring organization that aligns with your mission and vision, and assess your income, assets, and tax bracket. Additionally, you should determine how much and how often you want to contribute to your DAF, and how much risk and return you expect from your investments. It is also important to decide how involved and hands-on you want to be in your grantmaking, as well as how much flexibility and autonomy you want to have. Furthermore, you should consider how you want to collaborate and interact with other donors, nonprofits, or experts. You should also take into account your estate planning and succession planning needs. Ultimately, it is essential to check the sponsoring organization's reputation, track record, and transparency.

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Daniel Jones

Chief Purpose Officer at Stewardship
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Our experience at Stewardship, a Donor Advised Fund serving Christian’s in the UK, is that values alignment is key when selecting a provider. Working with a DAF who share your faith perspective, for example, can help enrich your giving at a deeper level through your interactions with your account management team and their appreciation for the motives behind your giving and the causes you choose to support. DAFs can also have specialist purposes which help drive innovation, from solving technical issues like dual-qualified giving for those taxed in the US and UK, or more specialist grants according to the objects of the fund. Stewardship, for example, also supports individuals, such as missionaries, in addition to usual grants.

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5 How to use a DAF?

Once you have chosen and opened a DAF, you can use it to make a difference in the world. You can contribute to your DAF with cash, stocks, real estate, or other assets, as well as transfer funds from other charitable accounts such as IRA or 401(k). You will receive a tax receipt for each contribution. You can also choose how to invest your DAF funds depending on your risk tolerance, time horizon, and social impact goals. You are able to select from a range of investment options offered by your sponsoring organization or create your own custom portfolio. Furthermore, you can research and identify the nonprofits that match your interests and values and submit your grant recommendations online or by phone. You can specify the amount, frequency, and duration of your grants and decide whether you want to remain anonymous or be recognized. A confirmation and report will be given for each grant.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do donor-advised funds work?

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2

3

4

5

6

1 What is a DAF?

2 What are the benefits of a DAF?

3 What are the drawbacks of a DAF?

4 How to choose a DAF?

5 How to use a DAF?

6 Here’s what else to consider

Philanthropy

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How do donor-advised funds work?

1

2

3

4

5

6

1 What is a DAF?

2 What are the benefits of a DAF?

3 What are the drawbacks of a DAF?

4 How to choose a DAF?

5 How to use a DAF?

6 Here’s what else to consider

Philanthropy

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