Donor advised funds (DAFs) are often used by the charitably-minded middle class, as well as the affluent, to benefit their favorite charities and do so in the most tax-efficient fashion. A DAF is a great option for charitable giving for those that would like to be anonymous in their donations, want to be tax efficient with their charitable efforts, provide the maximum help to their favorite charities (which could change over time), want the opportunity to involve their family in the charitable giving process and create an ability to benefit charities even after they are gone.
The American Endowment Foundation, the nation's largest independent sponsor of DAFs, describes the DAF as a charitable investment account that provides simple, flexible and efficient ways to manage charitable giving. The money that goes into a DAF becomes an irrevocable transfer to a public charity with the specific intent of funding charitable gifts in the future. The public charity serves as the administrator of the DAF. (For more, see: Is This the Best Time to Start a Donor Advised Fund?)
As with anything new in life, there is much that should be known before diving in head first. This is equally true when selecting the sponsor for your DAF.
For instance, some DAF sponsors limit the charities to which grants can be awarded. Others require that the investments be in a fund managed by the sponsor. Others limit the investments to only that investment company’s mutual funds. Some do not allow for international grants. Some are much more costly to manage than others.
Questions to Address
The following is a comprehensive list of the questions to ask of the fund sponsor before you establish your DAF.
- How long have you been sponsoring DAFs?
- How many DAFs do you sponsor?
- What is the level of assets in all the sponsored DAFs?
- What is the average size of the DAFs that you sponsor?
- Are there any minimum donations to my DAF?
- Is there a minimum amount to maintain in the DAF?
- What are the costs on an ongoing basis?
- Are there any fees each time a grant request is made?
- Do you have any limitations on what can be donated?
- What is the process of donating investments to the account?
- What is the process to request a grant be made?
- Do you ever refuse a grant to be made?
- Can a grant be made to any 501(c)(3) charity or are there any limitations?
- Are there any limitations to the investments that can be held?
- Where are the investments held?
- May my current financial advisor provide advice on the funds in the DAF?
- What is the timeframe to establish the DAF?
- How much time does it take to transfer assets to the DAF?
- Can you change the terms of the DAF sponsorship and if so how?
- What is the process and/or costs if I want to move my DAF to a different sponsor?
While a DAF is a great option for charitable giving, be sure to do your homework to make sure it works for your charitable giving goals. (For related reading, see: Donor Advised Funds: The Benefits and Drawbacks.)