Donor-Advised Fund

What Is a Donor-Advised Fund?

A donor-advised fund is a private fund administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, a family, or an individual.

Key Takeaway

  • Donor-advised funds are private funds for philanthropy.
  • Donor-advised funds aggregate contributions from multiple donors and aim to democratize philanthropy by accepting contribution bases as low as $5,000.
  • They offer tax advantages of up to 60% of adjusted gross income and can hold funds indefinitely.
  • Donor-advised funds also accept non-cash assets, such as stocks, mutual funds, and bonds, as well as complex assets, such as private S- and C-corporation stock.
  • Some criticize donor-advised funds as placeholders for money and assets whose purpose is to help wealthy individuals earn tax advantages.

How a Donor-Advised Fund Works

Donor-advised funds have become increasingly popular, primarily because they offer the donor greater ease of administration while still allowing them to maintain significant control over the placement and distribution of charitable gifts. In addition, companies are able to offer this service to clients with fewer transaction costs than if the funds were handled privately. Donor-advised funds democratize philanthropy by aggregating multiple donors and processing high numbers of charitable transactions.

Furthermore, donor-advised funds offer abundant tax advantages. Unlike private foundations, donor-advised fundholders enjoy a federal income tax deduction of up to 60% of adjusted gross income (AGI) for cash contributions and up to 30% of AGI for the appreciated securities they donate. When donors transfer assets such as limited-partnership interests to donor-advised funds, they can avoid capital gains taxes and receive immediate fair market value tax deductions.

According to the National Philanthropic Trust’s 2021 Donor-Advised Fund Report, these funds have become an increasingly efficient method for donating to causes. Assets held in donor-advised funds rose to $159.83 billion in 2020, a 9.9% increase from $145.49 billion in 2019, and for the first time, the number of donor-advised funds exceeded 1 million.

$159.83 billion

The total value of assets held in donor-advised funds in 2020.

Types of Donor-Advised-Fund Sponsors

There are several different types of donor-advised-fund sponsors from which to choose.

Community foundations

In 2020, there were 976 charitable foundations that sponsored donor-advised funds. These organizations have been deemed pioneers in the donor-advised-fund space because they were the first to offer alternatives to inefficient checkbook giving and the complications of creating a private foundation. Community foundations typically appeal to donors interested in giving to local causes. They employ staff that is more knowledgeable about local charity initiatives.

National donor-advised-fund organizations

There were about 55 national donor-advised-fund organizations in existence in 2020. A number of these organizations are actually the charitable arms of for-profit financial services institutions, such as the Vanguard Charitable Endowment Program, the Schwab Charitable Fund, and the Fidelity Charitable Gift Fund. Other national donor-advised-fund sponsors are not affiliated with financial entities. These include the American Endowment Foundation and the National Philanthropic Trust.

Public foundations

Public foundations typically support national and international charities that focus on a particular issue or geographic region. For this reason, public foundations personnel often have specific expertise to help donor-advised fundholders find causes that matter to them. For example, the Peace Development Fund houses donor-advised funds for individuals who care about creating systemic social change throughout the Americas.

Other public charities, such as universities and hospitals, establish donor-advised funds within the walls of their respective organizations with the purpose of advancing their own charitable missions.

Allowed Investments

Many donor-advised funds accept non-cash assets—such as checks, wire transfers, and cash positions from a brokerage account—in addition to cash and cash equivalents. Donating non-cash assets may be more beneficial for individuals and businesses because it can lead to bigger write-offs.

Example of a Donor-Advised Fund

One of the national organizations mentioned above, Fidelity Charitable, calls its fund the Giving Account. Your donation to it is tax deductible, you don’t need to maintain a minimum balance, and you don’t have to be a Fidelity Investments customer to contribute to it. You can set up recurring donations to your favorite charities, from local to international. The money in your account is invested based on your wishes and grows tax-free until you decide to give it away, though of course, it can also shrink if your investments aren’t profitable.

In addition to cash donations, Fidelity accepts stocks, mutual funds, bonds, complex assets such as private S and C corporation stocks, as well as non-publicly traded assets, such as restricted stock, life insurance, and Bitcoin and other cryptocurrencies.

$28 million

The amount of cryptocurrency donations received by Fidelity Charitable in 2020.

Advantages and Disadvantages of Donor-Advised Funds

Perhaps the biggest advantage of donor-advised funds lies in the immediate tax benefits. Whether you choose to disburse the assets to an approved charity immediately after contributing to the fund or let the assets grow tax-free, you still receive a tax benefit immediately. Additionally, you also receive full control over how the account is managed.

Another huge benefit of choosing a donor-advised fund over a traditional charity is that donor-advised funds can accept non-cash assets. This means that you can write off the fair market value of the stock, which may be larger than your original cash basis and can prevent you from paying capital gains tax.

Like any financial instrument, there are some drawbacks to donor-advised funds. Because you receive the tax benefit immediately, your contribution is irrevocable, which means your assets cannot be returned to you for any reason. Furthermore, although you can make suggestions as to which charities you would like to receive your distributed assets, the broker has the final say.

A common criticism of donor-advised funds is that donations can sit in the fund indefinitely—there is no deadline for when the assets must be disbursed to charities. Another drawback is that unlike private charities, there can be fees attached to donor-advised funds and potentially a minimum donation.

Pros
  • Control over account

  • Opportunity for larger tax write-off

  • Allows donation of non-cash assets

  • Immediate tax benefit

Cons
  • Don’t get final say on which charities receive your donation

  • Assets can remain in fund indefinitely

  • Fees and minimum donation requirements

  • Donations are irrevocable

Criticisms of Donor-Advised Funds

Criticisms of donor-advised funds have mostly centered on the fact that they can become placeholders for money and assets and are set up to help wealthy individuals earn tax advantages. They have been called “philanthropic fracking” and accused of “warehousing wealth.” Though private foundations are required to pay out 5% of their overall holdings annually, there are no restrictions for donor-advised funds.

A vast majority of assets at prominent donor-advised funds are intangible and illiquid complex assets, such as real estate, Bitcoin, and art. They are valued on a cost basis, meaning the price at which they were purchased. Any sale after an appreciation in their prices would incur a capital gains tax.

By holding these assets in donor-advised funds where there are no restrictions on the holding period for sale, the donors can ensure that the asset, when it is sold by the foundation running the donor-advised fund, is not subject to tax. An appraisal before donation also provides the owner with considerable tax deductions because the complex asset is appraised at fair market value.

The ecosystem is also beneficial to large financial services corporations because they can charge fees for donor-advised funds.

Donor-Advised Funds vs. Private Foundations

A private foundation is a charitable organization typically created by an individual, family, or corporation. Both private foundations and donor-advised funds are charitable-giving vehicles; however, private foundations have much stricter tax laws and regulations governing their actions. Compared with donor-advised funds, private foundations have greater administrative control over assets and making grants, including the ability to make grants to organizations other than IRS-qualified, 501(c)(3) public charities.

There are two types of private foundations: Operating foundations are directly involved in administrating a charity campaign for a specific project or area of need, whereas a non-operating foundation simply gives grants to various charities. According to the IRS, “Contributions to private oper­ating foundations...are deductible by the donors to the extent of 50% of the donor’s adjusted gross income, whereas contributions to all other private foun­dations are gen­erally limited to 30% of the donor’s adjusted gross income.”

How Long Can a Donor-Advised Fund Last?

Although there are no specific tax laws stipulating how often a donor-advised fund can be inactive, many fund providers have their own timeline for giving. Fidelity, for example, states that donors must make one gift of at least $50 every three years in order to remain active.

What Happens to a Donor-Advised Fund When You Die?

After the death of the fund creator, there are essentially two choices: distribute the remaining funds to an approved charity or charities and close the account or name the fund's successor, who can then make all necessary administrative decisions associated with it. Many advisors settle this question at the time the account is opened.

What Is the Charitable Limit for a Donor-Advised Fund?

The limit for deducting contributions to a donor-advised fund is 60% of your AGI. You won’t be able to write off any contributions exceeding that amount.

Article Sources

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  1. Internal Revenue Service. "Publication 526 Charitable Contributions: Limits on Deductions."

  2. The San Diego Foundation. "What to Know About Donor-Advised Funds in 2022: Rules, Tax, Deductions, Comparisons and More."

  3. National Philanthropic Trust. "The Tax Advantages of Donor-Advised Funds."

  4. National Philanthropic Trust. "The 2021 DAF Report."

  5. National Philanthropic Trust. "2021 Donor-Advised Fund Report." Page 20.

  6. Vanguard Charitable. "Expand Your Charitable Impact."

  7. Schwab Charitable. "A Modern Way to Give."

  8. Fidelity Charitable. "Give More. Save More."

  9. American Endowment Foundation. "America’s Independent Donor Advised Fund."

  10. National Philanthropic Trust. "Your Partner in Giving."

  11. Peace Development Fund. "What We Fund."

  12. Fidelity Charitable. "Benefits of the Giving Account."

  13. Fidelity Charitable. "What You Can Donate."

  14. Fidelity Charitable. "2021 Giving Report," Page 25.

  15. Inequality.org. "Warehousing Wealth in Donor-Advised Funds."

  16. Internal Revenue Service. "Taxes on Failure to Distribute Income - Private Foundations."

  17. Council on Foundations. "The Five Percent Minimum Payout Requirement."

  18. Internal Revenue Service. "Qualifying Distributions of Private Foundations."

  19. Internal Revenue Service. "Private Foundations."

  20. Foundation Source. "What is a Private Foundation?"

  21. Internal Revenue Service. "Private Operating Foundations."

  22. Fidelity Charitable. "Is There a Minimum Grant Amount?"

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