DEFINITION of Donor Advised Fund

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

BREAKING DOWN Donor Advised Fund

Donor advised funds have become increasingly popular, primarily because they offer the donor ease of administration, while still allowing him or her to maintain significant control over the placement and distribution of charitable gifts. 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, thereby lowering the cost barriers to entry and making it possible for individuals with as little as $5,000 to participate in the giving process. Furthermore, Donor-Advised funds offer abundant tax advantages. Unlike private foundations, DAF holders enjoy a federal income tax deduction up to 50% of adjusted gross income for cash contributions, and up to 30% of adjusted gross income for the appreciated securities they donate. And by transferring assets such as limited partnership interests to DAFs, donors avoid capital gains taxes and receive immediate fair-market-value tax deductions.

Choosing Your Sponsor

There are several different types of Donor-Advised fund sponsors to choose from. Some of the different models include:

•          Community Foundations: The approximately 700 community foundations that sponsor donor-advised funds, as well as the hundreds of faith-based entities, are deemed pioneers in the DAF space, because they were first to offer alternatives to inefficient checkbook giving and complicated private foundation creation. Community foundations typically appeal to donors interested in giving to local causes, because they employ staffs more knowledgeable about local-area charity initiatives.

•          National DAF Organizations: Most of the approximately 30 national DAF organizations in existence are actually 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 DAF sponsors are non-affiliated with financial entities, including 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 DAF holders find causes near and dear to them. Case in point: the Peace Development Fund houses DAFs for donors interested in creating systemic social change throughout the Americas.

•          Other: Other public charities, like universities and hospitals establish Donor Advised funds within the walls of their respective organizations, with the mission of advancing their own charitable missions.