Learn about the basics and potential considerations of adding DAFs to your giving plan.
Are you looking for ways to streamline your approach to pursuing your philanthropic goals? Donor-advised funds, also known as DAFs, can offer a middle ground between participating in simple “checkbook charity” and starting your own foundation.
Donor-advised funds are often considered smaller and nimbler cousins of private foundations. They offer many of the benefits of foundations, including the ability to:
- Involve multiple members of the family, friends, or other advisors
- Research potential recipients
- Recommend how funds are distributed
DAFs, being public charities, typically offer greater tax deductibility options and require less legal and financial paperwork than private foundations. For example, they help reduce administrative responsibilities for the donor, including filing annual tax returns, adhering to regulatory requirements, and paying excise taxes.
How do you contribute to a donor-advised fund?
Donor-advised funds allow you to contribute cash, stock, real estate, or other assets such as business interests. These contributions can be bunched to combine multiple calendar years’ worth of gifts into one year, which may offer tax benefits if you are close to your standard deduction limit.
To set up a donor-advised fund, you only need to complete an application with a fund sponsor. A fund sponsor can be a national or community foundation, an educational institution, or a religious institution. You or your designee may then recommend grants to qualified charities of your choice.
Rather than keeping track of gift receipts from multiple charities, a donor-advised fund can serve as your single source for tax receipts and grant recipient information.
With DAFs, families can spend more of their time focusing on how to be strategic with their philanthropy rather than administrative tasks.— Stephanie C. Buckley, Head of Trust Philanthropic Services
Generational shifts mean big changes
Donor-advised funds may be an attractive option for the next generation of donors. “Younger generations want to engage in family philanthropy but find the formal structure and requirements of a foundation burdensome,” says Stephanie C. Buckley, head of trust philanthropic services within Wells Fargo Wealth & Investment Management. “With DAFs, families can spend more of their time focusing on how to be strategic with their philanthropy rather than administrative tasks. In fact, we are witnessing the second or third generation converting existing foundations to DAFs more frequently than ever before.”
There can be other positives as well. No board meetings and much less paperwork for donors can allow more time to focus on the engaging parts of philanthropy, like meeting grantees and focusing on impact. DAFs also provide many families with teachable moments, introducing their children to financial literacy and philanthropy at the same time.
More potential considerations for donors and recipients
Donor-advised funds are gaining popularity for other reasons as well, including:
Anonymity: When you give gifts to a charity through a private foundation, those gifts become public record through IRS Form 990-PF. In contrast, you can choose to make your gifts from a donor-advised fund anonymous.
Recurring grants: Many donor-advised funds have recurring grant options (as well as a number of other online functionalities), to help you optimize your giving to align with your overall charitable strategy
Non-cash gifts: Appreciated stock, real estate, or collectibles may be easier to handle for the giver and the recipient through a donor-advised fund. This can even hold true for highly liquid yet non-cash assets like cryptocurrency.
“Many donors, as part of their overall business transition plan, opt to include a gift of a portion of their business to a DAF,” says Buckley. “This allows them to fulfill both their business transition and their charitable planning goals.”
While many charities may be unable or unwilling to take non-cash gifts given the level of complexity, DAFs serve an important role to help charities benefit from the wealth accumulated in these illiquid assets.
The potential downside
Of course, there are some potential downsides to keep in mind when considering a donor-advised fund, including:
Irrevocable donations: After contribution, funds can only be granted to qualified charities and cannot be used for any other purpose. Also, donors cannot receive any benefit from grants made through a DAF.
Underlying costs/fees: There are often ongoing and investment management fees. Other ancillary fees may apply.
Grant-making restrictions: DAF grants can be made only to certain eligible 501(c)3 organizations recognized as public charities by the IRS. In addition, when the DAF makes a grant, the DAF advisor cannot accept goods or services, such as tickets to a gala.
The sponsoring organizations maintaining the fund have ultimate control over how the assets in the fund accounts are invested and distributed. Donor-advised funds donors do not receive investment returns. The amount ultimately available to the donor to make grant recommendations may be more or less than the donor contributions to the donor-advised fund. While annual giving is encouraged, the donor-advised fund should be viewed as a long-term philanthropic program. Tax benefits depend upon your individual circumstances. You should consult your tax advisor. While the operations of the donor-advised fund and pooled income funds are regulated by the Internal Revenue Service, they are not guaranteed or insured by the United States or any of its agencies or instrumentalities. Contributions are not insured by the FDIC and are not deposits or other obligations of, or guaranteed by, any depository institution. Donor-advised funds are not registered under federal securities laws, pursuant to exemptions for charitable organizations.
Your relationship team can help
Given their flexibility, tax treatment, and relative ease of use, there are clear reasons why donor-advised funds are growing in popularity. But there are also grant-making restrictions and associated fees to understand. Before you develop a strategic plan for your family’s giving, we suggest you talk to your team of advisors, who can help you explore the most appropriate approach for your particular objectives.
Source: I.R.C. Section 170
Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.
Wells Fargo Bank, N.A., offers a donor-advised fund (DAF) through National Philanthropic Trust, a tax-exempt qualified public charity. In this offering, National Philanthropic Trust is the charitable sponsor of the DAF and Wells Fargo manages the DAF investments. Contributions to any DAF are irrevocable and the charity retains exclusive legal control over the assets.
As required by law, all contributions to a donor-advised fund are under the exclusive legal control of the sponsoring public charity — in this case, National Philanthropic Trust. Neither Wells Fargo & Company and its affiliates nor National Philanthropic Trust provide legal advice. You should consult with your own tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you will depend on the specific facts of your situation at the time your taxes are prepared.
