One of the hottest topics in charitable giving these days is the Donor-Advised Fund, and it’s easy to see why! According to the 2017 Donor-Advised Fund Report by the National Philanthropic Trust, assets under management in Donor-Advised Funds reached a record $85 billion in 2016, a 9.7 percent increase over the previous year. Donor-Advised Funds are the fastest-growing giving vehicle in the U.S. and account for 8.3 percent of all individual giving, according to Giving USA.
What is a Donor-Advised Fund?
A Donor-Advised Fund (DAF) is a charitable giving vehicle that manages charitable contributions on behalf of individuals, families, and organizations. The DAF is managed by a public charity that invests the assets, manages the returns, and distributes funds to other charitable organizations. Donors advise the fund manager on distribution decisions. Examples of fund managers, also known as DAF sponsors, include financial institutions and local community foundations.
Advantages of a Donor-Advised Fund
As we’ve discussed previously, donors who make larger charitable contributions may be able to benefit from increased tax deductions under this year’s new tax plan. Donor-Advised Funds allow donors to make contributions (and qualify for income tax deductions) immediately, even when the funds are not used for charitable purposes until some point in the future. In other cases, donors use a DAF to avoid capital gains taxes when disposing of appreciated assets. Donors who wish to make completely anonymous contributions also find DAFs to be a reliable method for doing so.
Considerations for Using a Donor-Advised Fund
Even though Donor-Advised Funds have been around for many years, they still remain very loosely regulated, and their use raises some concerns both for donors and for charities.
In most cases, donors choose to utilize a DAF so they can control their charitable contributions. In reality, though, those assets belong to the DAF sponsor once they are transferred. This is not usually cause for panic! A reputable DAF sponsor will accept the advice of the donor and make charitable grants according to the donor’s wishes. Choose your DAF sponsor carefully though! In the New York Review of Books in 2016, philanthropic experts Lewis Cullman and Ray Madoff described how, in one case, a DAF sponsor went bankrupt and the donated funds were seized to pay its creditors. In another case, a DAF sponsor used the donated funds to pay employee salaries and reimburse the costs of litigation when a dissatisfied donor sued. In both cases, courts ruled against donors and upheld the sponsors’ right to fully control and dispose of the DAF assets.
Another concern for donors is uncertainty about what happens to DAF assets if the donor unexpectedly dies or becomes incapacitated. Depending on the DAF sponsor’s policies, the donor may or may not be able to name a person to take over for the donor and recommend charitable grants—and even if it is possible to name a successor, it may require additional planning beyond typical estate planning arrangements. Donors who are considering a DAF should make sure to account for these unforeseen circumstances and choose their DAF sponsor accordingly.
Plan International USA gratefully accepts gifts from Donor-Advised Funds. However, Donor-Advised Funds create uncertainty for charities as well. Gifts received from DAFs typically come anonymously, whether the donor requested anonymity or not. This makes it difficult to connect the gift with the appropriate donor and that donor’s philanthropic goals. For example, if you sponsor two children and utilize your DAF to send your annual sponsorship contribution, we will not know that the check that arrives is intended to continue your child sponsorships unless we hear from you separately. We want to make sure your contributions do the work you intend them to do, so if you are going to make a contribution via a DAF, you can use this form as a guide to help improve your experience.
Above all, donors should think carefully about whether a Donor-Advised Fund actually provides them with additional benefits. Most of the benefits cited by donors for utilizing a DAF can actually be accomplished by simply donating directly to a charitable organization like Plan. The difference is that DAF sponsors charge management and investment fees that typically amount to an additional 1-2 percent of the DAF’s value each year. These fees can be avoided by working with your philanthropic advisor to structure your gifts in the way that meets your needs and accomplishes your charitable objectives. If you would like to speak to an adviser at Plan, reach out to me. I’ll be happy to connect you to the right person.