When it comes to philanthropy, most people think of wealthy individuals such as Bill Gates or Oprah, who can donate massive amounts of funding to charities of their choosing. Or perhaps individuals who have set up their own foundations to support causes of their choosing on a long-term basis. However, those aren’t the only types of philanthropists that exist. Say you’re interested in a particular cause, but you aren’t rich and don’t have a large sum to donate to a charity. You could simply give what you can afford to give as a one-time donation, or you could turn to a donor-advised fund. A donor-advised fund, or DAF, is a tax-free means of saving up money or other assets for the purpose of charitable donation. Donor-advised funds have rapidly gained popularity in the US as an easy and tax-free means of philanthropy, but there are a few things to consider before diving in.
Benefits of Donor-Advised Funds
Proponents of DAFs believe that they are a way to democratize giving. You don’t have to be rich to invest in a donor-advised fund. Though minimum donations vary, some are as low as $5,000 for an initial contribution. Since not everyone has their own charitable foundation or large sums of money, these funds allow small-scale donors to place donations into an account, give it time to mature, and then release the funds over time.
Donor-advised funds allow individuals to invest and grow their contributions in a variety of exchange-traded funds, mutual funds, or cash accounts. There are even DAFs that provide socially responsible options for investing. These allow you to invest in shares of companies that are committed to positive social impact or environmentally sustainable policies. According to the vice president of Fidelity Charitable, Amy Pirozzolo, “There’s increasing interest in impact investing, as investors realize that their money can work for good causes, even before they make a grant.”
With donor-advised funds, contributions can be in the form of non-cash assets. You can donate appreciated assets such as stocks, bonds, private equity, pre-IPO shares, real estate, life insurance, and more. When it comes to donating to smaller charitable organizations, such as the local food pantry, that may not have the resources needed to manage this type of donation; a DAF makes it possible. Appreciated assets given to a DAF can be liquidated and the funds sent to the charity without a complicated hassle.
The ease of record-keeping is another benefit of DAFs. Throughout the year, as you donate to various charities, the DAF tracks your contributions and provides you a single tax document when it comes time to file. This can eliminate the hassle of record keeping. Those who still itemize on their taxes may be able to receive a tax deduction for their donations to donor-advised funds; however, in 2019, changing tax laws are making it more challenging to qualify for deductions based on charitable giving. The standard deduction for singles is $12,200, and a couple filing jointly is $24,400; so unless you’re making a sizable contribution, it may not be worth itemizing.
These are just a few of the benefits of donor-advised funds. As with most things, there are downsides to donor-advised funds. It is the responsibility of every philanthropist to research the specifics of any given donor-advised fund they are considering.