What is a donor advised fund (DAF)?
A donor advised fund, or DAF, is a flexible, tax-advantaged way to give to your favorite charities. A DAF acts like a charitable investment account. When you contribute cash, securities, or other assets to a DAF at a public charity, you can typically realize an immediate tax deduction. Those contributions can then be invested and grow tax free, and at a later time of your choosing, you can grant distributions to nearly any IRS-qualified charity.
A DAF can help maximize your charitable giving. DAFs are among the fastest-growing charitable giving methods in the US not only because of the tax benefits they offer, but because they also help make administering and tracking your donations easy on you.
Organizations like American Muslim Community Foundation (AMCF) enable the administration of the donor advised fund, while Saturna Capital and Amana Mutual Funds help with investing the contributions.
How does a donor advised fund work?
1. Make a tax-deductible donation
First, you establish a DAF with an organization like AMCF or another DAF provider and then donate cash, stocks, mutual funds, or other assets (including complex assets like real estate, cryptocurrency, or business interests). You realize an immediate tax deduction in the year the contribution is made. Please note that a contribution to a DAF is irrevocable – the funds or other assets cannot be returned to the donor or any other individual, or be used for any purpose other than being granted to qualified charities.
2. Your donation grows tax-free
Next, one of the true benefits of a DAF is that you can take your time choosing which charities to support; this allows your contribution to grow tax-free over time. Most DAF providers offer a variety of investment options and strategies to help your donations grow.
3. When the time is right, support your favorite charities
Finally, you can make grants from your DAF to nearly any IRS-qualified public charity – that is, a 501(c)(3) certified charity – including local food banks, homeless shelters, and religious institutions (your church or mosque). This can be done all at once, or over time – the choice is yours. Generally the DAF sponsor will provide consolidated reporting for you to make reporting your taxes and tracking your donations simpler and easier.
What are the benefits of a donor advised fund (DAF)?
1. DAFs allow you to give many different kinds of assets
Donating non-cash assets can sometimes be more tax-advantageous than giving cash, but for many charities, accepting non-cash assets can be more complex. DAFs can help simplify contributing non-cash assets. In some cases, it's possible to transfer mutual fund shares directly from your investment account to a DAF.
Assets generally accepted include:
- Cash
- Publicly traded securities or mutual fund shares
- Restricted stock
- Interests in private equity and hedge funds
- Certain complex assets, such as privately held C-corp and S-corp shares
- Cryptocurrency (Bitcoin, Ethereum, etc.)
2. DAFs can help you realize potential tax benefits
When you make a charitable donation to a DAF, you can realize an immediate tax deduction, the same as you would through donating to any other public charity. Some donations can have additional benefits.
Cash donations
With cash donations, generally you can deduct up to 60% of your adjusted gross income.
Long-term appreciated assets
Donating long-term appreciated securities (such as stocks or mutual fund shares) directly to a charity, as opposed to selling the shares and donating the proceeds, can help maximize both your tax deduction and the overall amount you can give to charity. These types of donations can provide two tax benefits:
Deduct income tax equal to the full fair market value of the shares, up to 30% of your adjusted gross income
Eliminate capital gains tax you might otherwise owe on shares held longer than a year
3. DAFs allow your invested donations to grow tax-free
You can control the investment strategy for your DAF, potentially growing the assets and providing a bigger gift to charity. Many DAF-sponsoring organizations also allow you to select a financial adviser to manage the investments.
4. DAFs can ease your recordkeeping burden
With a DAF, you don’t have to keep track of every gift acknowledgment from every charity you support. The DAF sponsor will provide you with a consolidated tax receipt showing your contributions and donations.
5. DAFs integrate with your legacy and estate planning
You can incorporate your DAF into your estate planning by making a bequest in your will to the DAF sponsor or by making the sponsor a beneficiary of a retirement plan, life insurance policy, or charitable trust. By leaving instructions with the DAF sponsor, you can support multiple charities with one bequest. These gifts can also help reduce or eliminate the estate tax burden for your heirs.
Many sponsoring organizations also enable you to create a succession plan for your DAF — allowing you to pass the remaining funds in your account on to your heirs or your favorite charities. Some programs allow you to break the fund up into multiple smaller funds to pass down to different successors. While sponsoring organizations handle succession differently, DAFs can be a valuable tool for estate planning.
What happens to my donor advised fund (DAF) after my death?
The simplest way to continue your giving legacy is to name an individual, a charity, or a combination of both as successors for your DAF. Generally, you can establish a succession plan when you first open a DAF.
If a successor is not named, then upon your death any remaining balance will be granted out in accordance with the charitable giving guidelines of the DAF sponsor.
How much does a donor advised (DAF) cost?
Prices for DAF administration can range from 0.20% to 1.00% (or more) annually. Typically, fees are based on the size of the account; the larger the account, the lower the annual percentage.
What is the difference between donor advised funds (DAFs) and private foundations?
Both DAFs and private foundations can help donors achieve their philanthropic goals. With their different structures, rules, and features, DAFs and private foundations each come with a unique set of advantages and limitations.
Donor advised funds (DAFs) generally are simpler to set up, have lower administrative costs, offer immediate tax benefits, and don't require donations in any given tax year. Instead of contending with the potentially onerous financial and legal requirements of maintaining a private foundation, many philanthropists opt instead for donor advised funds that bear their names.
Private foundations are separate legal entities, generally established by an individual, family, or corporation. Private foundations are subject to more stringent tax laws and regulations than DAFs and are responsible for their own tax filing and other recordkeeping. Private foundations can offer more administrative control over assets and donations, including the ability to make grants to organizations other than IRS-qualified, 501(c)(3) public charities.
Saturna Capital does not currently offer donor advised funds directly. In 2021, Saturna Capital and American Muslim Community Foundation signed a Memorandum of Understanding that covers joint marketing activities where AMCF and Saturna will join forces to improve shareowner education around investing and donor advised funds.