Donor Advised Funds (DAFs)
Q. How does a DAF work?
A. A DAF is a unique sort of giving vehicle typically managed by a DAF sponsor—a community foundation or the charitable arm of an investment fund like Fidelity or Schwab. A DAF functions as a charitable investment account, with the sponsor making gifts from the DAF based on the donor’s requests. Donors get a charitable tax deduction when they give to a DAF; in exchange, they relinquish aspects of control of the donated funds to the sponsoring institution. For example, the DAF sponsor typically manages the investment of the assets in the DAF, and a DAF holder cannot make a grant from the DAF but rather can recommend a grant, with the sponsor having approval authority.
Typically a DAF sponsor would only decline to make a grant if it does not comply with IRS regulations—for example, the grantee is not a qualified 501(c)3 organization, or the holder wants to use the DAF to pay for their child’s college tuition, or if the gift is inconsistent with the sponsor’s announced policies—for example, prohibiting grants to hate groups.
Q. Can I withdraw funds from a DAF if I want to use them to support political campaigns or if I just need them for personal expenses?
A. No, you cannot. Your DAF contributions and any income earned from them are irrevocably committed to charitable purposes. If you have any doubts about how much to allocate to your DAF and how much to keep for other expenses, keep in mind that you can add to your DAF anytime you wish.
Q. What if the sponsor doesn’t follow my advice?
A. Although you cannot withdraw the funds for your own use, you can transfer funds to another DAF sponsor.
Q. Do I receive income from a DAF?
A. No, once you place funds in a DAF, any income earned on them must eventually be given to charitable organizations.
Q. What are the tax implications of giving to a DAF?
A. The tax implications are the same as giving to any 501(c)(3) public charity, as described above. Because you can contribute very large amounts to a DAF now without committing to particular organizations, it can provide excellent tax benefits especially in the wake of a wealth event.
Q. Do DAFs require a minimum contribution and minimum size of gift?
A. DAFs usually have an initial minimum establishment requirement, often between $5,000 and $25,000. With most DAFs, you can recommend grants as small as $50 and as large as you wish, typically with no additional charge per grant.
Q. How much do DAFs charge for their services?
A. Most DAFs charge an administrative fee based on the amount in your account; usually the fee is a higher percentage when the account is small and declines as the DAF balance increases.
Q. Is there a minimum annual payout from a DAF?
A. While some DAF sponsors require a small minimum annual payout (e.g., $500), many do not. Some do not permit funds to be dormant for more than a couple of years. There has been criticism of some DAF holders for being too slow to distribute their funds to operating charities. On the one hand, the average payout from DAFs is about 20 percent[i]—well above the 5 percent payout required of private foundations. On the other hand, many dollars for which donors have received tax deductions are sitting at length in DAFs rather than going to charities. Your decision to give now or postpone giving to a later time depends on at least two factors:
- The first is the nature of the issues you’re addressing with your charitable dollars. If the social or environmental problems you’re concerned with are growing faster than your DAF funds, that’s a good reason to give sooner rather than later. But you may wish to support perennial causes, such as education and the arts, and have no particular reason to prefer today’s beneficiaries over future ones.
- The second is when you feel that you can devote adequate time to charitable giving. One donor may treat his startup’s IPO as an opportunity to take a break from business and focus on philanthropy. Another may get right back into the fray and wait until she or family members have time to consider how to use their charitable dollars most effectively.
Q. Can I engage my children or grandchildren in my DAF?
A. Yes, you can involve your children as advisors to a DAF and even allow them to continue to advise gifts after your death. Nothing in the IRS regulations prohibit a DAF from being perpetual through the appointment of successor advisors—though some DAF sponsors may impose their own limitations.
Q. Can a DAF sponsor help find and vet charities in my focus areas?
A. DAFs hosted by many community foundations have well-informed staff who can advise you about charities relevant to your focus areas. Just as with direct giving, however, you may have to rely on your own resources to find and vet effective charities in your focus areas.
Q. Can I make anonymous gifts through a DAF?
A. Yes. If you wish, a gift from a DAF can be presented to the grantee with only the name of the DAF sponsor and therefore be anonymous even to the organization receiving the gift. Alternatively, based on the DAF holder’s wishes, the DAF sponsor can share the name of the DAF holder with the grantee but advise them not to make it public.