If you are charitably inclined and have made the decision to establish a donor-advised fund (DAF), you are not alone. DAFs have become a popular way for more than 238,000 Americans to support the charitable causes they care about1.
A DAF is a charitable giving vehicle sponsored by a public charity. A DAF lets you make an irrevocable contribution to the public charity sponsoring the DAF and claim an immediate tax deduction. You can then recommend grants to IRS-qualified charities whenever it’s convenient for you. Unlike private foundations, there are no time-consuming administrative tasks to manage. You simply donate assets and let them grow tax-free until you’re ready to make a grant recommendation.
You can establish a DAF in your own name or in your family’s name. Some DAF sponsors also allow you to appoint successors to continue your family’s legacy of philanthropic giving. A DAF is also a charitable giving vehicle that allows you to donate to charities anonymously.
If these features appeal to you and you want to set up a DAF, you first need to do your homework to ensure that the public charity that sponsors the DAF is a good fit for your particular needs. Below is an overview of the common types of DAF sponsors.
Community foundations and local faith-based foundations were the first public charities to sponsor DAFs. These organizations typically only allow grant recommendations to local or regional charities. There were more than 608 community foundations with DAF programs in 2015, representing charitable assets of more than $27 billion2.
If you plan to support a large national or international charity, a DAF with a community foundation may not be the right choice. But if you do intend to focus only on local or regional charities, community foundations typically have deep knowledge of the local charitable landscape and can provide recommendations tailored to your charitable goals. Due to their smaller size, charitable contribution minimums at DAFs sponsored by community foundations may be higher than with other types of DAF sponsors.
Affinity group and educational foundations
Affinity Group DAF sponsors typically allow you to recommend grants that can make an impact beyond your local area. In fact, many affinity groups support national and international causes such as natural disaster recovery, literacy, or hunger relief. For example, Yale University’s Global Health Initiative provides research support for health-related issues that makes an impact far beyond the borders of Connecticut. Keep in mind, however, that DAFs sponsored by colleges and universities may require you to designate a portion of your grant recommendations to initiatives that are directly related to the school’s on-campus programs.
National DAF sponsors
The third, and largest, type of DAF sponsors are those that sponsor national DAF programs, such as Fidelity Charitable, Schwab Charitable, and Vanguard Charitable Endowment Program. Other national DAF sponsors include National Philanthropic Trust and the American Endowment Foundation.
National DAF sponsors have attracted billions of dollars in donations, due in part to their ability to offer charitable planning to a broad range of donors at a relatively low cost, some have an initial charitable contribution minimum as low as $5,000, and low investment management and administrative fees.
The national DAF sponsors generally accept donations of cash and appreciated securities, as well as non-publicly traded assets such as real estate, limited partnership interests, and private company stock. This has made them a popular choice for donors. For example, contributions to Fidelity Charitable® totaled $4.6 billion in 2015 alone3.
Factors to consider when choosing a DAF sponsor
You can choose from a wide variety of DAF sponsors, each with its own particular niche. For example, some sponsors focus on local and regional issues, while others allow you to donate to national and international charities. Before establishing a DAF account, consider these factors:
- Minimum Contribution Requirements. Pick a sponsor that matches your charitable giving budget. Minimums at some national DAFs start at $5,000, while community foundations and affinity organizations may have minimums that range from $25,000 to $100,000 or more.
- Investment Options. National DAFs typically offer a variety of mutual fund and ETF options. They may also allow the DAF to invest in individual securities. In some cases, community foundations and smaller DAF sponsors may offer a more limited menu of investment options.
- Investment Management and Administrative Fees. Due to economies of scale, the larger national DAF sponsors typically offer lower fees than their counterparts at community foundations do.
- Portability. If you think there is a possibility you may someday want to transfer your DAF to another sponsor, be sure to confirm whether your sponsor allows it.
- Grant Making Processing Oversight. A key attribute of DAFs is that your charitable donation is irrevocable. While you can recommend grants, the sponsor has the final say. Generally, assuming you are recommending grants to qualified 501(c)(3) charities, DAF sponsors tend to make the grants as long as it is for a charitable purpose. However, you may want to inquire about the DAF sponsor’s minimums for grant recommendations, as the amounts can vary.