In the sector of charitable giving a new trend is emerging. This trend pools together the resources of the middle income class and has become for the second largest recipient of charitable funds in the United States behind only the Red Cross. Since the mid 1990's Donor Advised Funds have flourished into a dominant force in philanthropy and continue to grow as more money managers and investors become aware of their simplicity, flexibility, and low cost.
Donor Advised Funds (DAFs) are just that, individuals give money or assets to a charity or sponsorship organization who sets up a Donor Advised Fund account. That account is then invested in options offered by the specific organization that the donor has chosen. From this account, donors can make grants of $50 or more to specific organizations or causes that are important to them. While this seems basic, there are many choices to be made in creating, investing, and continuing this charitable account. But first, I will explain WHY you should consider setting up a DAF if you're looking to make charitable donations.
The first major advantage DAFs have over private foundations is the simplicity of setting up the fund. For donor advised funds, a simple agreement between the sponsoring organization and the donor is all that is needed to create the account. This method is much easier than applying for IRS tax-exempt status, filing all required tax reports, and maintaining compliance with all the rules that apply to charitable foundations.
Another positive aspect of the Donor Advised Fund is the low cost to create it. Needing as little as a $5,000 in initial contributions those who wish to donate even on a modest scale can get involved in charitable giving. Further, grants to individual charities can be made in increments of as little as $50.
Flexibility is the foundation of the Donor Advised Fund. When choosing a specific plan with a sponsorship organization there are many various investment options to select from. The plans range from broad investment choices, where donors are allowed to choose their own investment portfolios- to basic mutual fund choices offered by the sponsor, and finally to the option of pooling together mutual funds to invest. Only rarely are donors offered no investment choice at all but in these situations the sponsoring organization chooses and manages the investment options for the donor.
In the past most donors have contributed through private foundations often set up by the individuals themselves or through a third party. There are many benefits in doing so: up to 30% of cash contributions can be deducted and 20% of all other assets can be written off as well.
However, the up and coming DAF has joined the race and offers even more bang for your buck as well as less hassle than is involved in giving through private foundations. Offering a write off of 50% of initial cash contributions and a 30% write off of other assets contributed, the Donor Advised Fund trumps the private foundation in terms of tax breaks, as well as potentially reducing estate taxes since more of your assets are donated to the fund.