Donor-Advised Funds and Philanthropic Planning

If you’re considering creating a private foundation for your philanthropic efforts, a donor-advised fund might be a better choice. A donor-advised fund (DAF) is an account established at a sponsoring charity. You make irrevocable contributions of cash, securities, or other assets to the DAF and receive an immediate tax deduction. As the account advisor, you then make grants from the account to other operating non-profits, such as hospitals, schools, the Red Cross, etc. Approval of your grant is generally automatic as long as your designated charity is a 501(c)3 in good standing. And your DAF handles all the due diligence, tax filing, compliance, and administration, usually with much lower costs than a foundation.

There are plenty of DAFs to choose from. In addition to national funds administered by Fidelity, Schwab, Vanguard, and National Philanthropic Trust, there are local community foundations funds, including Northern Virginia, Alexandria, and Arlington, and national organizations such as the American Endowment Foundation.

I recently read an article by Ken Nopar, Principal of Nopar Consulting, a firm that works with wealth management firms and banks on charitable planning, that raises some important questions to ask before choosing a DAF. A few of Ken’s key questions include:

  • Can you manage the money inside the DAF and buy a wide array of investment alternatives?
  • Does the DAF provide resources to help you identify charities and plan your giving?
  • What types of assets can the DAF accept besides personal checks? (Many DAFs accept publicly traded stock, privately-held C- and S- company stock, real estate, life insurance, art and collections.)
  • Are there restrictions on the amount you can grant each year from your DAF? (Some DAFs are unrestricted. With donor-advised endowment funds often only 5% of the principal can be distributed annually.)
  • Can you leave the DAF to your heirs or others to manage?

If you have philanthropic goals, be sure to discuss them with your financial advisor.

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