Donor-advised funds (DAFs) have become one of the hottest tools in philanthropy over the last few years. While the funds have been around for decades, the 1990s ushered in an increasing interest in DAFs as financial planning and planned giving tools.
Today, they’re growing rapidly as vehicles for donors to make charitable contributions and gain tax deductions, while maintaining the ability to distribute those dollars to multiple charities in the future.
What makes a donor-advised fund so attractive? Simply put, it allows donors the ability to time their charitable contributions to maximize tax savings. A DAF gives donors time to consider where they want to invest those dollars over the coming months and years.
Here’s How it Works. The Donor:
- Establish a DAF with a public charity, like a community foundation, or a charitable fund (Fidelity Charitable or the National Philanthropic Trust, for example)
- Make a charitable contribution to fund the account (some funds require as little as $5,000 while others require a minimum of $25,000)
- Receive a full tax deduction (up to 50% of AGI) in the year the contribution is made
- Advise the public charity administering the DAF on where and how the funds should be distributed
For some, DAFs are a great alternative to setting up a charitable remainder trust or family foundation, and adoption rates prove their growing popularity. According to the National Philanthropic Trust (NPT), between 2013 and 2014, DAFs grew by 8.8% while charitable remainder unitrusts declined by 1.7% and charitable remainder annuity trusts declined by 7.7%. During the same period, private foundations grew by just 3%.
The amount contributed to DAFs since 2010 has also grown steadily in real dollars, as well as the percentage of giving by individuals. According to Giving USA, individuals contributed $211.77 billion to charity in 2010, and based on NPT data, $9.35 billion (4.4%) was given to DAFs. Just four years later, Giving USA reported that individuals gave $258.51 billion to charity in 2014, and NPT data show $19.66 billion (7.6%) was given to DAFs.
NPT also reports that, as of 2014 year-end, there were 238,293 DAFs representing $70.7 billion in assets. That’s up from 184,364 DAFs in 2010 representing $33.6 billion in assets.
DAFs are not without detractors, though. There is a growing debate about the amount of money sitting in DAFs that has yet to be distributed by the donor advisor. NPT data indicates that the amount granted from DAFs annually has only increased by $5 billion from 2010 to 2014 while the amount contributed to DAFs annually during the same period increased by more than $10 billion.
Here’s a helpful look at the data:
While the amount distributed from DAFs in 2014 actually eclipsed the amount contributed to DAFs in 2010, there is an increasing delta between the amount distributed and the remaining assets. In 2010, there was a $24.6 billion difference between remaining assets and amount distributed, whereas there was a $58.21 difference between the two in 2014. In addition, distributions represented 21.4% of DAF assets in 2010 compared to 17.6 percent of DAF assets in 2014.
Some legislators and giving experts are advocating for a sunset provision or requirement on DAFs. The aim would be to ensure that funds contributed to a DAF go to a charitable cause in a reasonable amount of time after they are made. As assets in DAFs continue to grow, so will the scrutiny—fundraisers are well-advised to stay tuned into philanthropy’s latest hot-button issue.
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