Donor-advised funds (DAFs) continue to be one of the country’s fastest growing giving vehicles. Donors using DAFs find the accounts lead to more strategic charitable giving, while still allowing them to maximize tax deductions. Yet while DAF use may be increasing quickly, many donors still don’t understand how DAF accounts function, and some fall prey to the many misconceptions surrounding DAF accounts.
While a donor-advised fund account is not right for all donors, the decision to use or not use a DAF account to facilitate your charitable giving should be based on the full facts. Over the next few weeks, we’ll clear up six DAF myths and misconceptions.
#1 – Donor-advised funds are only for the very wealthy
This may be the biggest myth surrounding donor-advised funds. When consulting financial and tax advisors about charitable giving and philanthropy, discussions of DAF accounts are often lumped in with discussions concerning private foundations, charitable lead trusts, and other giving vehicles. These vehicles, because of their associated administrative costs, are only practical when funded with assets valued in the hundreds of thousands, if not millions, of dollars.
Not so in the case of a donor-advised account. So many individuals hearing such discussions may incorrectly assume donor-advised funds are out of their reach financially. The truth is that DAFs democratize philanthropy.
Donor-advised funds put into the reach of a large segment of the population a sophisticated philanthropic giving vehicle that allow charitably minded individuals to move from “checkbook” giving to thoughtful, strategic charitable giving. Unlike in the case of private foundations and many other charitable vehicles, a donor-advised account is affordable for many donors. Most donor-advised fund providers require an initial contribution of between only $2,500 and $25,000. While some DAF providers require you to maintain a minimum account balance, many do not. These lower cost requirements put donor-advised accounts within reach of most charitable givers.
While DAF accounts open the world of strategic giving to many more individuals, higher-capacity givers can and do enjoy the benefits of a donor-advised funds. Indeed, in many respects, DAF accounts outweigh the benefits of other giving vehicles. Donor-advised accounts are simpler for a donor to manage than a private foundation, with no reporting requirements or board meetings imposed upon the donor (DAF providers take care of those tedious details). Even better, DAF accounts offer significant tax deductions that are more generous than those provided for gifts to a private foundation.
With the easy setup and lower start-up costs, most charitable givers can enjoy the benefits of a donor-advised fund.
#2 – Donor-advised funds don’t provide an opportunity to involve family in giving
For some, establishing a private foundation provides a way for an entire family to discuss and manage its charitable goals. Many turn to foundations to assist with this, seeing the board structure required by foundations as an easy method for involving future generations in philanthropy.
Donor-advised accounts, however, can provide the same thing. A DonorsTrust client in Illinois told us how, each year, his family gets together to discuss their charitable giving. They use the reports we provide to review funds available for charitable giving, examine past giving, and then discuss future giving. Once the family reviews the donor-advised account reports and agrees on future gifts and charitable goals, they simply send a list of grants they wish to make, as well as send a request for adjustments to how their charitable dollars are allocated among the various investment pools we maintain.
The formal board structure may be missing, but those who want to engage their families in a broader philanthropic discussion can easily do that through a donor-advised fund. Indeed, there is no reason you cannot go further. Consider establishing a written structure for governing your donor-advised account. You can create documents similar those you would use for running a private foundation. Involve your children with drawing up documents to govern your charitable giving, and run meetings in accordance with a governance plan, similar to the same process you would use to run a board of directors meeting for a private foundation.