A Donor-advised fund generally referred to as DAF is a fund that is set up privately and administered by a third-party entity for the sole purpose of supporting a charitable course. The fund is set up and administered on behalf of the private company, individual or family.
A donor advised fund is akin to a benevolent venture account. They are set up by private organizations or individuals to finance charitable courses that are of importance to the organizations or individuals who set them up. The charities to which the DAF’s can offer support must however be registered and certified by the Internal Revenue Service ensuring that they conform to the federal tax laws.
The third-party entities charged with the responsibility of managing the funds are charitable establishments, usually referred to as sponsoring organizations. The donors then direct the sponsoring organizations on which causes to support and the value of the donations they would like to give.
The process of setting up a DAF
- Make a tax-deductible donation.
Donate cash, non-publicly traded stocks, assets or even cryptocurrency to your preferred sponsoring organization to set up the fund. An immediate tax deduction applies to the funds donated. The amount given to the DAF is non-refundable as this is a binding pledge towards the support of a charity.
- Investing the donor-advised fund
Once set-up, the monies in the DAF can then be invested by the sponsoring organizations. As the investments do not attract any additional tax, the returns on investment can be attractive. It gives the donors a chance to make their donation grow before they can decide which charities they intend to support.
- Sponsor the charities preferred
The donors can finally advise on which charities they intend to sponsor. They give directions to the sponsoring organization, which then activates the process of funds transfer.
The donations need not be a one-off payout. As such, the donor will give details on the distribution of the grant.
Advantages of DAF’s
- Easy to set up
As the responsibility of the management of the fund falls to the sponsoring organizations, DAF’s are easy to set up.
- Cheap to initiate
The best donor-advised funds no substantial legal and accounting charges incurred when setting up. It is because the funds are for charity.
It is the primary reason behind the increasing popularity of DAF.
- Immediate tax deductions.
As they are donations to charity, DAF’s attract favourable tax rates from the Internal Revenue Service. They get up to 60% tax relief on cash donations and 30% on assets and stocks.
Additionally, the assets in the DAF can now appreciate tax-free. The returns on investment of funds held in a DAF also do not attract tax cuts.
While the above are the significant advantages of DAF’s, they also give flexibility to the donors. The donors have flexibility in terms of the timing of the donations. The donors can, therefore take their time in making the decisions as to which charities they would like to support. What’s more, DAF’s give donors an option of anonymity or recognition.