Donor-Advised Funds

Donor-Advised Funds

Donor-advised funds allow donors to maximize their giving by making investments into an account that helps them grow their donations. Earnings on their investments are tax free, and the donor can then recommend grants to public charities of their choice. 

What is a donor-advised fund?

It’s always great when a donor makes a gift, but if an organization could get more from the donor without the donor having to increase their donations, then both the donor and the organization would benefit. 

A donor-advised fund is one such tax-effective way to allow donors to maximize their donations to a nonprofit or organization while maintaining flexibility in how, when, and where they give.

How do donor-advised funds work?

A donor-advised fund works similarly to an investment account for charitable solicitation or donations. Once a donor sets up an account and adds money, though, it’s irrevocable. It can no longer go back to a private individual. 

The process to set up a fund is fairly simple:

Step 1: The donor opens a tax-deductible account with a public charity.

The first step of the donor-advised fund process is for the donor to open an account with a public charity that hosts donor-advised fund accounts. 

There are many public charities that help donors create these donor-advised funds. Some examples include:

As soon as the donor sets up their donor-advised fund, they are usually eligible to take a tax deduction immediately. The donation doesn’t just have to be cash. Donations can include any of the following:

  • Stock
  • Cryptocurrencies
  • Business interests
  • Real estate

Donor-advised funds can be opened by individuals, groups, companies, etc.; often, the funding entity’s initial investment must be at least $10,000.

Step 2: The donor makes investments into their account and watches them grow.

Depending on the public charity that they created the donor-advised fund through, the donor will now be able to invest in many options that the organization offers. Once the assets are invested, any earnings that the fund makes will be tax free, which means there is more to give to the charity or charities of the donor’s choice. 

Step 3: The donor can now recommend grants to charitable organizations.

Once the donor-advised fund is set up and funded, the donor can then make recommendations for grants to charitable organizations they want to fund with their accounts. While there are limits on how or if grants from a donor-advised fund can be made to a private foundation, most public charities operating through a 501(c)(3) are eligible to receive grants.       

How can donors control their donor-advised fund accounts? 

One of the great features of a donor-advised fund is its flexibility. Once a donor has created an account, they usually have a lot of room to customize it.

The idea behind donor-advised funds is to maximize giving while allowing donors to structure their giving in ways that are best for them. A donor-advised fund can often be created with other family members or friends with everyone’s roles assigned. It can also be set up for legacy giving with beneficiaries assigned for end-of-life donations. Many also let the donor name the account, which allows them to name who they want acknowledged for the donation.   

The more customizable and flexible the plan, the more freedom the donor will have to make the most out of their giving.

What are the benefits of a donor-advised fund?

There are many benefits for donors and organizations when it comes to donor-advised funds. For starters, the biggest benefit is that the donor is able to turn a donation into something larger without needing to give more. However, that’s not the only benefit. 

Here are some more potential benefits of donor-advised funds:

  • Tax incentives from the first investment
  • Tax-free earnings on investments
  • Quick and secure giving
  • Flexibility in how the funds are used and how the donor is acknowledged 
  • Legacy giving

What are the drawbacks to a donor-advised fund? 

Perhaps the biggest potential drawback to a donor-advised fund is that it’s usually limited to public charities. For a donor wanting to give to a private organization or individual, such as through the creation of a scholarship, a private foundation may be a better, if less tax-friendly, alternative to a donor-advised fund. 

Additionally, there are often fees associated with a donor-advised fund. While ideally the earnings from investments would more than make up for those fees, if they don’t, the donor could actually end up giving less than they planned with a one-time donation. 

Bottom line

A donor-advised fund allows donors to invest their donations in order to increase the funds they can give to organizations of their choosing.

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