Why Donor-Advised Funds Continue to Gain Momentum: 5 Key Advantages to Share with Your Clients
One tool that continues to gain momentum in the philanthropic world is the Donor Advised Fund (DAF). A staggering $230 billion is already set aside for giving in DAFs, likely because DAFs are accessible and flexible, providing a range of benefits for clients across varying financial capacities. In the past, donors with larger giving capacities would often start private foundations. Private foundations were seen as the go-to vehicle for structured philanthropy, offering control and prestige. However, the complexity, administrative burden, and high costs associated with running a private foundation has made it impractical for many.
Today, donor-advised funds (DAFs) have emerged as a much more accessible and user-friendly alternative that provides many of the same benefits as private foundations. DAFs offer donors the ability to contribute to a fund, receive an immediate tax deduction, and then distribute grants to their chosen charities over time. This approach is just as efficient and effective as a private foundation but without the high costs, required administrative oversight, or long-term commitment. In recent years, many DAF sponsors have lowered their minimum amount to create a fund to as low as $1,000 or eliminated their minimum amount altogether. The result is a highly flexible and cost-effective option that caters to both large-scale philanthropists and everyday donors who want to make a meaningful impact over time.
One of the most compelling reasons to open and contribute to a DAF is the immediate tax benefit your clients can receive. But the simplicity of a DAF shouldn’t be minimized; the ease of giving through a DAF allows donors to focus on the joy of giving without the added burden of administrative worries.
In our roles as advisors, we know the unique benefits that DAFs can offer to clients, but 83% of people remain unaware of DAFs. The first-ever national DAF Day will be on October 10, 2024. This day will highlight the incredible impact that donor advised funds can have, and raise awareness about the flexible, efficient, and strategic giving they offer to donors. Now is a great opportunity to start conversations with your clients about the advantages of a donor advised fund. Here are five unique elements to DAFs to discuss.
1. Ease of Use and Administration
Managing charitable contributions can sometimes be a cumbersome process, especially if clients are supporting multiple causes. DAFs simplify the process by centralizing giving into a single account. The sponsoring organization handles the administrative details, including recordkeeping and the distribution of grants to qualified charities. The ease of administration makes DAFs a practical alternative to more complex giving structures, like private foundations.
Why this matters for your clients: By using a DAF, clients can focus on the joy of giving rather than worrying about paperwork or logistical concerns, like tracking down multiple tax receipts from multiple charitable organizations. This simplicity is ideal for those who wish to engage in charitable giving without the time commitment that comes with managing a private foundation or other philanthropic vehicles.
2. Investment Growth and Impact
DAFs aren’t just a place for charitable dollars; they’re also a way for giving capacity to grow. Once contributed, the funds in a DAF can be invested according to your clients’ preferences, often with options for growth-focused or socially responsible investments. Over time, this can increase the value of the DAF, allowing clients to give more than they initially contributed.
Why this matters for your clients: The potential for investment growth means that your clients can maximize their philanthropic impact. By growing their DAF, they can give more to the causes close to their hearts – whether their giving timeline is short-term or extends over several years or generations.
3. Flexibility in Grantmaking
One of the most valuable features of DAFs is the flexibility they provide in terms of grantmaking. Clients can contribute to a DAF today, and then take their time deciding which charities to support, distributing funds at their own pace. There are no requirements to disburse funds within a specific timeframe, offering a level of control not available with other direct giving options.
Why this matters for your clients: For those who want to take a strategic approach to their giving, this flexibility is invaluable. Clients can adjust their charitable priorities over time, respond to urgent needs (such as a natural disaster or public health crisis), and continue to support their favorite causes at their convenience. This makes DAFs an excellent tool for individuals who prefer a more hands-on, deliberate approach to philanthropy.
4. Privacy and Anonymity
DAFs offer clients the option to make grants anonymously if they wish. This feature is particularly useful for individuals who prefer to keep their giving private or who want to avoid being solicited by other organizations. When making anonymous grants, the DAF sponsor disburses the funds without revealing the donor’s identity, allowing clients to support causes discreetly.
Why this matters for your clients: For your clients who value their privacy and want discretion in their philanthropy, DAFs offer a way to give generously without attracting attention or revealing personal financial information.
5. Family Involvement
DAFs offer a wonderful opportunity for families to come together and make giving decisions. Families can decide how much involvement they want across generations and branches. Donors may name future generations as successor grant advisors, ensuring that their philanthropic legacy continues. For those wanting more autonomy or to avoid family conflicts, funding multiple DAF accounts (e.g., one for each child) might be a good solution.
Why this matters for your clients: For your clients who are passionate about creating their legacy and passing down philanthropic values, DAFs are a powerful way to involve the entire family in giving decisions. It provides an opportunity for clients to instill a culture of giving in younger generations while working together to support causes that align with the family’s values. This family-centered approach also allows for long-term planning and helps ensure the client’s charitable vision continues through future generations.
Donor advised funds offer a unique combination of tax benefits, ease of use, and flexibility – all of which make them an attractive option for clients looking to streamline their philanthropy while maximizing impact. Whether the goal is to make immediate donations or to leave a legacy that spans generations, DAFs provide a simple yet powerful tool to achieve those aims.
With DAF Day approaching on October 10, now is the perfect time to introduce your clients to the many benefits of donor advised funds, helping them make informed decisions that enhance both their philanthropic impact and financial planning strategy.
By Pamela D. Leonard, CAP®
