Here are answers to your common questions about donor advised funds, a popular approach to charitable giving.
If you’re intrigued by the idea of investing in a donor advised fund (DAF), you’re not alone. The number of individual DAFs rose above 1 million in the U.S. for the first time in 2020, up from about 290,000 in 2016.1
So what are DAFs, why are they increasingly popular, and what should you consider if you’re looking into one? Keep reading for an introduction that will help answer these and other common questions about DAFs.
What are donor advised funds?
Donor advised funds are personal charitable giving accounts that offer you flexibility, accessibility and tax benefits for charitable giving.
Unlike one-time donations, the contributions made to DAFs are invested to grow over time while allowing you to direct grants to nonprofits at any time. They provide some of the advantages of a family foundation, but have a much lower point of entry and allow you to hand off administrative, investment management and fiduciary responsibilities to the DAF sponsor. In some cases, DAFs are hosted by community foundations like the Saint Paul & Minnesota Foundation.
Why do people want to invest in and give through donor advised funds?
DAFs provide a simple, flexible way for you to give back to the charitable causes you care about most. From contributing to a DAF to making grants to potentially involving your family in giving, DAFs offer convenience in giving:
- Contributing to a DAF: You can fund a DAF in a variety of ways, including with cash, stock or other assets like real estate or farm equipment. When you transfer your assets to the DAF, you typically receive an immediate tax benefit. Then your contributions can appreciate tax-free to grow your philanthropic capacity over time.
- Making grants to your favorite charities: While you no longer have ownership of the contributed funds once they are in the DAF, you have advisory rights to direct the giving out of the DAF to qualified nonprofits. One of the benefits of partnering with an organization like the Minnesota & Saint Paul Foundation is you will work with a local, dedicated philanthropic advisor to fulfill your charitable mission. This partner has the experience to help you start, continue and grow your giving.
- Creating a legacy of giving for the next generation: In addition, DAFs provide a means to engage multiple generations of your family in being community minded. You can name children or grandchildren as successor advisors on your fund to carry your giving legacy beyond your lifetime.
What is the typical size of a donor advised fund? Is there a minimum amount which you must contribute and grant?
In the U.S., the size of individual DAF accounts vary greatly, with an average size of an estimated $159,000 in 2020.1
The minimum initial contribution and minimum grant vary by host organization, so it’s important to ask about those requirements when setting up a DAF. For example, minimum contribution sizes could range from as low as $0 to as high as $100,000 or more.2 The Saint Paul & Minnesota Foundation has a $25,000 initial gift minimum to open a donor advised fund. The smallest allowable grant size can also vary from organization to organization, ranging from $50 to $500 or more.2
How popular are donor advised funds?
DAFs have gained popularity in recent years. In 2020, contributions to and grants from DAFs rose in the U.S. even as we experienced the pandemic, national social movements and economic instability.1
In fact, as they responded to urgent needs in their communities, DAF donors gave well above historic trend lines. While the number of individual DAFs rose above 1 million, DAFs granted an estimated $34.67 billion to qualified charities in 2020. This represented a 27% increase over 2019 and marked the highest DAF increase in 10 years.1
Could a donor advised fund be right for you?
There are a number of things to consider in weighing whether a DAF is right for you. You may want to explore a DAF further if you:
- Are interested in setting aside money now or at the end of the year but want to grant it to nonprofits later or over a number of years
- Want to support multiple nonprofit organizations in a given year
- Prefer to give anonymously
- Expect a year of higher income, a sale of assets, an inheritance or other boost to your income or assets and want to set aside some or all of it for future charitable giving through a vehicle that potentially provides immediate tax benefits
- Have a goal of organizing family giving or want to give the next generation (or generations) a way to give back
- Want a partner that handles the accounting, legal and investment services of your DAF, like the Saint Paul & Minnesota Foundation
- Considered starting a family foundation but want to explore other options that require less administration and management (See How to Decide Between a Donor Advised Fund and a Private Foundation.)
To further consider if a DAF is right for you, read Is a donor advised fund with a community foundation right for you?
As more people look for simple, accessible, flexible vehicles to maximize their charitable giving, DAFs are filling a need by allowing them to set aside dollars for charitable giving today so they can help meet the needs of tomorrow.
1. “The 2021 DAF Report,” The National Philanthropic Trust, 2021
2. “5 questions to ask when choosing a donor-advised fund sponsor,” Fidelity, February 8, 2021
The Saint Paul & Minnesota Foundation does not provide tax, legal or accounting advice. Please consult your own tax, legal and accounting advisors regarding your individual situation before engaging in any transaction.
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