What Is a Donor-Advised Fund (DAF)?

A donor-advised fund, or DAF, is a popular type of planned giving vehicle established at a public charity, most commonly with a community foundation. It allows a donor to make a charitable contribution, receive an immediate tax deduction and then recommend grants to organizations of their choosing, like Children’s Health, from the fund over time. A donor can contribute to their DAF as often as they’d like and recommend distributions whenever it is best for them. 

How do Donor-Advised Funds work?

A donor can contribute an array of private or public assets that extend beyond cash to a donor-advised fund. How it works:

• A donor makes an irrevocable contribution to the DAF and can take an immediate tax deduction
• The assets in the DAF may be invested and any investment growth is tax-free for the donor
• The donor recommends grants from the DAF assets to support qualified nonprofits of their choice

What Are the Benefits of a Donor-Advised Fund?

DAFs allow donors to give when, what, how and where is most favorable for them. Benefits of donor advised funds include:

• Receiving a tax deduction for each contribution to the DAF
• Contributing immediately, building a philanthropic strategy and donating when you’re ready
• Growing your contributions over time, making more charitable dollars available to nonprofits
• Guaranteeing your philanthropic dollars reach the causes you care about with an irrevocable contribution
• Simplify organization and administration of your hard-earned dollars designated for charity
• Creating a charitable legacy
• Choosing how you are acknowledged
• Developing a philanthropic vision and philosophy
• Reaching international charities and non-governmental organizations while still receiving federal tax credit

What is the Difference Between a DAF and Private Foundation?

There are similarities between DAFs and private foundations in that they are both charitable vehicles to invest in and make grants from, but they are not the same. DAF funds provide the benefits of a private foundation without the complexity, administrative burden or additional expenses. Specific differences between DAFs and private foundations are:

	Donor-Advised Fund	Private Foundation
Startup costs		√
Grant anonymously	√
Annual taxes		√
Annual 5% payout required		√
Maximum tax benefits	√
Grant and admin services	√
Form 990 required		√
Community knowledge	√
Fees re-invested into community	√
Network with local donors	√
Philanthropic advisors	√
Donor owns brand	√	√

What are the Donor-Advised Fund Tax Deductions?

Once a donor makes a DAF contribution, they are eligible for a DAF tax deduction the year the gift was made – like giving to a public charity. Other donor-advised fund tax benefits include:

• Donating cash, via check or wire transfer and generally being eligible for a donor-advised fund tax deduction of up to 60 percent of your adjusted gross income
• Becoming eligible for a donor-advised fund tax deduction of the full fair-market value of the asset, up to 30 percent of your adjusted gross income
• Eliminating capital gains tax on long-term appreciated assets (assets held for more than one year)
• Donations exceeding limits can be carried over for up to five tax years

Frequently Asked Questions About Donor-Advised Funds

• What is a donor-advised fund?

  A donor-advised fund (DAF) is a giving vehicle that provides an immediate tax benefit to a donor and allows them to grant funds to nonprofits of their choice.

• How does a donor-advised fund work?

  A donor makes an irrevocable contribution to a donor-advised fund and receives a tax deduction for the year the gift is made. Once the gift is made, the sponsoring organization has legal control over the funds and the donor can make grant recommendations to nonprofits of their choice when the donor chooses to do so.

• Are there any rules to owning a donor-advised fund?

  Yes, there are donor-advised fund rules. The IRS has specific guidelines around the types of organizations that are eligible to receive grants as well as the purposes the grants can serve. For instance, grants can only be made to qualified nonprofits and not to a person, or the donor cannot receive more than an incidental benefit, so it cannot be used for the admission price for an event or a gala. Distributing funds from a DAF to Children’s Health is a great way to make life better for children today.

• Is there a tax deduction for donor-advised funds?

  Yes, there is a donor-advised fund tax deduction. The DAF donor will receive tax documentation from the sponsoring organization of the DAF.

• What is the typical size of a donor-advised fund?

  In the U.S., the size of individual DAFs varies significantly. The average size of a DAF was estimated to be $159,000 in 2020.

• Can I establish a DAF directly with Children's Medical Center Foundation?

  While we do not establish DAFs, the DAF you create with any sponsoring organization can be used to support the mission of Children’s Health through grant distributions to make life better for children.

• How popular are donor-advised funds?

  DAFs have become more popular in recent years. In 2020, contributions to and from DAFs rose in the U.S. The number of individual DAFs rose above 1 million and the amount that DAFs granted represented a 27% increase over 2019, marking it as the highest DAF increase in a decade.