Why are Donor Advisors Funds Important? A Brief Guide

A t first glance, the world of finance may seem like a tricky one; with dozens of different options to choose from, there is no shortage of options for a newcomer to invest their funds.

One such option is Donor Advisor Funds. So, why exactly are Donor Advisors Funds important? It’s because they’re a low entry barrier charitable funds and provide a good option for those looking to invest their finances towards charity.

Keep on reading to find out everything you need to know about Donor Advisor Funds.

What are Donor Advisor Funds?

These are funds that are created to distribute funds to various charitable organizations. As the name suggests, these funds take the advice or input of the donors contributing to the fund, who have a say in where their charitable donations go. 

Ultimately, however, it is the fund managers who decide where donor contributions should go.

Donor Advisor Funds are created by a third party, who set them up on behalf of individuals, families, or organizations.

How Do They Work?

Donor Advisor Funds can be thought of as somewhat similar to personal charitable savings accounts. 

The account is set up with a third party, often with a nonprofit division of an investment company. That company acts as the fund sponsor and manager.

The funds deposited by donors are earmarked for exclusive use for charitable works. The donations are counted as tax-deductible to the donor, in the tax year that the donations are made.

These donations are not bound to be donated in the same year; they can be kept dormant, to be paid in later years when the donor decides it's suitable.

Do They Provide Significant Tax Advantages?

They offer a sizeable Federal Income Tax deduction. It is around 60% for cash contributions for Adjusted Gross Income (AGI), and 30% for appreciated securities. 

Appreciated securities are simply those that may appreciate after some time has elapsed, such as stocks, bonds, and mutual funds.

Donors won’t have to pay Capital Gains Tax they would otherwise have had to pay if they had sold those securities instead. In addition, donors are not subject to estate tax.

Comparison Between DAF and Private Foundation

A private foundation is another way in which your charitable donations can be managed. However, there are several drawbacks to a private foundation compared to a DAF.

First, you have to consider the time taken to start a fund. A Donor Advisor Fund takes minimal time, while a private foundation may require weeks or months of paperwork and legal counsel.

Next up, we have minimal donations. A DAF typically has a $5000 to $25000 minimum donation, with a few reaching up to $100,000, while there are a few that require no minimum donation. The fees for legal counsel are often minimal.

By comparison, the minimum donation required to set up a private foundation often runs in the millions of dollars, typically $10 million to $20 million, although some people have managed to start private foundations with as little as $250,000 to a million dollars. 

Any less and the fees for legal counsel may exceed the amount that you want to donate to a cause.

There are privacy considerations too; in a DAF, the names of donors, advisors, and those who receive can be kept private. On the other hand, all the employees of a private foundation have to file taxes, including board members, and these are public records.

The Convenience of Using DAFs

Their ease of use makes them quite convenient. You can simply go online, log in to your DAF’s web portal, and specify the amount that you want to grant. The approval and all sundries are handled by the sponsor company.

The sponsor company sends regular reports about all the charitable causes that they have donated to, so the donor can easily keep track of them. They are also able to contribute to multiple causes without worrying about micromanagement too much.

Contributing Whenever You Want

Donors often wait until the tax year is near its end before making contributions, for tax deduction purposes. You don’t need to do this with a donor advisor’s fund; you can contribute the funds at any time in the given tax years, and they will count as tax-deductible at the end of the year. 

You don’t have to contribute them immediately either. They can sit in the fund, giving you ample time to decide which causes should your contributions go to. 

If you are interested in philanthropic funds, you might want to ask yourself why are donor advisors' funds important. Whether you are an individual, family, or organization, their ease of use and benefits will surely make them an attractive charitable giving vehicle.