What is a Donor-Advised Fund (DAF)?

A Donor-Advised Fund (DAF) serves as a tax-advantaged personal giving account. The account is held at or within a sponsoring 501(c)3 charitable organization. Individuals, families, or corporations can open a DAF and make charitable contributions into it while maintaining advisory privileges over where the funds should be disbursed to over time. It is important to note that contributions to a DAF are irrevocable, and control of the funds is ultimately held by the sponsoring organization – though it is exceedingly rare for a sponsoring organization to deny a disbursement request so long as the requested recipient is also a 501(c)3 charitable organization in good standing with the US Internal Revenue Service (IRS).

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How does a DAF work?

Donor-Advised Fund (DAF) sponsors open an account in the donor’s name and send donations to the charity of the donor’s choosing. Contributions to the fund can be deducted from a donor’s taxable income at the time of giving, even if they are not used for philanthropic purposes for several years. As a result, donors who need a tax deduction are encouraged to make a donation now and then decide where the money will go later. Additionally, unlike some other charitable organizations, many DAFs are well-equipped to turn valuable equities or other tangible assets into cash.

DAFs enable you to make grants to your chosen charities, letting you effectively pre-fund your philanthropy. DAFs are found in a wide range of charitable organizations, including universities, hospitals, organizations, and other religious organizations. At Groundswell, we’re bringing the DAF to corporate giving.

The rise in DAFs

One of the good news stories of the past few years is this: Despite the pandemic, humanity still chose to give. In 2020, Americans gave $471.44 billion to charity. Individuals account for $324 billion of this, or 69% of total giving. In 2021, 81% of U.S. adults donated money to a charitable organization, up from 73% in 2020. This reflects an upward trend more broadly – donations by individuals have risen in five of the last six years.

In tandem, Donor-Advised Funds (or DAF grants) have reached an all-time high for the decade. DAF grants to charities recently surged 27% to $34.67 billion; DAF contributions jumped 20% to $47.85 billion; and the number of DAF accounts surpassed one million for the first time. Though the disruptions of the pandemic have complicated the picture, there’s no doubt that, in general, DAFs are in vogue.

So: Donor-Advised Funds are popular, and getting more popular. But why? What do DAFs offer that other philanthropic instruments don’t? Why do some people claim they represent a form of zombie philanthropy – clue: taxes – and how is Groundswell doing things differently?

Why are DAFs useful?

DAFs provide tremendous flexibility for people looking to make charitable contributions. A contribution into a DAF is immediately tax-deductible, but the funds do not have to be distributed to recipient charities right away. This provides an individual the ability to maximize their tax reduction strategies, while also providing time and space to formulate an effective approach to philanthropy.

Additionally, DAFs make it much easier for donors to donate non-cash assets such as stock (both privately held and public securities), property, art, jewelry, and other valuables that many charities are incapable of accepting as gifts. By donating these assets to a DAF and then liquidating them, donors maximize the full value of the asset since they do not have to pay capital gains taxes on the appreciated amount.

Finally, much like a retirement account, funds held within a Donor-Advised Fund account can be invested in appreciable assets such as stocks and bonds. These investments grow tax free, meaning that when a donor advisor ultimately decides to disburse to charity they may have more funds to donate.

The tax benefits of Donor-Advised Funds

Here at Groundswell, we are doing something a little different with DAFs. But we’re under no illusions – the chief reason DAFs have grown popular has to do with their tax efficiency.

According to the IRS, Nonprofit charitable organizations are tax exempt under section 501(c)(3) of the Internal Revenue Code. Other tax-exempt organizations covered in this tax code section include those exempt under sections 501(c)(4) through 501(c)(9).

DAFs are sub-level accounts advised by donors, but held by a sponsoring 501(c)(3), and so they are exempt! Hence giving through Donor-Advised Funds can be a highly tax-efficient way to contribute to charities. In terms of taxes, the DAF benefits include:

Grow funds tax-free

Donor-Advised Funds allow donors to increase their charitable capacity tax-free. Moreover, DAF funds can be invested over time, similar to retirement vehicles like Roth IRAs and SEPs. This means that a DAF will follow the fluctuations of the market, and so your investments appreciate (or depreciate!) your DAF value, in other words your charitable capacity, will also appreciate. Any principal gains in your DAF will not be taxed because the investments belong to the DAF’s philanthropic sponsor.

Decrease tax liabilities

When you make a donation to your Donor-Advised Funds, you enjoy an instant tax deduction, reducing your income tax obligation in that year. That means a key DAF tax benefit is that a DAF decreases tax liabilities following a sudden and unexpected spike in income– like receiving an inheritance, selling a property or business, or enjoying gains in a hot market.

Donors can also lower their marginal income tax by gifting appreciated stock held for more than one year directly to a DAF – rather than liquidating it and then donating the cash.

Minimize capital gains

You can contribute appreciated assets to Donor-Advised Funds to dramatically reduce or eliminate capital gains taxes. One of the most creative ways to fund a DAF is through a direct donation of publicly traded shares or other liquid donations. This is a particularly tax-efficient option because shares held for more than a year can be transferred at their fair market value without incurring capital gains tax. Donor-Advised Fund holders enjoy a federal income tax deduction of up to 50% of adjusted gross income for cash contributions, and up to 30% of adjusted gross income for the appreciated securities they donate.

Can anyone have a DAF?

Until recently, Donor-Advised Funds were only available to ultra-rich clients of private wealth managers and brokerage firms. Brokerages like Fidelity, Schwab, and Morgan Stanley have typically had minimum contribution amounts up to $25,000 to open a DAF. As a result, 99% of American households have been unable to access Donor-Advised Funds or their significant advantages for charitable giving.

Today, there are numerous new companies that are offering lower-cost DAFs with superior, more modern, and mobile-first technology platforms. Here at Groundswell, we offer users a DAF with a $1 minimum contribution – the lowest in the industry.

Is it true DAFs have no minimum distribution requirements?

Currently, legislation governing Donor-Advised Funds does not require a minimum annual distribution to charity. This is different from a private foundation, which has a minimum annual distribution requirement of 5% or more.

Creating a similar minimum annual distribution requirement for DAFs is being discussed in Congress, and many suspect that new legislation will close what is perceived by many as a loophole. The ACE Act is one such piece of legislation, and would significantly alter when donors could recognize deductions based on liquidation of non-cash assets and actual distributions to recipient charities. Generally speaking, Groundswell is supportive of new legislation that increases the frequency and amount of distributions from DAFs to recipient charities, as we believe this is what is best for charities operating in our communities.

Why do some call DAFs a form of elitist, “Zombie Philanthropy”?

Let us explain why DAFs have been labeled a form of zombie philanthropy.

Short version: because of the tax benefits listed above.

In contrast to private foundations, DAFs have no requirement for minimum annual distributions. As a result, some investors deposit significant amounts of equity or cash into their DAFs – with no obligation to distribute them right away – or ever! This means that the capital in a DAF can sit static for many years – mindless, like a zombie – and never fund any actual impact in the community.

Also, some people use DAFs only for tax reasons – or to pass control of the funds to their kids with minimal taxes.

This is why DAFs have come under fire with the accusation that they serve as nothing but tax shelters for the ultra-wealthy. As this New York Times article outlines, there are sensational examples of billionaires transfers hundreds of millions of dollars into Donor-Advised Funds, thereby saving tens of millions of dollars in capital gains taxes and reducing their income tax obligations with large charitable deductions – all while failing to distribute those DAF funds to recipient charities who can in turn create positive impact in their communities.

However, similar to recent stories about unorthodox uses of Individual Retirement Accounts (IRAs) by billionaires like Peter Thiel, it’s clear that well-intentioned tax-advantaged vehicles will always be abused by people with significant wealth.

This does not mean that DAFs are inherently bad. DAFs provide significant tax-advantages and administrative streamlining for donors. Any tax instrument can be used for the wrong reasons. However, DAFs are not inherently evil – wielded the right way, they can be powerful tools that make philanthropy more efficient for all stakeholders.

Donor-Advised Funds, the Groundswell way

Here’s how we’re doing things differently at Groundswell:

  • An organization brings in Groundswell’s Philanthropy-as-a-Service platform to decentralize their CSR.
  • Groundswell creates a Donor-Advised Fund for each and every employee.
  • Companies can include contributions into an employee’s DAF as a component of their total compensation & benefits package
  • Employees can allocate a portion of their payroll into their DAF, with rules-based, corporate matching opportunities for the company
  • Employees distribute their funds to the causes they care about, when and how they see fit.
  • All of this functionality resides within a modern, mobile-first app available of iOS and Android.

With Groundswell, a DAF is a way to drive meaningful giving – not just for the tax benefit, but for the benefit of the community. As we laid out last Halloween, this is how we are raising zombie philanthropy from the dead.

Want to Offer an Employee Benefit that Benefits the World? Get in touch with Groundswell.

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