What is a Donor Advised Fund?
A donor advised fund (DAF) is a fund or account which is separately identified by reference to contributions of a donor or donors. The account is owned and controlled by certain types of charitable organizations (known as sponsoring organizations) which are often public charities or community foundations. A donor (or a person appointed or designated by the donor) to such a fund would be able to provide non-binding advice with respect to the distribution or investment of amounts held in such a fund or account.
How Does It Work?
You would create a separate account with a sponsoring organization that operates DAFs. A gift of cash or certain types of property would be made to the sponsoring organization; the gift would be credited to your DAF account. The sponsoring organization may require that the gift be of a certain minimum size to open a DAF account. In some cases, you may then suggest how your gift is invested by the DAF (usually suggesting from a menu of investment options offered by the sponsoring organization). When you wish to make a charitable gift from the DAF, you may advise (but not require) the sponsoring organization to make a gift from your DAF account to a charitable organization.
Why Should I Consider Doing This?
A DAF is a way to make gifts to charitable organizations that you wish to support now and in the future. By giving to a DAF today, you can set aside amounts that will be invested by the sponsoring organization for future gifts to charitable organizations. When you desire to make a gift to a charitable organization, you may advise (but not require) the sponsoring organization by suggesting that it make the gift from your DAF account.
If you itemize deductions for federal income tax purposes, the Internal Revenue Code (IRC) may allow you to take a deduction when calculating taxable income for gifts made to charitable organizations. Your ability to deduct the amount you give to charity may be limited depending upon the type of charitable organization that receives your gift, the amount of your adjusted gross income (AGI) and the type of property (including cash) that you give. In general, there are higher limits for gifts made to public charities and lower limits for gifts made to private foundations. Gifts that you make to a DAF generally qualify for the higher limits allowed for gifts made to public charities. For example, if you make a gift of cash to a DAF in 2023 through December 31, 2025, under current law you are able to deduct up to 60% of your AGI on your federal income tax return for the year of the gift (under current law, the limit returns to 50% of AGI in 2026). You should consult your tax advisor to determine the tax impact in your particular circumstances.
Giving to a DAF may allow you to receive an income tax deduction today for gifts to charitable organizations in the future. For example, assume you would like to receive an additional income tax deduction in 2023. To obtain a deduction you would like to give to charity, but don’t yet know which charitable organizations should receive your gifts. You could give cash or property to a DAF in 2023 and, up to the limits of the IRC, receive a deduction for the gift on your 2023 income tax return. In later years, after you have determined which charities should receive your gifts, you can advise (but not require) the sponsoring organization to make grants to those charities.
Another attractive feature of a DAF is the ability to make anonymous gifts. When funds are distributed from a DAF to a charitable organization, unless you are identified, your personal information, such as your name and social security number, need not be associated with the gift.
Finally, the costs of creating a DAF are minimal when compared to other types of private charitable giving structures.
What Are the Downsides?
As the name suggests, you may only advise the sponsoring organization with respect to making distributions from the DAF. The sponsoring organization may decline to take your advice and may refuse to make a distribution to the charitable organization you wish to fund. For that reason, you should carefully select your sponsoring organization. Some sponsoring organizations limit their operations to specific geographic locations (such as community foundations) or specific causes. For example, a community foundation that serves a city or region in the northeastern United States, may not follow a donor’s advice to make a grant to a charitable organization in California.
Additionally, if the sponsoring organization allows it, you may only provide advice with respect to the investment of the funds in your DAF. Also, the investment choices may be limited. When selecting a sponsoring organization, be sure to understand whether you can offer investment advice and the investment options offered. Because of this limitation, the DAF may not be the right structure for large gifts or if you wish to control which charities receive your gifts and how your charitable moneys are invested before distribution to those charities.
If you wish your DAF to be used as a family charitable vehicle after you have died, be sure to follow the sponsoring organization’s rules for naming successor advisors. If you wish for more than one person to succeed you as advisor to the fund, be sure the sponsoring organization’s rules allow for that.
Should I Do This?
A DAF is a cost-effective way to create a charitable giving program and may allow you to receive tax benefits as well. Additionally, it may be a way for you to leave a charitable legacy for future generations to maintain and follow. As described above, there are limits. You cannot control the distribution of the funds from your DAF account, nor can you control the investment of the funds in the account.
As with any giving and tax strategy, you should consult your attorney, accountant or other tax advisors to determine if a DAF is the right giving strategy for you.
To learn more about DAFs, please contact your PNC Private Bank team; we would be glad to discuss with you and your advisors whether a DAF is appropriate for you.
For more information, please contact your PNC Private Bank advisor.