Complete Guide to Donor-Advised Funds
Donor-advised funds (DAFs) are a type of charitable giving vehicle that allow individuals, families, and organizations to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to charitable organizations over time.
DAFs have grown in popularity in recent years as a way for donors to simplify their charitable giving and make a greater impact.
While DAFs were previously only available to the wealthy, Groundswell makes the benefits of a donor-advised fund accessible to everyone.
In this article, we provide a complete guide to donor-advised funds, including how they work, their benefits and drawbacks, and how to set one up.
How Do Donor-Advised Funds Work?
When a donor makes a contribution to a DAF, the funds are invested and managed by a sponsoring organization.
The donor receives an immediate tax deduction for the contribution, and can then recommend grants to charitable organizations at any time. The sponsoring organization is responsible for managing the DAF and distributing the grants as directed by the donor.
One of the main benefits of DAFs is that they allow donors to make a charitable contribution and receive an immediate tax deduction, even if they are not ready to decide which charities to support.
This can be especially useful for donors who want to make a charitable gift but are not sure which organizations to support, or for donors who want to spread their charitable giving out over time.
Learn the difference between a private foundation and a donor-advised fund
Benefits of Donor-Advised Funds
There are several benefits to using a DAF for charitable giving, including:
Simplicity: DAFs are a simple way to make charitable contributions, as donors can make a single contribution to the DAF and then recommend grants to multiple charities over time.
Immediate Tax Deduction: Donors can receive an immediate tax deduction for their contribution to a DAF, even if they are not ready to recommend grants to charitable organizations.
Professional Management: DAFs are managed by a sponsoring organization, which means that donors do not have to worry about managing the investment of the funds or distributing the grants.
Flexibility: Donors can recommend grants to any IRS-qualified charitable organization, and can change the organizations they support at any time.
Anonymity: Donors can remain anonymous when making a contribution to a DAF or recommending a grant, if they choose.
How to set up a donor-advised fund
Setting up a donor-advised fund (DAF) is a simple process that can typically be done online in a few easy steps:
Choose a sponsoring organization: There are many different organizations that sponsor DAFs, including community foundations, financial institutions, and charitable organizations. It is important to choose a reputable organization that aligns with the donor’s charitable goals.
Groundswell is a flexible choice for small to enterprise-sized businesses looking to provide a charitable giving platform for its employees.
Learn to open a DAF account with Groundswell.
Make a contribution: The donor can make a contribution to the DAF using cash, securities, or other assets. The donor will receive an immediate tax deduction for the contribution.
Recommend grants: The donor can recommend grants to charitable organizations at any time, either online or by contacting the sponsoring organization.
Monitor the DAF: The donor can monitor the activity of their DAF and recommend additional grants as desired.
Donor-Advised Fund Tax Deduction Information
One of the main benefits of donor-advised funds (DAFs) is that they allow donors to receive an immediate tax deduction for their charitable contributions. The tax deduction for DAFs is generally the same as it would be for a charitable contribution made directly to a charitable organization.
To be eligible for a tax deduction, the donor must itemize their deductions on their tax return and the contribution must be made to a qualified charitable organization. Contributions to a DAF are tax-deductible in the year that they are made, even if the donor does not recommend any grants from the DAF until a later year.
It is important for donors to keep in mind that there are limits on the amount of charitable contributions that can be deducted each year.
Limits for charitable contributions that can be deducted for tax year 2022
The limits on the amount of charitable contributions that can be deducted for tax year 2022 depend on the type of organization to which the donation is made and the taxpayer’s filing status.
For tax year 2022, the limits are:
For donations made to public charities and certain private foundations, the limit is generally 60% of the taxpayer’s adjusted gross income (AGI).
For donations of appreciated capital gain property made to public charities and certain private foundations, the limit is generally 30% of AGI.
For donations made to certain private foundations and veterans organizations, the limit is generally 30% of AGI.
For donations of appreciated capital gain property made to certain private foundations, the limit is generally 20% of AGI.
It’s always recommended to check with a tax professional or the IRS to confirm the limits that apply to your specific situation.
It is also important for donors to retain documentation of their contributions to a DAF, as they may be required to provide proof of their charitable contributions in the event of an audit.
A software like Groundswell keeps track of all the important information you need come tax time.
Donor-Advised Funds Distribution Rules
The distribution rules for donor-advised funds vary depending on the specific terms of the fund and the sponsoring organization. In general, however, the following rules apply:
- Donors must make an irrevocable contribution to the fund in order to participate. This means that the donor cannot change their mind and take the money back after making the contribution.
- Donors can recommend how their contributions are invested and how the earnings are distributed to charitable organizations, but the sponsoring organization ultimately has the discretion to approve or deny the recommendations.
- Donors cannot receive any personal benefit from the fund, such as the use of donated assets for personal purposes or the receipt of goods or services in exchange for their contribution.
- Distributions from donor-advised funds must be used for charitable purposes. This means that the funds must be used to benefit a charitable organization or to support a charitable program.
- Donors must follow all applicable federal and state laws, including laws related to self-dealing and excess benefit transactions.
- Sponsoring organizations may have additional rules and requirements for donor-advised funds, such as minimum contribution amounts or distribution frequencies. It is important for donors to understand and comply with these rules in order to maintain the tax-advantaged status of their contributions.
How Groundswell Uses the DAF to enable corporate giving programs.
Groundswell is a cooperation giving platform revolutionizing access to DAFs.
Groundswell accounts are powered by donor-advised funds. Groundswell’s DAF infrastructure gives companies and its employees a better, smoother experience when compared with traditional workplace giving programs.
With Groundswell, companies can deposit gifts directly into their employees’ accounts.
Groundswell’s infrastructure also enables privacy and security for employees and employers. Since charitable giving can be deeply personal, adding a level of privacy aids in fostering a corporate culture of generosity and giving.
Learn more about setting up a corporate giving program and DAF with Groundswell.
The 4 Best Donor-Advised Fund Software in 2023
There are many options if you’re looking for the best donor-advised fund software.
You can undoubtedly look at every single one of them, but it’s not necessary. The top donor-advised funds offer the same basic functionality. The choice comes down to which provider is really in service to the nonprofits donors want to support, offering the service, convenience, and flexibility the company and its donors require.
DAFs are no longer just a tool for the uber-wealthy. Individuals can use them as well. One of the easiest ways to do this is through a corporate giving platform.
Donor-advised funds (DAFs) provide a simple solution to support tax-deductible contributions. They are similar to a charitable foundation without the fuss. In fact, one of the best things about DAFs is how much of the money goes to work for nonprofits.
Although foundations beat DAFs hands-down with 900% more in assets, DAFs comprise 42% of the giving. In addition to being more cost-efficient, DAFs don’t require public disclosures like foundations.
How to compare donor-advised fund software
As mentioned, many of the features and benefits are the same when you’re comparing the top contenders. Most donors will be concerned with fees and minimums that allow them to maximize their charitable contributions. In this article, we’ll compare Groundswell, Greater Horizons, Schwab Charitable and Vanguard Charitable.
The four best DAF software compared
Fees: Donors pay no annual fee.
- Account minimum: $0
- Contribution minimum: $1, the lowest in the industry
- Grant minimum: N/A
Groundswell is the affordable option with no fees and a $1 minimum contribution amount. It offers a superior user experience in a mobile technology platform.
Fees: Greater Horizons has a $500 minimum annual fee and is tiered according to the balance but pricing is not available online.
- Account minimum: $0
- Contribution minimum: $0
- Grant minimum: $0
Greater Horizons is a good option for those who don’t want the constraints of minimums. However, the signup process is largely manual.
Fees: Schwab has a $100 minimum annual fee and is tiered according to the balance. Fees are the second cheapest for accounts under $25,000.
- Account minimum: $0
- Contribution minimum: $0
- Grant minimum: $50
Schwab offers an easy signup process but you’ll need a Schwab brokerage account and the DAF has limited customer service hours.
Fees: Vanguard has a $250 minimum annual fee and is tiered according to the balance. Fees are the second cheapest for large accounts.
- Account minimum: $0
- Contribution minimum: $5000
- Grant minimum: $500
Although Vanguard has lower fees than some, the minimum contribution amount is one of the highest.
Why Groundswell is the Obvious Choice
As mentioned, the main reason DAFs are so popular is that they offer tax advantages. Much like a retirement account, DAF account funds can be invested in appreciable assets and these investments grow tax-free. Donors, themselves, can donate non-cash assets, both privately and publicly held, for the full cash value without having to pay capital gains taxes. So, the donor gets a tax break and once they decide to disburse the funds to a non-profit, there may be more money to give. DAFs used to be available only to the wealthy and were sometimes exploited to pass wealth on to future generations without tax implications.
The biggest advantage to the Groundswell option is its affordability and accessibility. Groundswell democratizes DAFs for all. With Groundswell, every employee can have a donor-advised fund. In addition to boasting the lowest operating costs, Groundswell is doing a few other things differently. The Groundswell philanthropy-as-a-service platform decentralized the process, making it easy for employees to
- Donate whenever and wherever they choose
- Make affordable contributions
- Allocate a portion of their payroll into their donor-advised fund
- Take advantage of corporate matching opportunities
Groundswell puts it all in a mobile-first app available on iOS and Android. It’s even easier for companies. They can include DAF contributions as a component of their overall compensation packages. Employee donations are safe, secure, and confidential.
With Groundswell, your employees can be assured that what’s important to them is important to you. Like to know more? Contact Groundswell today.
Donor-Advised Fund vs. Private Foundation: What’s the Difference?
Donating directly to a charitable organization might be the simplest way to give, but there are also various philanthropic vehicles available for minimizing taxes and maximizing impact. Two of the better known structures are donor-advised funds (DAF) and private foundations.
Donor-Advised Fund vs. Private Foundation
While there are 1.4 million registered public charities in the United States, less than 1% are donor-advised funds. Likewise, private foundation numbers, at around 90,000, are relatively modest. The impact of these nonprofit organizations, on the other hand, can be considerable. Here are the key differences between donor-advised funds and private foundations.
What Is a Donor-Advised Fund?
The donor-advised fund (DAF) is a tax-advantaged personal giving account established at a public nonprofit sponsor organization. The account is opened in the donor’s name and contributions are made to the organization(s) chosen by the donor. That might be a charity, but it could also be a university, religious foundation or financial institution. DAFs are enjoying unprecedented popularity with donations jumping by 27% since 2019. Giving from DAFs topped $34.67 billion in 2020, with the five largest — Fidelity, National Philanthropic Trust, Schwab, Vanguard and Silicon Valley Community — accounting for $24.5 billion alone. That said, the size of the average fund is a lot less, at around $150,000. Donors can gift cash, stock, real estate or other assets to a donor-advised fund.
Traditionally, DAFs have been viewed as a tax-efficient way to give over a longer period of time without any annual obligation to distribute funds (thus the nickname “zombie philanthropy”), but now Groundswell is empowering corporations to unlock the advantages through our Philanthropy-as-a-Service platform. Whereas DAFs have conventionally been the preserve of the ultra-rich and brokerages, we’re offering access starting at $1 million (the lowest minimum contribution in the industry) to help employees with meaningful giving that benefits communities.
What Is a Private Foundation?
A private foundation, on the other hand, is a legal entity established solely for charitable purposes. Usually launched as a family or organization’s legacy initiative, the private foundation is a long-term project whose influence can spread worldwide. That’s certainly true of three of the biggest three: the Bill and Melinda Gates, Ford and Getty foundations.
Private foundations are administered by a board of directors and can receive funds via real estate, investment assets or charitable donations. Unlike public charities, however, they usually derive their financial support from a single source, whether it’s a person, family or organization.
Key Differences Between Donor-Advised Fund vs. Private Foundation
There are a few important distinctions to note between the two, particularly where it comes to the overarching mission and vision.
Most donor-advised funds are intended to support charitable giving during the philanthropist’s lifetime, although some do extend to a further generation or two. One of the criticisms of DAFs is that rather than distributing donations to non-profit organizations in need, they are used by the rich to “park” private wealth in a tax deductible fund. That’s not the Groundswell approach. Our platform is designed to establish a minimum annual distribution for DAFs to bring communities to life, not mothball zombie philanthropy funds. Private foundations, by contrast, focus firmly on the future legacy, and most are established as permanent entities that will outlive the founder.
The board of directors (which can include the founder) manages a private foundation. For a DAF, the sponsor organization has control, although the donor may give their recommendation or advice on how grants are distributed.
Private foundations often celebrate a particular goal or set of values, so concealing the founder’s identity is rarely a concern. DAFs do offer confidentiality, so they are a useful vehicle for benefactors who want to support a charitable organization anonymously.
There is a lower barrier to entry for donor-advised funds, some of which can be set up with as little as $5,000, although upwards of $100,000 is more common. Because all legal formalities are covered by the parent organization, DAFs are relatively easy to set up. By contrast, private foundations take longer to establish, and the legal, administrative and tax affairs require professional support. Private foundations usually start with funds of $10 million or more.
Arguably the biggest difference between the two is in terms of tax regulation. For private foundations, the IRS dictates that a 5% minimum of net investment assets must be distributed annually in the form of grants or administrative expenses. To set up a private foundation, the founder(s) must apply for recognition of exemption under Section 501(c)(3) with the IRS, and will subsequently need to file detailed tax returns on board members’ compensation, fees and grants. All are a matter of public record.
Donor-advised funds, on the other hand, do not require any annual grants to be administered but do offer immediate tax advantages, particularly if the donor is receiving a windfall, inheritance or revenue from a business or property sale. Neither do DAF donors have to file tax returns to the IRS, not least because ultimate control of the DAF is with the sponsor nonprofit organization.
We’re Here To Support Your Giving Efforts
Despite the “zombie” tag, DAFs are by no means evil by nature. In fact, they can be an effective way to drive meaningful giving that brings communities to life. To find out how we’re raising zombie philanthropy from the dead with an employee benefit that benefits the world, get in touch with us today.
Donor-Advised Funds: Tax Benefits for Givers
Donor-Advised Funds’ tax benefits are widely known and well documented, and are one reason why the popularity of DAFs has surged in recent years. However, how do DAFs actually work, and what tax benefits do they create? Let’s get into the nitty gritty.
How DAFs Work
A DAF allows a donor to contribute a sum of money into an account held with a sponsoring 501(c)3 nonprofit organization, such as a public foundation, and take an immediate tax deduction in that tax year.
One of the benefits of Donor-Advised Funds is that donors can then take their time in determining when and where to grant those funds to recipient charities. This ties to the key Donor-Advised Funds tax benefit – it allows a donor to disaggregate their decision to optimize their tax deduction from their decision about which charities to support and how. (However, note that this charitable giving tax deduction has also opened DAFs up to legitimate criticism that they serve primarily as a tax avoidance vehicle, and only secondarily as an effective tool for philanthropy. See here for more.)
DAFs also provide donors the ability to donate non-cash assets such as appreciated stock, real estate, and collectibles such as art – all as a form of charitable donation tax credit. With thoughtful and well-advised planning, donors can reap the Donor-Advised Funds tax benefits while simultaneously increasing the amount they contribute to charity by utilizing these non-cash donations.
A Typical DAF Scenario
Here’s how tax deductions for contributions to Donor Advised Fund work:
If a donor has held an asset such as a stock for more than one year, the donor can contribute that stock to their DAF. The sponsoring foundation that controls the DAF then liquidates that asset (sells the stock), making the full value of the sales proceeds available for that donor to recommend to a charity.
By taking this approach, the donor has avoided paying the entirety of their capital gains tax obligation – which is either 15% or 20% at the time of this writing, depending on the donor’s income level.
Even better, the donor is able to deduct the full fair market value of the asset at the time of transfer into the DAF, significantly reducing taxable income.
Let’s look at the math.
Let’s imagine a donor, we’ll call him Phil Anthropy, bought 100 shares of Apple stock at $5 (don’t you wish you bought Apple for that price now!). This gives Phil a cost basis of $500 for that purchase. If five years later Apple is now worth $50 per share, Phil now owns $5,000 worth of Apple.
Now imagine it’s the end of the year and Phil wants to make a $5,000 donation to his favorite charity. If he doesn’t have the cash, Phil’s first option is to sell his Apple stock for $5,000. When he does this he’ll immediately incur a capital gains tax on his appreciated value – which is $4,500 ($5,000 current value minus the $500 cost basis). If Phil’s capital gains tax rate is 15%, his capital gains tax bill will be $675. It also means that Phil only has $4,500 to give to charity!
The Math of DAF
Next, let’s assume that Phil has a Groundswell account, which is powered by a Donor-Advised Fund. In this scenario, Phil can contact Groundswell to transfer his Apple stock directly into his DAF. Once received, Groundswell sells the position for $5,000 and puts that cash in Phil’s account. Phil then recommends a grant to his favorite charity for the full $5,000. In Scenario 2, Phil pays zero capital gains taxes and is able to deduct the full fair market value of the stock – $5,000 – off his income taxes. That’s a $500 higher deduction than scenario 1 ($5,000 vs. $4,500).
As you can see, Scenario 2 both gives more money to charity and saves nearly twice as much money in taxes. We enjoy the usual Donor Advised Funds tax benefits – and we do more good.
But there is actually a third scenario, and in this scenario the donor gets the best possible outcome: they still give a significant sum to charity and they pay zero taxes. In Scenario 3, a donor works for a company that has implemented a modern day, decentralized approach to its corporate philanthropy.
DAFs & Philanthropy-as-a-Service
With this Scenario 3, a company has chosen to make charitable giving a component of its total compensation or total rewards approach. In this scenario, Acme Corporation understands that its employees, like Phil, are likely already giving a portion of their take-home pay to charitable causes.
Knowing this, Acme Corporation has decided to implement a Philanthropy-as-a-Service solution, like Groundswell, to decentralize corporate giving and provide Phil with an annual charitable giving allowance. Using Groundswell, Acme deposits $5,000 annually directly into Phil’s Groundswell account, which Phil can then direct to the charity of his choice.
The Donor-Advised Fund tax benefits here are astounding. Because the $5,000 is deposited directly into Phil’s DAF – and is never received by Phil as actual income – Phil never has to pay payroll taxes on the funds. The US Federal Government assesses payroll taxes on all earners, and some states pile on additional tax requirements. Current federal payroll taxes for individuals are 7.65% (6.2% for Social Security and 1.45% for Medicare). This means that Phil isn’t responsible for paying the $382.50 in payroll taxes that would have been automatically withheld from his paycheck.
Here, Acme Corporation gets the charitable tax deduction because the contribution to Phil’s Groundswell account qualifies as a contribution to a 501(c)3 public charity, while Phil gets to feel great about sending a big donation to his favorite cause.
Leveraging DAFs, the Groundswell Way
- The key Donor-Advised Fund tax benefit is providing donors a simple, tax-advantaged vehicle to streamline their charitable giving and ensure their deductions are fully accounted for
- Donor-Advised Funds offer incredible opportunities to contribute non-cash assets such as publicly traded equities, creating increased tax advantages for the donor and extra revenue for the nonprofit
- Companies that choose to decentralize their philanthropy can provide employees with a significant financial benefit by contributing funds directly into an employee-held DAF, allowing the company to take the tax write-off and the employee to still make meaningful donations to their favorite charities