The Latest Charity (and Tax-Savings) Trend: Donor-Advised Funds

Alden Wicker
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They may be able to save you money on taxes and help make giving to charity simple. We’re talking about the newest charitable-giving darling: donor-advised funds or DAFs. These philanthropic vehicles allow people to make a charitable contribution, receive a potentially sizable tax benefit, and decide not only which charities will receive their donation but also when exactly the money will be disbursed.

Michael Hardy, a Certified Financial Planner™ and a partner at Mollot & Hardy, often recommends donor-advised funds to his clients. “It’s for people who want to donate some money–whether it’s current or in the future,” he says.

And it’s clear that he and his clients are not alone.

According to the National Philanthropic Trust, the number of donor-advised funds has grown steadily from 160,415 in 2007 to 201,631 in 2012—and the total amount of assets under management in DAFs also reached a high of over $45 billion in 2012. That same year, contributions to Fidelity Charitable, which is run by Fidelity Investments, reportedly rose by 89%, making it the second largest charity after the United Way. In fact, several well-known brokerage companies now offer DAFs, including Schwab, Vanguard and Calvert, to name a few.

There’s no doubt that donor-advised funds appear to be gaining traction, but it’s important to do your homework and understand both the benefits and the drawbacks of DAFs, including typically higher minimum contributions. So read on to find out how donor-advised funds work, whether they’re right for your financial situation—and how to help make sure your money is actually going to a good cause.

How Donor-Advised Funds Work

Put simply, if a mutual fund and a charity had a baby, it would produce a DAF. When you put money into a DAF, what you’re doing is taking funds that you’ve earmarked for a good cause and transferring them over—irrevocably—into the DAF. (You can also transfer over stocks or mutual funds, which many people do.) Once there, the assets are managed just like a mutual fund, and will hopefully grow tax-free until you’re ready to donate next month, next year or ten years from now. You can also dictate which nonprofit will receive the money and how much, and then the DAF writes out the check, so to speak. Seems simple, right?

Robert Berger, founder of the blog doughroller.net, is a big fan of DAFs. He and his wife use one for their charitable gifts. “In our case, it’s extremely easy,” he says. “We opened ours with Vanguard since we have a lot of investments with them. I literally just log into the charitable account, and I can transfer the individual stocks we own or Vanguard mutual funds. It takes a couple of minutes.”

RELATED: How to Budget for Giving All Year Long

4 of the Benefits of DAFs

Now that we’ve gotten the basics of how donor-advised funds work out of the way, here’s a simple breakdown of how these funds may be able to work in your favor:

  • Nonprofiteer

    1) Much of that $2Bn may be in endowed DAFs. So it’s not that the money isn’t making it to charity: it is that the principal is being protected in perpetuity for longer-term, and ultimately larger, impact. As with any financial service, there will be fees attached that pay for the customer service and charitable guidance that you receive.

    2) DAFs can also be opened at community foundations, which will help localize the benefit of fees, provide access to in-depth community knowledge (helps to ensure your charitable dollars are being spent wisely), and support you in defining and meeting your charitable goals. Learn more about and find your local community foundation here: http://www.cof.org/foundation-type/community-foundations