3 Benefits of Donor-Advised Funds
Use of donor-advised funds has increased over time and for good reason—they provide multiple perks to donors.
There are more ways to give and more nonprofits to give to than there ever have been, according to the National Philanthropic Trust, a charity that manages nearly $30 billion in charitable assets.
One route to giving in particular has been growing—donor-advised funds (DAF). These funds require donors to make irrevocable donations into a DAF account, and in return, the donor receives certain benefits that may not be available through other modes of donating. As the name implies, donors can direct the funds to go to the causes they choose when they’re ready to release them from the account.
A big draw of DAFs is that donors can take an immediate tax deduction once money is transferred into the DAF account, even if they’re not ready to donate to a specific cause or recipient yet.
As of 2022, there were about 2 million DAF accounts in the US. Grant dollars coming from DAFs reached a high in 2022, at $52 billion, 9% higher than the year prior. Further, grantmaking from DAFs has increased every year over the past 13 years and has more than doubled in the past five years, according to the National Philanthropic Trust.
Here are a few reasons donors are using DAFs as their vehicle to donate.
Donor-advised funds allow for an immediate tax deduction
A big draw of DAFs is that donors can take an immediate tax deduction once money is transferred into the DAF account, even if they’re not ready to donate to a specific cause or recipient yet.
Donors can also give to international organizations via DAF accounts and still receive a federal tax deduction.
Donor-advised funds allow for donors to make larger donations
Funds within DAFs can also be invested, allowing them to grow over time. This increases the potential impact donors can have through their gifts. DAF donations can include cash, stock, real estate, and other assets. Donors are not taxed on the account growth, and similarly, when stocks are donated to a DAF account, the donor doesn’t have to pay capital gains taxes.
Donor-advised funds allow for donors to give anonymously
If a donor prefers not to have their name attached to a certain cause, DAFs allow them to make anonymous contributions. Recipient organizations often don’t know the source of contributions from DAFs because the donation is attached to the fund, rather than the person.
Will accepting a donation put your public support test at risk?
Nonprofits need to be aware of a potential risk associated with DAFs, or any large donation: the ability to pass public support tests. The IRS’s rules for public charities require them to receive a certain amount of support from the general public, along with what they receive from larger funders and investment income. It’s important to ensure that accepting one large donation won’t put passing the public support test at risk. Normally DAFs are set up as public charities and public charities are excluded from the excess contributions listing on Schedule A of the 990, so donations from a DAF would not affect an organization’s public support percentage.
Han Group is dedicated to working exclusively with nonprofit clients. Our purpose is to use our expertise in nonprofit-specific accounting to be a reliable partner to organizations as they navigate a changing landscape.
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