Donor advised funds (DAFs) have certainly had their share of headlines recently. Proposed regulations seemed designed to limit investment options and impose excise taxes. Then an extended comment period and a public hearing fueled speculation that this could spell the end of the fastest growing segment of American Philanthropy – or maybe just level the playing field for private foundations by limiting some of the advantages of DAFs. That came atop years-long – and largely baseless – fretting that DAFs are a tax shelter, somehow allowing the wealthy to warehouse vast sums of money and keep it from being used for charitable purposes, and the looming threat of legislative proposals that could radically revamp the landscape for DAFs and community foundations.
With all the noise, it’s been easy to lose sight of one the most important players in the DAF story, namely, the donor. In fact, while the charitable beneficiary is the raison d'être for a DAF, the donor is the most important player because, it goes without saying, there would be no DAF if it weren’t for the donor.
Research indicates there may be as many as two million DAF accounts in the country holding assets of nearly $250 billion. Year in and year out, contributions to DAFs continue to grow faster than the rate of philanthropy in general. Let’s consider some of the reasons why DAFs have become so popular and how donors are likely to continue to use DAFs, come what may.
Tax Advantages:
Flexibility and Convenience:
Other Advantages:
Of course, DAFs also have some drawbacks, and it is important that donors understand and evaluate them. Donors should be fully cognizant of the fact that when they make a charitable contribution to their DAF they are, in fact, making an unrestricted contribution to the sponsoring organization. The donor’s only involvement is to offer recommendations as to how the funds are used. This fact can become obscured because, in practice, the sponsoring organization almost always accepts the donor/advisor’s recommendation. Another drawback is the potential fees associated with account management and investment. Making a charitable contribution directly to a charitable organization can reduce or eliminate these costs allowing the full value of the contribution gift to go to work for the charitable cause.
Nevertheless, for many donors, the advantages of a DAF outweigh the disadvantages.
| The BDQ (Big Dumb Question) We’ve all been there: at some point during a presentation someone says, “This may be a dumb question, but…” and the presenter (hopefully in a gracious tone of voice) says, “There’s no such thing as a dumb question,” before providing the obvious answer. But sometimes, just to yourself, you have to admit you were wondering about the same thing. That’s the idea behind this occasional series we’re calling “The Big Dumb Question” (or BDQ). Our aim is to provide easy to understand answers to basic gift planning questions – the kinds of questions you may be reluctant to ask. We’ve got a list of topics in mind (see below). More Big Dumb Questions Here are some of the BDQs we have addressed or plan to:
If there are other BDQs you’d like answered, let us know. You can remain anonymous, of course! |