How to Start a Donor-Advised Fund (DAF)

What is a Donor-Advised Fund?

A donor-advised fund (DAF) is a charitable investment account that allows donors to make a substantial, upfront contribution, receive an immediate tax deduction, and then distribute the funds to their chosen charities over time. This approach offers flexibility in charitable giving and is a powerful tool for tax-efficient charitable planning. It enables donors to optimize their tax benefits while thoughtfully planning their philanthropy. It’s important to note that contributions to a DAF are irrevocable, so having a sound financial plan is essential before getting started. 

The Missed Opportunity for Charitable Deductions

Imagine this: Jane, a passionate supporter of environmental causes, donates a few thousand dollars every year to her favorite charities. However, because she files a standard deduction on her taxes, she misses out on the benefits of itemizing her charitable donations. Frustrated by the lack of tax benefits, Jane feels disheartened, wondering if there’s a better way to maximize her impact while taking advantage of tax benefits. 

This is where a donor-advised fund (DAF) can come into play. By opening a DAF, Jane could make a significant, upfront charitable contribution, receive an immediate tax deduction, and then spread her charitable giving over several years. Not only would she enjoy significant tax savings, but she could also carry forward the deduction for up to five years, allowing her to plan her philanthropy strategically. 

How to Start a Donor-Advised Fund (DAF)

1. Choose a Sponsoring Organization

The first step in setting up a DAF is selecting a sponsoring organization. This could be a national charity, a community foundation, or a financial institution. Each sponsor has different minimum contribution requirements, fees, and investment options, so choosing one that aligns with your charitable goals and financial situation is essential. 

2. Make Your Initial Contribution

Once you’ve selected a sponsoring organization, you’ll need to make an initial contribution to fund your DAF. Your initial contribution can be cash, stocks, or other assets. The amount you contribute is tax-deductible in the year you make it, providing you with an immediate tax benefit. If you choose to donate appreciated securities, you’ll also avoid paying capital gains tax.

3. Select Investment Options

After funding your DAF, you must decide how the assets should be invested. Most sponsoring organizations offer a range of investment options, from conservative to aggressive portfolios. The returns generated by these investments can grow tax-free, increasing the amount available for charitable grants over time. 

4. Recommend Grants to Charities

With your DAF funded and invested, you can now start recommending grants to your favorite charities. You can advise on how much and how often to distribute funds. There’s no rush—grants can be distributed over several years, allowing you to support charities when they need it most. With advanced giving strategies, the capital in your DAF can continue to grow tax-free, which boosts your charitable impact. 

5. Keep Records and Stay Informed

It’s important to keep thorough records of your contributions and grants and stay informed about the rules and regulations governing DAFs. For example, while you have advisory privileges, the final decision on grant approvals rests with the sponsoring organization, and there are restrictions on certain types of charities. The IRS offers a search tool that allows donors to confirm whether or not an organization is tax-exempt and eligible to receive contributions from a DAF.

Start a Donor-Advised Fund with Professional Guidance 

Starting a DAF can be a powerful way to maximize your charitable giving while optimizing tax benefits; however, the process can also be complex. This is where the charitable giving experts at 5280 Associates can help. Our team can guide you through each step, ensuring that your DAF aligns with your overall financial goals and philanthropic vision. We’ll help you navigate the nuances, from choosing the right sponsoring organization to selecting investment options that can grow your charitable contributions. 

Ready to start your Donor-Advised Fund? Contact us today to schedule a consultation and begin your journey toward impactful, tax-efficient philanthropy.