Which DAF is right for you?

Key criteria to help you choose a donor advised fund fit for your needs

If you’re seeking to fulfill your philanthropic aspirations while maximizing your tax savings, you’ve probably heard of donor advised funds, or DAFs. Established in the 1930s, DAFs have become increasingly popular in recent years. And their growth, which was further fueled after the 2017 Tax Cuts and Jobs Act nearly doubled the standard itemized deduction, isn’t slowing down. In fact, the National Philanthropic Trust reported that grant-making from DAFs to qualified charities totaled more than $25 billion in 2019 – a 93% increase since 2015.

Deciphering DAFs

Simply put, a DAF is a charitable savings account that enables you to make a donation without needing to immediately choose your recipients. This not only allows your funds to grow tax-free, it also allows you to receive a tax benefit the same year you make the donation. To capitalize on the latter, donors often opt for a bunching strategy – they make a sizable contribution to a DAF that they can then distribute to qualified charities across several years.

Not all DAFs are created equal

While there are over one million 501(c)(3) public charities in the U.S., only about 1,000 of them are considered DAF sponsor organizations. These sponsors typically fall into one of three categories: community foundations, single-issue nonprofits or national nonprofits.

No matter which type of sponsor you opt for, you’ll want to keep the following points in mind to ensure you choose a DAF that fits your needs:

Confirm the costs are worth it. The costs of establishing and managing a DAF vary from one program to another. Administrative fees – typically used to cover operating expenses for managing accounts as well as for reviewing and distributing grants – are charged in addition to fees on the underlying investments. Some sponsors charge high administration fees on top of investment management fees. Also remember that lower balances tend to incur higher fees, and you may be able to receive discounts on large account balances (think over $500,000 in assets).

Make peace with your minimums. DAFs differ in their minimum initial donation and ongoing contribution amounts. For instance, while Raymond James Charitable allows you to open a DAF with $10,000, some programs may require you to start with $100,000 or more. Keep in mind, too, that opening a DAF with less than $10,000 may not be the wisest use of your money, since the disproportionate fees collected on those small funds could be donated directly to the charity instead. Furthermore, while some programs may require that your account balance not dip below a certain threshold to remain active, Raymond James Charitable doesn’t require you to maintain a balance of any amount. This allows you more flexibility to request distributions or add to the account when you are ready.

Investigate your investment options. The “donor advised” part of a DAF means that you, as the donor, have a say in how your donated funds are managed. But that say varies from one program to another. Depending on how much flexibility you want, consider asking potential DAF sponsors questions like, “Could my family or financial advisor select and manage assets within my DAF?”

Another tip? Examine the performance of any investment strategies offered by a DAF program. As a client of Raymond James Charitable, for example, you can review the performance of our investment objectives directly on our website. In addition, our mutual fund strategies consist of funds from Raymond James Mutual Fund Research's Highly Recommended list, which is unique compared to other programs that may offer strategies with only their proprietary funds.

Learn your limitations. Organizations must meet certain criteria established by the IRS in order to benefit from a DAF donation. However, certain DAF programs may have additional limitations. For instance, some:

• May restrict grants within a single community
• Faith-based sponsors may only approve grants to charities that align with the teachings of their religious institution
• Educational and medical sponsors may require you to direct a portion or all of your DAF funds to their in-house programs

Since DAF contributions are irrevocable, you’ll want to confirm the level of flexibility you want from your sponsor, particularly if you might be relocating or if your giving intentions might evolve in the next few years.

Ready to explore your options? Click here to discover the benefits of opening a DAF with Raymond James Charitable.

Sources: nptrust.org; ncfp.org; independentsector.org; morningstar.com