A donor-advised fund (DAF) offers an easy way for a donor to make significant charitable gifts over a long period of time. A DAF is similar to a private foundation but requires less money, time, legal assistance, and administration to establish and maintain. A DAF also enjoys greater tax advantages than a private foundation.

Technically, a DAF is an agreement between a donor and a charity that gives the donor the right to advise the charity on how a portion of the donor's contributions to the charity will be distributed to other charities. Contributions may be tax deductible in the year they are paid to the DAF if they are structured so that they aren't considered earmarked for a particular distributee. Though they may bear the donor's name, these funds are not operated as separate entities, but are mere bookkeeping entries. They are components of the DAF. The DAF must own the funds and have ultimate control over distributions.

During life, a donor (or a donor's designee) can make ongoing, nonbinding recommendations to the DAF as to how, when, and where grants from the fund should be made. Additionally, the donor can offer advice to the DAF regarding how contributions should be invested. The donor may suggest that, upon death, grants be made to charities named in his or her will or other legal instrument such as a revocable living trust. Or, the donor may designate a surviving family member(s) to recommend fund distributions. However, the fund is not obligated to follow any of the donor's suggestions--hence the name "donor-advised fund." As a practical matter, though, the DAF will generally follow a donor's wishes. Grants to recipients are typically identified as being made from a specific donor's account, but they can be made anonymously at the donor's request.

Technical Note: The community foundation was the first type of organization to offer a DAF but, today, many funds are offered by financial institutions and many public charities have DAFs or will create a DAF upon request.

DAFs vs. private foundations

Both private foundations and DAFs allow a person to take tax deductions now and decide later to whom to give. Both DAFs and private foundations can be named to honor the donor.

A DAF usually receives contributions from many unrelated donors, while a private foundation is typically funded by one source (an individual, family, or corporation). While donors to a DAF may only offer advice regarding distributions, private foundations offer the donor exclusive control and direction over distributions and investments, an attractive feature to some philanthropists.

However, various legal restrictions imposed on private foundations are not imposed on DAFs, and the federal income tax treatment of a donation to a private foundation is less favorable than that afforded to a DAF. Because gifts to a DAF are considered gifts to a "public charity," they may allow a greater income tax deduction than gifts to a private foundation.

Furthermore, private foundations are required to distribute a minimum of 5 percent of their assets each year. DAFs have no such minimum distribution requirement (though some DAFs follow the 5 percent rule voluntarily), and DAF donors may be allowed to let their accounts build up tax free for many years and be distributed only upon a specified date or upon the occurrence of a specified event.

Also, DAFs do not need to fulfill many of the reporting and filing requirements that are imposed on private foundations. And because the organization that offers the DAF handles any legal, administrative, and filing requirements (including tax returns), the donor is completely freed from these responsibilities. In addition, since separate accounts within a DAF are administered as part of the larger organization, the administrative costs borne by the donor are generally lower than those incurred by a private foundation.

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The information on this site is for educational purposes only and is not intended as legal, tax or investment advice. If you are considering a planned gift to the Sanctuary Friends Foundation of the Florida Keys, we highly recommend you consult with your own tax and legal advisors to determine the best options for you.