A piggy bank with a money tree growing out of it

The holidays are getting into full swing, which means you’re probably being swamped with requests for charitable donations. But choosing the right worthy cause, while avoiding charities that are poorly run or outright scams, can take time.

Enter the donor-advised fund, or DAF, a charitable savings account that lets you make a donation without choosing a specific charity right away. You can send the money later, at any time, to a qualified charity, while the account grows tax-free. Your gift may also qualify for a charitable tax deduction in the year you donate, assuming you itemize; more on that below.

Although DAFs make up only 6 percent of overall giving, with grants of $19.08 billion in 2017, these funds are the fastest-growing form of philanthropy today, according to a 2018 study by National Philanthropic Trust, a public charity that makes grants and sponsors a DAF. Contributions to these funds grew 16.5 percent to $29.23 last year and assets reached $110 billion, up from $86.5 billion in 2016.


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More on Charitable Giving

“Donor-advised funds are increasingly popular, because they’re easy and flexible, like the online banking experience,” says Eileen Heisman, president and CEO of the NPT. “That makes them attractive not just to high-net worth people, but those who are younger and have more modest means.”

With thousands of DAFs available, you can find these accounts offered by major fund companies, as well as community foundations, universities, and individual charities. Minimum required investments vary—you need a $5,000 initial contribution at Fidelity and Schwab, while Vanguard requires $25,000. You will also be charged fees, typically less than 1 percent.

There’s no central resource that evaluates DAFs, so you’ll have to do a little research to find one. The best method is to choose one that you’re comfortable with or that is linked to causes you care about.  

To figure out whether this giving option is right for you, here are five key points to know about donor-advised funds.

You May Get Tax Benefits for Giving

You may be able to get a tax deduction for your contribution to a donor-advised fund, but only if it still makes sense for you to itemize. For 2018, the standard deduction has nearly doubled to $12,000 for singles and to $24,000 for married couples filing jointly. So you will need sizable itemized deductions to come out ahead, which is more difficult to do under the new tax law.

If itemizing doesn’t work for you this year, you might opt for a so-called bunching strategy instead. Double up on your charitable contributions every couple of years or so, which may help you reach the itemizing threshold.

Even if you don’t itemize, a DAF may still be a good giving option if you have noncash assets—such as securities that aren’t publicly traded, or stocks—that have grown in value over time. Many smaller charities, such as homeless shelters and food pantries, might not have the resources to manage such donations. Contributing that appreciated asset to a DAF allows it to be sold and the money sent to charity with little or no hassle.

Be aware that there’s an annual deduction limit—30 percent of your adjusted gross income—on donating an appreciated asset. If you make a larger donation, you can carry forward the deduction over the next five years.

Your Fund Can Simplify Record-Keeping

When you give to charities during the year, the DAF will track your contributions, as well as provide a single tax document, which can ease your record-keeping hassles.

“Instead of writing 10 to 15 checks to individual charities, and keeping all those receipts, it’s aggregated in one location,” says Chris Carnal, president and CEO of TIAA Charitable, a donor-advised fund.

The DAF will also make sure that your donation goes to a qualified charity—one that is registered as a 501(c)3 organization with the IRS. That step helps reduce the risk that your money will go to scamsters, says Daniel Borochoff, president of CharityWatch, a charity watchdog organization.

Of course, simply being registered as a charity is no guarantee that the organization will make the best use of your money—you will need to do additional research. (Read more about vetting charities.)

Your Money Can Grow for Good Causes

Just as in a 401(k) plan, you can choose to invest your DAF contributions in a menu of mutual funds or exchange-traded funds, as well as cash accounts. Many DAFs also offer socially responsible investing options, which let you put your money in shares of companies based on environmentally sustainable policies or social impact.

“There’s increasing interest in impact investing, as investors realize that their money can work for good causes, even before they make a grant,” says Amy Pirozzolo, vice president of Fidelity Charitable, a donor-advised fund, which has introduced three new impact-investing options.

Some companies will let your financial adviser oversee your investments, though you may pay additional fees for those services; more on that below. 

There's a Cost for Convenience

You will be charged fees by the DAF, which can include both administrative and investment expenses. So be sure to check out these costs with the fund company or charity sponsoring the DAF.

For example, both Schwab and Fidelity charge 0.60 percent of assets or $100, whichever is greater, on account balances up to $500,000. At both fund groups, the next $500,000 is charged 0.30 percent.

You will also pay investment expenses, which may range from 0.02 percent for exchange-traded funds to 0.85 percent or more for actively managed funds. If you have an adviser helping you manage your DAF investments, you may also be charged 1 percent of assets for those services, Heisman says.

You Will Need to Give Regularly

The flexibility of donor-advised funds can also be a drawback, some critics say. There is no government regulation requiring that the money in a DAF be donated to charity within a specific time frame. In theory, donors could let those assets sit indefinitely.

“Too much money is being warehoused in donor-advised funds, when it could be helping the needy,” says Alan Cantor, a nonprofit consultant based in Concord, N.H.

But DAF providers say that these funds are encouraging more giving over time.

“You’ve made the gift, and the money in the donor-advised fund isn’t yours any more,” Heisman says. “Most people want to see an impact from their gifts sooner rather than later.”

Grants from donor-advised funds to charity rose nearly 20 percent last year to $19.1 billion, up from $16 billion in 2016, according to the NPT study. The grant payout rate—the percentage of assets being donated—was 22.1 percent in 2017 vs. 20.6 percent the previous year.

Even though no tax rules require it, many DAF providers have their own policies that mandate regular giving. At Fidelity, donors must make one gift of at least $50 every three years, Pirozzolo says. After five years or so, if the donor remains inactive, the account could be liquidated and the money moved to a philanthropic fund.

Still, most donors are active, making six to seven gifts annually on average, NPT data show. But to make sure that you do donate regularly, set reminders or stick to a regular schedule, even if you can give only small amounts.

“People don’t realize the power of a dollar, what it can do granted to a charity,” says TIAA’s Carnal. “Even $50 or $100 can really help.”