Key Points

Charitable gifts are a great way to show your support for your favorite causes, impact your community in a positive way, and reduce your taxable income. Donor-advised funds give you the option to make anonymous contributions and avoid solicitation. They’re an accessible and low-cost alternative to private foundations.

Despite our best intentions, charitable giving can feel rushed and disorganized with the holiday season (and tax deadlines) taking center stage at year-end. But there’s one alternative that allows you to meet your charitable giving goals, make grants at your own pace and reap potential tax benefits.

What is a donor-advised fund?

Simply put, a donor advised fund (DAF) is a charitable account that’s managed by a nonprofit—typically a charitable organization founded by a financial services company, a community foundation or a university. You decide when and how much to contribute to the account and can direct grants to 501(c)(3) charities that are in good standing with the IRS. The custodian vets charities for IRS eligibility and sends out grants at your request. The custodian also manages the investment of the charitable assets based on your preferences. Some custodians offer a choice of investment pools and allow independent investment advisers to manage the assets of larger accounts. The custodian keeps complete records of contributions and grants for tax purposes, allowing you take a strategic approach to philanthropy.

Donor-advised funds have grown at a surprising rate despite slow economic growth in recent years. In 2012, assets under management grew by $7.21 billion, an 18.9% increase from the previous year. 1 DAFs’ growing popularity isn’t surprising—they offer donors a tax-smart opportunity to give to their favorite charities with relatively low costs. Accounts can start as low as $5,000 or as high as $1 billion and deliver tax benefits for a wide range of gifts—from cash and appreciated securities to closely held shares and property. One of the most notable features of DAFs is how they uncouple the timing of the charitable tax deduction from the granting, which lets donors make one tax-deductible contribution at year-end and grant to charities of their choice on their own schedule. Donors can also maintain a level of privacy around their giving if they desire.

How do donor-advised funds compare to private foundations?

Upon opening a DAF account, incremental gifts can start at $100 and there are no annual disbursement requirements or public filings. Grants start as low as $50 and can be acknowledged or anonymous (a valuable feature for those who want to avoid publicity or solicitation). Administrative fees are typically less than 1 percent of assets under management and as low as 0.1 percent for the largest accounts.