What are donor-advised funds?

Donor-advised funds (or DAFs for short) are a type of charitable-giving tool that has become increasingly prevalent in recent decades. They are a powerful, versatile, and tax-efficient tool for individuals, couples, and families interested in philanthropy. In the last 30 years DAFs have become a major source of funding for charities, both locally and nationally.

Despite this, there’s a good chance that you’ve never heard of donor-advised funds—or if you have, that you still aren’t sure what they are, how they work, or why you might want to create one. If so, then keep reading! We’re going to take a close look at all those questions in this post.

Donor-advised funds: What are they?

Donor-advised funds are a type of charitable fund or account. The fund is charitable because it is owned by a public charity like the Community Foundation of Southeast Kansas (called the sponsor) and any amounts held in the fund must, ultimately, be distributed to another charity, religious institution, or government agency. In the meantime, the sponsor invests the assets in the fund, growing them tax-free.

What distinguishes the donor-advised fund from other types of charitable funds is the ongoing role of the individual, couple, or family that established the fund (the donor-advisor). The details of that role can vary from one sponsor to another. For donor-advised funds established with CFSEK, a donor can recommend charitable grants from his or her donor-advised fund over time, as well as recommend an investment strategy for the fund.

However, federal law limits the extent of a donor’s role. Because contributions to a donor-advised fund are irrevocable gifts to a public charity, donor-advisors cannot control the investment or distribution of fund assets. Instead, they may only make recommendations to the sponsor. Although the sponsor will typically follow a donor-advisor’s recommendations, ultimately the sponsor controls how its donor-advised funds are invested and when and to whom grants are distributed.

History and impact of donor-advised funds

The first donor-advised fund was established at the New York Community Trust in the 1930s. DAFs began to increase in popularity during the 1990s, when for-profit financial-services firms began offering DAFs through newly established charitable arms.

In 2006, Congress enacted the Pension Protection Act, which for the first time defined donor-advised funds in federal tax law. Since then, DAFs have become only more popular. National Philanthropic Trust’s annual report shows that the number of DAFs in the country increased from 162,000 in 2007 (PDF) to nearly 1.3 million in 2021.

As a result, donor-advised funds have become a powerful force in the world of philanthropy. Nationwide, those 1.3 million DAFs held over $230 billion in assets as of last year and made nearly $46 billion in grants, according to National Philanthropic Trust’s report. Locally, by year-end 2021 donor-advised funds accounted for only 15% of CFSEK’s total assets by value and 20% of our funds by count, yet they made 32% of our total grants that year.

Benefits of donor-advised funds

Needless to say, the benefits that donor-advised funds offer the nonprofit community are significant, but what advantages do they offer donors? These will vary depending on the sponsor, but here are some of the benefits CFSEK’s donor-advised-fund holders can expect:

  • Versatility. CFSEK’s donor-advisors can recommend grants to different organizations and changes to their fund’s investment strategy over time.
  • Eligibility verification. CFSEK verifies organizations’ eligibility to receive grants from a donor-advised fund, saving research time for our donor-advisors.
  • Local expertise. CFSEK constantly engages with local communities and the churches, government agencies, and nonprofit organizations that serve them. As a result, we can help our donor-advisors understand local needs and introduce them to new giving opportunities.
  • Low cost. The Community Foundation charges a low annual administrative fee on all its funds. For donor-advised funds with a balance of $500,000 or less, the fee is 1% of the fund balance, with a minimum fee of $250 per year.
  • Anonymity—or recognition. In general, we do not publicly list our donor-advised funds. Plus, grants from a donor-advised fund can be made in the name of the fund or anonymously. In other words, our donor-advisors can choose for themselves whether to be recognized for their giving or not.
  • Tax benefits. Because CFSEK is a public charity, donors are eligible for an income-tax deduction when they donate to their CFSEK donor-advised fund. This opens the door to strategic giving opportunities like bunching donations.

And there’s one more advantage to CFSEK donor-advised funds: They are easy for donors to set up and maintain!

How to establish a donor-advised fund

Establishing a donor-advised fund at the Community Foundation of Southeast Kansas is a simple and straightforward process:

Graphic illustrating the four steps to establish a donor-advised fund.

Step 1. Contact CFSEK

The first step to establish a donor-advised fund is to contact the Community Foundation. We’ll explain what you need to know and send you the (minimal) paperwork needed to get your new fund started.

Step 2. Personalize your fund

Your next step will be to personalize your fund, tailoring it to fit your charitable vision. We’ll go over all your customization options when you contact us to discuss establishing a new fund, but for now, here are some basics to get you started:

  • Choose a fund name. Typically a donor-advised fund will be named after the person, couple, or family that creates it.
  • Select an investment strategy and manager. You will be able to choose the investment strategy you’re most comfortable with. By default professionals hired by the Community Foundation invest all our funds, but if you’d prefer, you can recommend another investment professional to manage your fund’s assets.
  • Decide on a fund duration. Your donor-advised fund can be endowed, distributing only a small part of its balance each year and meant to provide funding for nonprofits forever, or non-endowed, able to distribute the entire balance in a single year. Most DAFs are non-endowed, but the choice is yours!
  • Define a fund-succession plan. You can appoint successor advisors, name the Community Foundation as the successor advisor, or specify which charity, charities, or charitable causes the fund balance should be used for when you pass away.

Step 3. Donate to your donor-advised fund

Once we’ve established your donor-advised fund, you’ll need to donate to it so it has money to grant. For your convenience, the Community Foundation can accept many different types of property as funding for your donor-advised fund, including:

  • Cash;
  • Corporate stock, bonds, and other securities;
  • Farmland and other real estate;
  • Retirement accounts; and
  • Life-insurance policies.

Going forward, you can donate to your donor-advised fund as often as you’d like!

Step 4. Recommend grants to eligible organizations

Whenever you want to recommend a grant from your donor-advised fund to an eligible organization, you can contact us to let us know. You’ll need to tell us what organization you’d like us to grant to and how much to grant. Then, we’ll double-check that the organization you’ve recommended is a qualifying 501(c)(3) public charity or other eligible organization and, subject to CFSEK’s approval, send the check.

As long as you have a balance available in your donor-advised fund, you can continue to make grant recommendations.

Contact us to learn more about donor-advised funds

Donor-advised funds have become a powerful tool for charitable giving in Southeast Kansas and across the country. The Community Foundation of Southeast Kansas makes it easy for you to take advantage of this unique giving opportunity to leave a lasting impact on the causes you care about.

If you’d like to set up your own donor-advised fund, or if you’re interested in learning more, please contact us today!

Last updated November 23, 2022.