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What Is a Donor-Advised Fund? A Comprehensive Guide

Donor-advised funds are one of the most effective methods to support the causes you're passionate about.
Steven Aguiar
July 13, 2023

As a generous individual, you're always on the lookout for the most effective methods to support the causes you're passionate about. One term you've likely encountered in your philanthropic journey is "donor-advised fund" or DAF. But what exactly is a DAF, and how does it function? Could it be the tool you need to optimize your charitable giving? And importantly, in an era where cryptocurrency is booming, can you contribute crypto assets to a DAF? At Givepact, we are committed to helping you navigate these questions. Let's delve deeper into the world of donor-advised funds.

Understanding the Concept: What is a Donor-Advised Fund?

In simple terms, a donor-advised fund (DAF) is an account for philanthropic purposes, maintained and operated by a sponsoring organization, which is typically a public charity. A DAF offers donors the ability to make an irrevocable contribution to the fund, gain immediate tax benefits, keep the funds invested in the portfolio of your choice, and subsequently recommend grants from the fund to non-profit organizations anytime in the future.

The concept of DAFs arose from the need for a more accessible, flexible, and less administratively burdensome method of giving, compared to traditional foundations. It offers the same giving spirit but simplifies the process and expands the possibilities, especially when it comes to the types of assets one can donate.

The Nitty-Gritty: How Does a Donor-Advised Fund Work?

The journey of creating a DAF starts with a simple step: making a contribution. A donor contributes personal assets, which could range from cash, stocks, bonds, mutual funds, real estate, to the more recent inclusion of crypto assets. This contribution is transferred to a fund managed by a sponsoring organization.

Once you make the donation, it becomes irrevocable, meaning it cannot be returned. Nevertheless, while the sponsoring organization maintains legal control over the assets, you, as the donor, retain advisory privileges. You can recommend how the fund's assets are invested and suggest grants to your preferred IRS-qualified 501(c)(3) public charities at your own pace.

Unveiling the Benefits: Why Choose a Donor-Advised Fund?

The surge in popularity of DAFs is not a mere coincidence; it's attributed to a host of benefits they offer:

  1. Immediate Tax Benefit: Unlike some other charitable giving options, when you contribute to a DAF, you're eligible for a tax deduction in the same tax year, irrespective of when the funds are distributed to charities.
  2. Potential for Investment Appreciation: One of the most compelling aspects of a DAF is the potential for tax-free growth of assets. Your contributions can be invested, allowing for growth over time, which could mean more funds available for granting.
  3. Flexibility and Control: DAFs empower donors with flexibility. You can recommend grants to your chosen charities whenever you wish, allowing for strategic and thoughtful philanthropy.
  4. Simplified Record Keeping and Administration: By contributing various types of assets to a DAF, you streamline the donation process. The sponsoring organization, like Givepact, manages the assets, handles all record-keeping, and provides you with a single, consolidated tax receipt.
  5. Legacy Planning and Continuity: A DAF doesn't end with you. You can appoint successor advisors, such as your children, allowing the tradition of giving to continue across generations.

Embracing the Future: Crypto Assets and Donor-Advised Funds

As we usher in a new era of digital finance, it's important to recognize the role of cryptocurrency in philanthropy. This is why at Givepact, we've paved the way for donors to include crypto assets in their DAFs.

The process of donating cryptocurrency to a DAF echoes the principles of donating stocks or mutual funds. When you donate crypto assets, you are eligible for a tax deduction equivalent to the fair market value of the assets. Additionally, you avoid capital gains tax that would otherwise be due if you sold those assets.

The inclusion of crypto assets in DAFs opens up new opportunities for donors invested in these digital assets. It allows for the tax-free growth of the assets within the DAF, potentially leading to larger charitable grants over time.

Concluding Thoughts: The Future of Giving with Donor-Advised Funds

In the world of charitable giving, DAFs have emerged as a powerful vehicle. With their unparalleled flexibility, significant tax advantages, and the ability to incorporate a broad spectrum of assets, including crypto assets, DAFs are transforming the landscape of philanthropy. Givepact is thrilled to be part of this evolution, facilitating lasting impact through innovative financial tools.

While this guide provides a comprehensive overview, we always encourage donors to seek advice from a tax advisor or financial planner to fully understand the implications of their contributions to a DAF. Making informed decisions is an integral part of strategic and impactful giving.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Please consult with a professional before making any decisions.

At Givepact, we believe in the power of generosity and its capacity to create change. Whether you're a seasoned philanthropist or starting your giving journey, we're here to assist you. Remember, every act of giving creates a ripple effect, and together with Givepact, you can create waves of change.