If you have philanthropic intentions, one of the challenges you may be facing is determining which method of giving makes the most sense given your goals and financial circumstances. As a donor you have many options, but one giving strategy—donor-advised funds—has exploded in popularity over the last few years.

Donor-advised funds (DAFs) are accounts that are set up within a charitable organization, such as a community foundation. Some DAFs can be set up as charitable gift trusts and are managed by financial institutions. With a DAF, a donor contributes personal assets to an account, where the contribution can be invested and grow tax-free until a grant is made to a qualified charity.

While DAFs are not new, growth in assets in these funds relative to other non-profit structures has skyrocketed recently with no signs of stopping. According to National Philanthropic Trust, assets in DAFs nearly doubled between 2012 and 2016, growing from just under $45 billion to more than $85 billion in five years. And Giving USA estimates that DAFs now account for 8.3% of all individual giving.

Although DAFs have their limitations, the advantages they offer over private foundations have likely contributed to their massive appeal of late. If you’re seeking an effective way to give, it may be helpful to consider how the pros and cons of DAFs align with your philanthropic and financial goals.

Flexible Contribution Guidelines  

According to a 2017 Foundation Source survey, the average family foundation manages $5 million in assets, while the average DAF account size is $292,000, making DAFs accessible to a larger donor base. Additionally, a broad range of asset types—for example, cash, publicly traded securities, and real estate, among other financial and physical assets—may be donated to a DAF. Any asset that can be accepted by the managing charity may be accepted by the DAF, which helps donors receive the best possible income tax deduction opportunities.

Immediate Tax Advantages

DAFs offer the maximum tax benefits allowed by the Internal Revenue Code. Since a DAF is considered a public charity, individuals can often deduct a larger portion of their contributions than if they had made the same donation to a private foundation.

Donors also receive an immediate tax deduction when they contribute to a DAF. Moreover, those who choose to use a DAF avoid the stringent private foundation rules in the Internal Revenue Code and don’t have to file separate tax returns like they would for a private foundation.

Administratively Efficient

Set-up costs for a DAF are typically low, and a gift can be made quickly and easily. A private foundation, on the other hand, often takes months to establish and can be costly, often due to associated legal fees.  Additionally, all accounting, administration and filings are conducted by the managing charity of a DAF, allowing donors to focus on their philanthropic goals.

Anonymity

A DAF can be a great option for those who wish to remain anonymous when making charitable gifts. Unlike private foundations, which require an annual report that discloses board members, grant recipients, and other information, DAF grants are made in the name of the managing charity, protecting the identities of the underlying donors.

Of course, DAFs have drawbacks, primarily related to donor control. Once a donor contributes to a DAF, the organization managing the fund has legal control over it—in other words, the gift is irrevocable. The donor may indicate an investment objective or strategy offered by the managing charity but does not control the investment. Additionally, while a donor can recommend charities to receive grants, the donor does not reserve the right to direct distributions. Ultimately, the managing charity has the authority to approve or deny any recommendations made by the donor.

For charitable individuals and families who wish to avoid the administrative and financial requirements associated with private foundations, DAFs offer an efficient alternative. However, they may not be right for everyone. If you are considering a DAF as part of your overall wealth or estate plan, it may be helpful to seek the guidance of a trusted wealth management or estate planning advisor.