A Closer Look at HNWI Charitable Tools

Donor-advised funds (DAFs) can be a great way for you to reach your philanthropic goals. These funds are administered by charities and handle large donations on behalf of individuals, families, or organizations.

There are several things you need to consider before choosing the right DAF, including the sponsor, the fees, and the grantmaking abilities they offer.

Is a Donor-Advised Fund (DAF) Right for You?

A donor-advised fund is a charitable tool often employed by high-net-worth individuals, but are available to philanthropic individuals. It works much like an investment account. You make (charitable) contributions, get an immediate tax benefit, and advise the fund on how the money is distributed. You can keep the fund open as long as you contribute or make recommendations, so your charitable giving can have a long-term positive impact in the community.

This is one reason why DAFs are a popular way for people to enhance their charitable giving. According to Philanthropy Roundtable, roughly $55 billion in grants were facilitated through these funds in 2023, which are widely accessible to donors.

But are they right for your financial plans? Talk to a financial advisor to be sure. But DAFs can be a great option if you want to make a long-term impact, appreciate the flexibility of deciding where your donations will go in the future, and want a simple way to manage your charitable giving, according to Marcos Segrera, wealth manager and principal at Evensky & Katz/Foldes, who suggests donating highly appreciated assets like stocks or real estate.

“Donating these can help you avoid capital gains taxes while still getting a deduction for their fair market value within certain limits,” Segrera says, adding that you can also add cash to the fund.

The payout rate for DAFs is the percentage of assets granted to charities each year. The average rate was 17.1% for community foundations and 25.4% for national charities from 2020 to 2022.

Choosing the Right DAF

Donations are irrevocable, which means the assets you donate cannot be reclaimed once the sponsoring organization takes them over. Since the legal ownership of your assets is turned over to the sponsor, Segrera says it’s important to consider the following:

• Sponsor’s reputation and fees: Research the sponsor’s history and the costs, including any administrative, investment, and grantmaking fees. As the donor, you’re responsible for paying them, which means they can eat away at the funds set aside for the charity.
• Investment options: Determine whether the investment options offered by the fund meet your goals. They should also align with your risk tolerance. Because the assets in the fund can lose value (like stocks), you want your assets to be appropriately managed.
• Grantmaking process and minimums: As the account holder, you can advise the sponsor and recommend how and when money is distributed to certain charities. This is called the grantmaking process. Ask how easy grantmaking is and if there are any minimums attached. Although you can make recommendations, the ultimate decision lies with the sponsor.

The Bottom Line

Donor-advised funds may help you reach your charitable goals while giving you an immediate tax deduction, even if you want to do so anonymously. But do your research before you commit—the same way you would with any other investment. Consider sitting down with a financial professional to discuss your charitable goals and see if a DAF fits into your financial situation.