A donor-advised fund (DAF) is a personalized approach to philanthropy that allows donors to make a charitable donation to a fund, receive an immediate tax deduction, and recommend grants to support nonprofits that align with their values.
How Donor-Advised Funds Work
An individual or organization directs a contribution to a donor-advised fund at a sponsoring organization like a community foundation. The sponsoring organization invests the fund’s assets which may grow over time. The donor or “fund advisor” recommends grants from the DAF to qualified 501(c)(3) nonprofit organizations, and the sponsoring organization administers the grants.
Because the DAF sponsoring organization is a 501(c)(3) public charity, contributions to the donor-advised fund are tax-deductible in the year in which they are made. The sponsoring organization is legally responsible for managing the fund and making grants to eligible nonprofits, while the fund advisor makes recommendations and receives updates on the fund’s activities.
The Benefits of Donor-Advised Funds
As a donor, you have unique community interests. A donor-advised fund allows you to personalize your approach to philanthropy, empowering you to recommend grants to nonprofits that you truly believe in.
DAFs offer several benefits for individuals and families who are interested in an efficient vehicle for charitable giving:
- Contributions to a DAF are tax-deductible in the year they are made, which can help reduce the donor’s taxable income and increase their tax incentives.
- DAFs allow donors to make contributions at any time and recommend grants to eligible charities whenever they choose. This can provide donors with more flexibility to decide when and how to support their favorite causes.
- Setting up and managing a DAF is simpler than establishing a private foundation, as the sponsoring organization handles most of the administrative responsibilities.
- Using a DAF does not require specialized finance or investment knowledge since the DAF-sponsoring organization will invest the assets of the fund with the aim of accruing interest. The donor can typically choose between investment pools and the finance staff of the sponsoring organization works directly with investment managers.
- DAFs are often managed by charitable organizations with expertise in philanthropy, which can offer donors access to philanthropic advisory services to inform your grantmaking to help you maximize the impact of your charitable giving.
- DAFs can be a way for community members or families to come together to support their favorite causes and involve future generations in their philanthropic activities.
DAFs vs. Private Foundations
Donor-advised funds are one of the most impactful and flexible alternatives to private foundations. While they carry some similarities, each has their own unique qualities and benefits. The five basic differences between the two include:
- Structure: A DAF is managed under a public charity like East Bay Community Foundation (EBCF). This sponsoring organization offers investment options to the fund advisor but has legal control over the administration of the fund. The fund advisor retains advisory privileges on the charities funds are directed to. In contrast, a private foundation is a separate legal entity built by an individual, family, or corporation with full responsibility for investment management.
- Formation: Opening a DAF is easier and less expensive than starting a private foundation.
- Tax benefits: Contributions to a DAF or a private foundation result in a tax benefits, but the exact stipulations of those benefits depend on the circumstances. Typically, contributions to a DAF result in an immediate tax deduction, while private foundations have restrictions on the timing of deductions.
- Public disclosure: DAFs are governed by more lenient public disclosure laws, while private foundations must file annual tax returns and abide by stringent regulations.
- Flexibility: DAF fund advisors have more flexibility with their grantmaking than private foundations. With a DAF, fund advisors can shift their giving to different causes or adjust their fund’s investment strategy as time goes on. Additionally, DAFs don’t have annual spend out requirements while private foundations are bound to an annual spending requirement of 5%.
How EBCF does DAFs Differently
EBCF empowers donors to align their giving with social justice and racial equity values and forge a deeper connection to the East Bay. Opening a DAF with EBCF offers several unique benefits:
- Partnering with EBCF perfectly positions you to lift up your local community. Our philanthropic advisors offer expert insight on the deep rooted causes of inequities in the Bay Area. You’ll get a direct line to local organizations and movement leaders who are championing social change in your region.
- You’ll have access to the most effective ways to mobilize capital to create a positive impact, in line with social justice values.
- You’ll be a key player in making the East Bay inclusive for everyone. Fees associated with the management of your fund become a local investment that stays in the East Bay.
- You can contribute to community interest funds and giving circles from your DAF via interfund transfer, allowing you to increase your impact to multiple local grantees.
- Our hate-free grantmaking clause ensures our grants undergo a comprehensive vetting process, guaranteeing that no funds will support organizations engaging in hateful activities.
- Our inactive funds policy encourages our fund advisors to remain actively involved in creating community impact and keeps funds moving.
- EBCF is committed to aligning 100% of its investments to its mission, meaning that while funds are invested in a DAF, they are advancing community impact.
Our donors are using their DAFs in novel ways. Letitia Henderson, a West Oakland native with a commitment to uplifting nonprofits in her community, saw that establishing a DAF under EBCF would aid her in her work to support the capacity-building needs of nonprofit organizations in the area. In search of a solution to efficiently move funds to nonprofits while maintaining tax accountability, she landed on EBCF. “Letitia chose EBCF as her partner because she wanted to work with someone that shared her racial justice and racial equity values and had expertise working with grassroots nonprofits in her community.”
Get Started Today
Donor-advised funds help individuals, families, and corporations maxmize the impact of their giving while minimizing the administrative work. In partnership with your Senior Philanthropic Advisor, you can begin allocating funds to areas that align with your philanthropic interests and EBCF’s vision of A Just East Bay. Learn more about how opening a DAF with EBCF allows you to align your giving with your values.
If you’re ready to open a Donor-Advised Fund, complete this fillable PDF and email it to dsas@eastbaycf.org.