Among all possible charitable vehicles, donor-advised funds (DAFs) continue to increase in popularity. With the current sluggish projections for the immediate future of the economy and financial markets, DAFs are likely to experience slower rates of growth in charitable assets. However, the latest report from the National Philanthropic Trust points toward a trend of continued growth for DAFs:
- Grants from DAFs to charitable organizations reached 45.74 billion in 2021 — a 28.2% increase from a revised 2020 total of $35.68 billion and one of the highest rates of increase on record.
- Charitable assets in all DAFs totaled $234.06 billion in 2021, a record high 39.5% increase from the revised 2020 total of $167.81 billion.
- The number of individual DAF accounts rose by 28% to 1,285,801 — another all-time high.
- Annual aggregate grant payout rates from DAFs remain consistent, exceeding 20% in every year on record.
As more of your charitable-inclined clients may be interested in establishing a DAF as a possible giving option, here are the essential “need to know” donor-advised fund rules to share with them for 2023.
Donor-advised fund rules and contribution limits
While every sponsoring organization may have its own rules or guidelines for the donor-advised funds that they manage, the following DAF rules will apply to every sponsor and corresponding account:
- While there are no contribution limits on how much a donor may contribute to a DAF, some sponsors may require a minimum contribution and/or a minimum grant amount.
- All contributions to the DAF are irrevocable and cannot be taken back once they are gifted. All donated assets belong to the sponsoring organization, with the donor maintaining advisory and grantmaking privileges.
- All grant recommendations from DAFs must be approved by the sponsoring organization. A grant recommendation can be rejected if it doesn’t abide by the organization’s standards or guidelines.
- All grants must go to an approved private operating foundation or a public charitable organization recognized by the IRS. All grants must be approved by the DAF sponsor and can support qualified charitable initiatives including:
- religious and social service organizations
- food banks and hunger alleviation
- arts and culture
- the environment
- animal welfare
- educational institutions
- DAFs may be used to support an existing or start a new scholarship fund at any eligible charitable organization or institution. However, the grants cannot support scholarships where the donor or any family members may be eligible recipients. The grant also may not be used to pay the tuition of any specific individual.
- No grants can be made from a DAF to benefit a specifically designated individual.
- Donors cannot receive a personal benefit from DAF grantmaking, nor their advisor or any family member. In addition, neither the donor or advisor may claim a charitable contribution deduction for the grant. Also, grants cannot be made to political parties or candidates or to private non-operating foundations.
- Donors may not use DAF funds to fulfill a personal, legally binding pledge. The donor can make a recommendation to the sponsoring organization for multi-year commitments that are not treated as a legally-binding pledge.
- DAF grants cannot be used to pay for tickets to events, galas, or auctions or used to cover membership fees unless the cost is fully tax deductible. Grants cannot be used to pay for items or services purchased or won at a charity auction.
For the full list of restrictions, explanations, and guidelines established by the federal government, see the donor-advised fund guide sheet on the IRS website.
Donor-advised fund tax deductions
Donor-advised funds are popular choices for charitable-minded donors not just for their flexible giving options, but also for their tax benefits. Immediately following a DAF contribution, donors are eligible for a tax deduction in that calendar year.
- Donors can receive an immediate income tax deduction for cash, check, or wire transfer of up to 60 % of adjusted gross income (AGI).
- The deduction for securities and other appreciated assets (i.e. closely held stock, real estate, illiquid assets) is up to 30 % of AGI.
- Donors incur no capital gains tax and no estate tax on gifts of long-term appreciated assets
- Investments within a donor-advised fund will appreciate tax-free.
- Any donations that exceed limits can be carried over for up to five tax years.
- The donor may prefer to “bunch” their annual DAF donations, instead donating 2-3 years worth of donations all at once to claim a larger tax deduction for that year.
Donor-advised Fund Quick Reference Sheet
Additional considerations for donor-advised funds
Donor-advised funds are highly valued for their flexibility and ease in establishing a legacy of giving. It’s important to note that there’s a few conditions unique to DAFs:
- Unlike most other charitable vehicles, DAFs do not have start-up costs or annual income excise tax, though they do come with annual administrative costs and investment fees.
- Donors have to understand that contributions to DAFs are irrevocable. While donors do maintain advisory and grantmaking privileges for their DAF, once assets are gifted to the account, they belong fully to the sponsoring organization and cannot be taken back.
- Depending on how it is set up, and the restrictions of the sponsoring organization, a DAF may have certain rules or limitations:
- While DAFs currently have no annual distribution requirements, some sponsors may require annual or semi-annual donations.
- The sponsoring charity may place a limit on the number of successor generations. One DAF could be established to last only for the duration of the donor’s lifetime, while another may be passed on to successive generations in perpetuity or even become part of the organization’s general endowment.
- The sponsoring organization and fund management could face federal penalty excise taxes for the misuse or abuse of DAFs.
- Congress has introduced the Accelerating Charitable Efforts Act (ACE) in their fiscal year 2023 budget, which could impact how and when DAFs distribute funds. Possible changes include restrictions on anonymous grants, adjustments to how qualified DAFs are defined, and the treatment of non-cash contributions. As of the start of 2023, there’s been little immediate action on the ACE act — stay informed on any possible developments through our blog.
That’s all the essential information for the current 2023 calendar year. If you or your clients have other donor-advised funds or their rules and restrictions, we can help. Ren can administer the DAF and manage the reporting, accounting, compliance, and client case consulting so that you can focus on other areas of your clients’ investments.
To learn more, download our donor-advised fund ebook guide below or reach out to talk to one of our experts.