- Date : 30/05/2022
- Read: 6 mins
As per the National Philanthropic Trust's 2021 report, donor-advised funds had assets worth $159 billion. This is a 10% increase from $145 billion in 2019. In 2020, the number of DAFs exceeded 1 million for the first time. But what is a DAF and what makes them so popular?
The COVID-19 pandemic and the resulting lockdowns pushed millions of people across the world into poverty. In many countries, years of effort to reduce poverty got reversed in just the last two years. India is no exception. The country saw one of the world's strictest lockdowns that increased unemployment and pushed millions of families into poverty.
In such a scenario, helping people in need through donations is more important than ever before. This article discusses what makes a donor-advised fund (DAF) a good bet in 2022.
What is a donor advised fund?
A donor-advised fund or DAF is a charity account set up with a public charitable organisation to make donations. It allows one to make contributions and avail tax deductions for them. Once the account is set up, the donor can keep making contributions as and when required.
The contributed amount can partially or wholly be used for making immediate grants or over time. If the funds are not used immediately for grants, they are invested as per the investment strategy selected by the donor. The donor can choose charitable organisations of choice for making grants.
Image: How donor-advised funds work
Apart from cash, a donor can make contributions to a DAF in the form of assets such as stocks, art, real estate, etc. DAFs are a popular mode of doing philanthropy in the US due to the tax savings they provide.
Well-known DAF sponsors in the US
Some of the well-known DAF sponsors in the US include:
- Fidelity Investments Charitable Gift Fund
- National Christian Foundation
- Schwab Fund for Charitable Giving
- Vanguard Charitable Endowment Program
- Silicon Valley Community Foundation
- National Philanthropic Trust
Are DAFs a good bet in 2022?
As mentioned earlier, due to the COVID-19 pandemic, millions of people have been pushed into poverty. There’s a pressing need for donations now. DAFs are a good bet in 2022 for individuals and corporations to make a difference with their donations. DAFs are a tax-efficient vehicle to contribute toward sustainable development goals (SDGs)
Image: Sustainable Development Goals (SDGs)
The above image shows how individuals and organisations can contribute toward various SDGs apart from ‘No Poverty’ through DAFs.
Sponsored charitable organisations provide you with various investment offerings for investing your funds. This helps your funds to grow till such time they are invested. The return on investment is tax-free, so you can donate more than what you have contributed over time.
Advantages of DAF
There are several advantages of DAFs, such as the following:
Personalisation of DAF account: You can personalise your contributions to a DAF based on the purpose for which you will use them. For example, you can name the DAF account as ‘Alex College Education Fund’.
Tax advantages: Investments made in a DAF are one of the most tax-efficient investments. You can avail tax deduction against the contribution made to the DAF. The contribution can be invested before it is granted. Any growth in the DAF contribution is not taxable in the hands of the contributor.
Record keeping: Your DAF has a record of all the contributions you have made, their growth, and the grants that you have recommended.
Privacy (anonymous donations): If you don't want others to know about your donations, you can make grants anonymously. This way, you can continue making grants confidentially.
Expert fund management: The DAF sponsors employ expert fund managers to invest the donor contributions based on the investment plan chosen.
Contribute non-cash assets: While cash is a popular contribution method, you can make contributions in the form of other asset classes too, such as stocks, fixed income securities, art, collectables, real estate, etc.
Create a legacy: You can involve your next generation in the DAF and encourage them to continue contributing and granting after you. You can also leave a bequest to the DAF with an instruction to grant a certain percentage of the assets over time. This creates a legacy that will continue after you.
Disadvantages of donor-advised funds:
While DAFs have many advantages, they do have some disadvantages also. Some of these are listed below:
Contributions are irrevocable: Contributions give you immediate tax benefits, so they are irrevocable. So whatever contributions you make are final, and you will not get them back under any circumstances.
Minimum donation amount: Some sponsors have a minimum requirement ranging from $5000 to $25,000 to start a DAF account. Others have minimum amounts from $500 to $5000 for additional contributions. It may not be feasible for everyone to donate such high amounts.
Sundry fees: The sponsors may charge various fees in the form of administrative fees, investment fees, etc. These fees are a certain percentage of contributions.
Availability of DAFs in India
While DAFs are popular in the US, currently, we don't have such investment vehicles available directly in India. However, some NGOs that have a presence in India have tied up with DAF sponsors in the US. An individual can open a DAF with a US-based sponsor and make contributions. The donor can choose an NGO based in India to make the grants. Resident Indian investors should check with the NGO/DAF sponsors for income tax benefits for contributions.
Some examples include:
- Mission India is a member of the Barnabas Foundation and National Christian Foundation. Individuals can open a DAF account with any of these sponsors. You can make your grants in favour of Mission India.
- Global Giving has a tie-up with Vanguard Charitable for DAF. An individual can contribute and make grants favouring Rajasthan Samgrah Kalyan Sansthan, an NGO that is working towards providing COVID-19 humanitarian relief in India.
Donor-advised funds (DAFs) are an excellent vehicle for fund donation. They give you the flexibility to contribute as much as you want and any number of times. You can leave your funds invested to grow. They give you tax benefits immediately at the time of contribution, and you can recommend a grant favouring any charitable organisation/s of your choice.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.