Which Type of Donor-Advised Fund Is Right for You?

When people first think of donor-advised funds (DAFs), they naturally turn to the national funds – the big box stores of the donor-advised world. Yet, by 2021, nearly 30% of our new accounts at DonorsTrust have switched from large, national DAF providers, such as Fidelity Charitable.

Community foundations and Jewish federations were among the first to offer donor-advised funds in the 1930s. Institutions have been trapped for the past three decades, and DAFs have flourished ever since. As of 2020, there are an estimated 1,000 DAF sponsorship organizations in the United States, according to the National Philanthropic Trust.

With a sharp increase in charity over the past two years, new generations are looking for ways to donate to charity using donor-advised funds, whether it be with a mission-driven fund or donating to charities at the local or national level. Below are some of the key questions to ask when considering whether a donor-advised fund makes sense for one’s unique charitable goals.

Q: First, why should I consider using a DAF sponsor group to achieve my philanthropic goals?

Answer: DAFs act as an investment account for charities close to your heart, with the added bonus of immediate tax deductions when you contribute money, securities or other assets. Those funds can then undergo tax-free growth until you decide to place them for the charity of your choice. This is especially beneficial given the state of philanthropic donations in the United States, where some charities are struggling to come to an end.

Through DAFs, you can help nonprofits withstand the storm by providing far-reaching funds that pay out over time and benefit the rainy day needs of charities. Aside from being one of the fastest growing and most effective ways to give, many DAF sponsor groups can provide insight and guidance for the type of charities you want to donate to.

Q: What are the types of sponsorships I can use to create a DAF?

Answer: There are three different types of sponsorship groups from which a donor can choose. The first is community foundations, founded by and for people in a particular community. Community foundations vary in size, capacity, and reach, but are a great option for donors with a variety of interests and financial resources, who lend to long-term assets for a specific sector of society in their geographic area.

Second is national funds, which differs from community funds in some ways – while other sponsors provide DAFs in addition to their existing work, national funds operate exclusively to service DAFs with a key focus on fundraising and grants. There are two types of national funds: funds affiliated with financial institutions, such as Charles Schwab or Vanguard. This is known as commercial gift funds. And non-profit organizationswhich on the other hand are national funds that operate independently, such as the National Philanthropic Trust and United Charitable, or those that are faith-based, including the National Christian Foundation or Jewish National Fund.

Last but not least mission-driven funds. And they are driven by it – a mission, whether related to a particular cause, faith or institution. Unlike community foundations, these groups go beyond an individual community and are organized behind a shared identity or cause that extends beyond certain geographic areas. Some of the most common types of mission-driven funds you may be familiar with include hospitals, universities, rotating clubs, and topic-driven nonprofits.

Q: What type of donors should consider using a community foundation sponsorship group?

Answer: If you have a close connection with a certain city or town, or a family that has roots in an area that you now want to give back to, using a community foundation is the right choice for you. These foundations have a keen understanding of the community’s needs and a history of overcoming obstacles with your donation. The ability to gather that knowledge and investigate local non-profit organizations allows you to feel safe in the knowledge that your charity choices best serve the community you love.

In addition, community funds offer donors not only of DAF opportunities, but also funds of interest, earmarked funds and bursary funds among others – which means that your donation can make a big impact just the way you want it.

Q: I want to focus on a specific goal, such as childhood hunger. What type of sponsor group is best suited for me?

Answer: By using single-expense nonprofits, mission-driven funds can better connect you to your goal to support this particular cause, as well as a larger network of contributors who want to do the same. Choosing a mission-driven fund means knowing that the organization believes in the efforts and issues you make, and has the proven experience and ability to make a difference.

This expertise and guidance can help you make the smartest giving choices with your money, including linking DAF funding to further donations by the family or donor, or achieving a larger specific goal, such as impact investing or international giving .

Q: What else do I need to know when choosing a DAF sponsor group?

Answer: Here are additional key considerations to keep in mind when choosing which sponsor group is best for you:

  • Some community foundations are better equipped than others. Smaller foundations in more rural areas may have less technological and administrative capabilities, while others have resources where you can manage your DAFs online.
  • National commercial funds do not always provide individualized support. Although they can provide unique award-winning services, many do not offer expertise in giving in a specific area or to a specific issue. As a result, they do not offer networking opportunities with other like-minded donors that you can find within other groups.
  • Community foundations can differ in many ways. This may include investment costs, ability to accept certain assets and DAF minimums. Make sure you check these details before choosing which community foundation is best for you.
  • Similarly, national fund resources and capabilities also differ. Each can offer a number of different features and benefits, minimum fund amounts, a variety of investment options and different payout rules. If you have a wealth manager or adviser, they may not have access to all DAF sponsors, and they may be compensated differently by each one.
  • Do you want your money to be put to work quickly? Mission-driven fund providers – also known as single issue – have the highest payout rates among the different types of providers: 28.8% in 2019 compared to 16.4% for community foundations in 2019 and 24.2% for the national funds. The higher payout rate suggests that this type of fund is good for donors who are eager to put their charity dollars into action quickly for a cause they believe in.

Donor-advised funds are one of the fastest growing financial instruments on the market – and with good reason, as the tool helps donors simplify, secure and grow their charity dollars. Choosing the right partner in your giving comes down to what you value most.

President, HUB, DonorsTrust

Lawson Bader has served as President and CEO of DonorsTrust since 2015. He has 20 years of experience leading free market research and advocacy groups, including the Competitive Enterprise Institute and the Mercatus Center. DonorsTrust is a community foundation that protects the intentions of account holders that seeks to promote charities that address civic issues, are mostly privately funded, do not increase the size and scope of government, and promote free enterprise and personal responsibility.

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