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Donor-Advised Funds: Basics and Potential Benefits

Learn more about this philanthropic tool and how it offers flexibility and benefits that private foundations may not.

multiple hands holding a wooden heart

A shift in the values and priorities that drive charitable giving is also driving a shift in the way that many affluent and high-net-worth individuals choose to give.

According to The 2018 Donor Advised Fund (DAF) Report from National Philanthropic Trust, contributions to donor-advised funds reached 10.2 percent of total U.S. individual giving in 2017, more than doubling during the past decade. Some families are even moving assets out of private foundations to one or more donor-advised funds to give a younger generation more flexibility. And other families are closing their private foundations entirely and doing all their grantmaking through donor-advised funds.

How donor-advised funds work

A donor-advised fund offers a middle ground between participating in simple “checkbook charity” and starting a nonprofit foundation.

Often considered smaller and nimbler cousins of private foundations, donor-advised funds offer many of the perks of foundations—the ability to research potential recipients to decide how funds are distributed—without the volume of legal and financial paperwork that a foundation requires.

To set up a donor-advised fund, donors contribute cash, stock, real estate, or other assets to the 501(c)(3) organization of their choice. The 501(c)(3) serves as a sponsoring organization of the fund. The sponsor may be run by a financial institution, such as Wells Fargo Bank, or by a community, educational, or religious institution. (Learn more about Wells Fargo Philanthropic Services here.)

Generational shifts mean big changes

A few years ago, assets from wealthy families flowed into donor-advised funds in sums typically less than $250,000. Now, says Beth Renner, National Director of Philanthropic Services for Wells Fargo Private Bank, it’s sometimes millions of dollars.

“We’re starting to see generational differences around how families want to engage with philanthropy,” she says.

“The [younger] generations are saying, ‘I don’t want that administrative burden that goes along with a foundation. I want to engage in the fun part of it.’”

That’s because donor-advised funds can be much simpler to manage than private foundations. There are no board meetings and much less paperwork for donors.

More potential benefits for donors and recipients

Donor-advised funds are gaining popularity for other reasons, as well, including: 

Anonymity. Unlike gifts to a charity through a private foundation, which become public record, individuals contributing to a donor-advised fund do not have to be specified as grants are awarded from the fund. Donors can make their gifts anonymous and delegate part of their giving to other family members if they like.

Potential tax advantages. In addition to having the immediate tax deduction relative to your overall income tax liability—by donating highly appreciated assets to donor-advised funds—the invested assets also have the potential to grow tax-free.

“Many of the people we see using donor-advised funds will have an event of some kind” such as the sale of real estate or a business, says Matt Lawson, Senior Specialized Wealth Services Advisory Specialist, Philanthropic Services. “They could use the tax deduction right now, but they don’t want to give right now.”

Donor-advised funds can also provide tax benefits that private foundations cannot. Real estate donated to a private foundation is valued at its cost basis; real estate gifts to donor-advised funds are valued at their current value, which can be higher, potentially providing a bigger tax break. Your wealth team can help you explore different scenarios of how a donor-advised fund fits into your strategic giving plan.

In addition, donor-advised funds can make noncash gifts easier to handle for the giver and the recipient. Donating appreciated stock, real estate, or collectibles directly to a charity can be complicated, and not all nonprofits can handle all types of assets. Selling these assets and donating the proceeds may result in lost value or tax consequences that a transfer into a donor-advised fund may not.

“Boomers can be collectors,” Renner says. “Their son or daughter often doesn’t have the same level of affinity for Dad’s 1950s car collection. So some parents are choosing to donate these assets into the donor-advised funds.”

Mark Tosczak is an experienced business writer and marketing consultant based in North Carolina. Image by iStock

What can Wells Fargo do for you?

Your passion for giving is unique, and your strategy should reflect that. Talk to your team at Wells Fargo to get started.

Wells Fargo Philanthropic Services is part of Wells Fargo Wealth Management providing financial products and services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries.

Wells Fargo Bank, N.A., offers a donor advised fund (DAF) through National Philanthropic Trust, a tax-exempt qualified public charity. In this offering, National Philanthropic Trust is the charitable sponsor of the DAF and Wells Fargo manages the DAF investments. Contributions to any DAF are irrevocable and the charity retains exclusive legal control over the assets.

As required by law, all contributions to a donor advised fund are under the exclusive legal control of the sponsoring public charity—in this case, National Philanthropic Trust. Neither Wells Fargo & Company and its affiliates nor National Philanthropic Trust provide legal advice. You should consult with your own tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you will depend on the specific facts of your situation at the time your taxes are prepared.

Wells Fargo Bank, N.A., offers various advisory and fiduciary products and services including discretionary portfolio management. Wells Fargo affiliates, including Financial Advisors of Wells Fargo Advisors, a separate non-bank affiliate, may be paid an ongoing or one-time referral fee in relation to clients referred to the bank. The bank is responsible for the day-to-day management of the account and for providing investment advice, investment management services and wealth management services to clients. The role of the Financial Advisor with respect to Bank products and services is limited to referral and relationship management services.

Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors does not provide tax or legal advice. Please consult your tax and legal advisors to determine how this information may apply to your own situation.

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