Donors have a number of options at their disposal when they want to contribute to a nonprofit. An outright gift is the most popular option, but they can also give via a private foundation. A third option, which offers the most control for the individual, is to create a donor-advised fund.
As defined by Ron Jordan and Katelyn L. Quynn in “Invest in Charity,” a donor-advised fund is a specifically named fun at either a charitable or for-profit institution. The fund can be permanently endowed and the donor can make non-binding recommendations to the organization as to how the funds are distributed.
There are types of donors for who this type of fund is best: Individuals who want to make substantial donations to a few nonprofits or individuals who want to make smaller donations to a large number of nonprofits. Jordan and Quynn list six advantages that these people will gain from creating a donor-advised fund:
- Small Gift Minimums: Donor-advised funds can usually be established at for-profit organizations or community foundations for a small amount of money (i.e., $10,000).
- Flexibility in Timing of Gifts: Donors can get an immediate charitable income tax deduction by donating to a donor-advised fund.
- Tax Benefits: Tax benefits are more attractive than those of private foundations.
- Administration: The fund is not required to file separate tax returns or accountings.
- Resources: They bring more charitable dollars into the philanthropic community.
- Investment: They may grow depending on investment performance providing additional support to the charity.