With nearly 1.8 million donor-advised fund (DAF) accounts in the country and rising according to The DAF Report, more donors are asking their advisors whether they should open a DAF account or donate directly to charities.

Though some advisors will need to explain how DAFs benefit their clients, many donors already know. Some clients might want to spend time comparing DAFs and private foundations, though as the popularity of DAFs rises, more will become aware of differences.

While DAFs can offer immense value to a wide range of donors, there are some instances where clients should donate directly to their favorite charities. In those cases, advisors can still recommend the most tax-advantaged assets to donate. Even clients who contribute to DAFs may also choose to give directly on occasion.

Questions surrounding this topic increase during times of economic uncertainty and market downturns when donors want to have the greatest impact on causes that matter to them. Since every donor’s situation is different, we’ll review some reasons to establish DAFs vs. donating directly to charities.

10 Reasons to Set Up a DAF for Charitable Giving

There will always be donors who decide to give directly to charities. However, establishing and using DAFs to grant is on the rise, particularly for those with considerable assets. Reasons to establish a DAF include:

  1. Donors do not want to contribute a large donation at one time to one charity; they can instead give to a DAF which can grant out over time to various charities.
  2. DAF sponsors may be able to accept illiquid assets such as privately held stock, real estate, limited partnership interests, and more that many charities cannot accept directly.
  3. Donors can receive an immediate tax deduction for gifting assets to a DAF while they are still working and their income is high, then continue to recommend grants from the DAF in retirement when their income is less.
  4. Successful business owners or executives who donate to a DAF can continue to suggest grants to charities from the DAF even when business is down in the future.
  5. Assets invested within DAFs typically grow tax-free.
  6. DAFs enable donors to react quickly and provide support during crises.
  7. Donors can enjoy the simplicity and efficiency of receiving only one tax receipt letter from one DAF sponsor rather than numerous letters from different charities.
  8. DAFs allow donors to include children, family, and loved ones in the grantmaking process and can establish a charitable legacy for their heirs.
  9. DAFs provide structure for personal or organizational giving without the burden of a private foundation.
  10. Donors can more easily decline solicitations if a cause does not align with the mission of their DAF.

9 Reasons to Donate Directly to Charities

Donating directly gets funds to charities quickly. Rather than setting up a DAF, direct donations might be more appropriate in the following situations:

  1. Donors only support a few select charities.
  2. An individual is only interested in one-time donations rather than long-term philanthropy.
  3. Donors feel confident in providing large irrevocable donations to charities even if the mission or leadership changes – or the donor’s goals change.
  4. The specific charities to which one wants to donate can accept illiquid assets, like stocks.
  5. The entirety of a donor’s yearly charitable giving is through qualified charitable distributions (QCDs) from their IRA.
  6. The donor is not concerned about tax planning.
  7. Donors want to make charitable contributions but do not have considerable assets and still need to plan for retirement and their heirs.
  8. The amount donated may fluctuate from year to year.
  9. Donors are more interested in small donations with no concern for tax deductions.

DAFs vs. Direct Donations: Advisors Can Help Donors Decide

Regardless of whether they decide to establish DAF accounts, there are many benefits to charitable planning conversations between advisors and clients.

Donating directly to charities will always have its place, but donors and advisors can work together to decide if it is more prudent to utilize a DAF to make grants and receive the maximum tax deduction. As always, it’s most important to determine what will have the greatest charitable impact.

Interested In a DAF? Reach Out to American Endowment Foundation

At American Endowment Foundation (AEF), we are always happy to discuss how DAFs can play a role in charitable giving. It doesn’t have to be an “either or” situation – if you or your client intends to continue donating directly to charity, a DAF could be an excellent complement. Contact AEF today, and we’ll talk about expanding philanthropy with you.

Note: An earlier version of this article appeared in the July 27, 2022, edition of ThinkAdvisor.