What is a donor-advised fund?

A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities or other assets to a donor-advised fund at a public charity, like Fidelity Charitable, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity.

When you give, you want your charitable donations to be as effective as possible. Donor-advised funds are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity. Let’s take an in-depth look at how a donor-advised fund works.

What are the benefits of a donor-advised fund?

1. Easily contribute a wide range of assets

Giving non-cash assets is often more efficient than giving via cash or credit cards, but it is difficult for many charities to accept these donations. Contributing assets other than cash is simple with a donor-advised fund. In some cases, it’s possible to transfer stock directly from your brokerage account with the click of a button. See what you can donate.

Assets generally accepted include:

2. Maximize potential tax benefits

As soon as you make a donation, you are eligible for an immediate tax deduction, just as you would by donating to another public charity, like your local homeless shelter or food pantry. But some donations could make you eligible for additional benefits.

Cash donations
If you donate cash, via check or wire transfer, you're generally eligible for an income tax deduction of up to 60 percent of your adjusted gross income.

Donations of long-term appreciated assets
Donating long-term appreciated securities directly to charity—instead of liquidating the asset and donating the proceeds—can help maximize both your tax benefit and the overall amount you have to grant to charity. These donations provide two tax benefits:

• Become eligible for an income tax deduction of the full fair-market value of the asset, up to 30 percent of your adjusted gross income.         
• Eliminate capital gains tax on long-term appreciated assets, as long as they’ve been held for more than a year.

3. Invest your donation for tax-free growth

Once you have funded your donor-advised fund, you may recommend an investment strategy for your account—potentially growing your account and providing you with more dollars to grant to charity. Many sponsoring organizations also have programs allowing you to nominate your financial advisor to manage the investment of your charitable funds.

4. Simplify recordkeeping and organization

With a donor-advised fund, you don’t have to keep track of every gift acknowledgment from every charity you support—just the receipts from your donor-advised fund contributions. When you’re ready to support your favorite charity, you can simply log in to your account and recommend a grant to any IRS-qualified public charity. 

5. Support your legacy planning

You can incorporate your donor-advised fund into estate planning by making a bequest in your will to the donor-advised fund sponsor or by making the sponsor a beneficiary of a retirement plan, life insurance policy or charitable trust. By leaving instructions with the donor-advised fund sponsor, you can support multiple charities with one bequest. These gifts can also help reduce or eliminate the burden of estate tax for your heirs.

Many sponsoring organizations also enable you to create a succession plan for your donor-advised fund—allowing you to pass the remaining funds in your account on to your heirs or to your favorite charities. Some programs allow you to break the fund up into multiple smaller funds that you can pass down to different successors. While sponsoring organizations handle succession differently, donor-advised funds can be a valuable tool for estate planning.

How can I use my donor-advised fund to support charities?

With a donor-advised fund, you generally CAN:

• Support IRS-qualified public charities with grant recommendations from the donor-advised fund. The public charity sponsoring your account will conduct due diligence to ensure the funds granted go to an IRS-qualified public charity and will be used for charitable purposes. 
• Choose whether to recommend anonymous grants to charity or to provide grant acknowledgment contact information with their grant recommendations. While donors choose to provide their names and addresses on nearly 90 percent of grants recommended through Fidelity Charitable, donor-advised funds offer the option for anonymous granting for those who wish to recommend grants privately.
• Specify a specific use, campaign or purpose for your grant recommendation. While you cannot fulfill legally binding pledges with a donor-advised fund, you are able to attach a special purpose to your grants, which the sponsoring organization will relay to the charity. Similarly, you may make grant recommendations “in honor of” or “in memory of” a loved one.

With a donor-advised fund, you generally CANNOT:

• Support organizations other than IRS-qualified, 501(c)(3) organizations, such as political groups or crowdfunding campaigns. Private foundations are also ineligible to receive donor-advised fund grants.
• Recommend grants that may provide a personal benefit—such as school tuition for a grandchild or tickets to a charity event that you will attend. Because you would receive something of personal value from these grants, they are not eligible, just like they would not be eligible for a tax deduction. Donor-advised fund dollars are to be strictly used for charitable purposes. 

How is a donor-advised fund different from a private foundation?

Private foundations and donor-advised funds are both charitable giving vehicles that help donors facilitate their giving and achieve their philanthropic goals. Unlike donor-advised funds, private foundations are separate legal entities, generally established by an individual, family or corporation. Private foundations are subject to more stringent tax laws and regulations than public charities and are responsible for their own tax filing and recordkeeping. Benefits of a private foundation include greater administrative control over assets and grantmaking, including the ability to make grants to organizations other than IRS-qualified, 501(c)(3) public charities. With different structures, rules and features, donor-advised funds and private foundations each come with a unique set of advantages and limitations. Learn more about private foundations.