... but not the charities. Donors give their charitable donations (and get a tax deduction) to investment companies to be managed in separate client accounts. Money in such donor-advised funds is invested and held until the clients give instructions (“advise”) about distributions to operating charities. Donor-advised funds (or DAFs) give donors all of the tax benefits of charitable giving while imposing no obligation that the money be put to active charitable use. They have become the second-most-popular “charity”.
If a donor fails to distribute the account during her lifetime, she can pass on the privilege of making distributions to her children or grandchildren or anyone else she chooses. Thus, assets that have been given the tax benefits of charitable donations can be held in a DAF for decades or even centuries, all the while earning management fees for the financial institution.
While the donor cedes all legal control over donated funds, he can save taxes in a number of ways. If he donates shares of stock—rather than cash, he can save an additional 20 percent in capital gains taxes. If he donates property that is not publicly traded stock and the property goes up in value, his deduction also goes up. For example, if a donor invested $100,000 in a hedge fund, and it grew to be worth $2 million, the donor would get only a $100,000 deduction if it were given to a private foundation, but would get a $2 million deduction if it were given to a DAF.
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