Donor-advised funds (DAFs) are a type of charitable fund that organizations and individual donors can contribute as a way to benefit philanthropic goals. They provide an immediate tax benefit to you and allow you to recommend grants to your favorite charities.

DAFs are the fastest-growing charitable giving tool in the U.S., providing an easy and tax-advantageous way to support your favorite causes. These charitable accounts empower donors to give as often as they wish to the nonprofits they care about.

DAFs can be a sensible alternative to private foundations, providing flexible giving strategies with minimal overhead for you as a donor.

DAFs are run by third-party organizations, classified as Section 501(c)(3) organizations. These sponsoring organizations are typically community foundations or public charities. However, some large investment firms may also sponsor DAFs, such as Vanguard and Charles Schwab.

You can donate multiple types of assets to a DAF, including cash, real estate, investments or other noncash assets.

When you contribute to a DAF, you donate to the organization sponsoring the donor fund, not to a charity directly. However, donors to DAFs can recommend the money pooled within the donor fund go to particular charitable organizations, as part of their advisory privileges.

The DAF then acts as a charitable giving vehicle for its donors, and each donor can immediately deduct the full amount of the donation from their taxes for the current tax year.

DAFs are tax-efficient giving accounts and offer many of the same benefits as other philanthropic giving options. Some of these benefits may include:

• Avoid paying capital gains tax on long-term appreciated assets held for more than a year
• Get an immediate tax deduction for the full market value of the gift, up to specified limits
• Easily contribute a wide range of assets
• Consolidate all your charitable giving
• Support a charity you believe in through strategic giving over time
• Create a generational legacy
• Influence your DAF’s charitable gifts and your investment options, without the effort or funds required to run a private foundation

To open a DAF, a donor selects a qualified sponsoring organization or financial institution and puts funds into an account. You can establish a DAF with a number of entities, including community foundations, charities and financial service companies such as Fidelity, Schwab, Vanguard or Bank of America. It is usually best to work with a financial and tax advisor to discuss your philanthropic goals.

Any individual, family, company, foundation or other entity can open a DAF account by contributing assets.

The minimum initial contribution depends on the financial institution you choose when opening your DAF account. While some large institutions have very low to no minimums, initial funding requirements for others can range as low as $5,000 to as high as $250,000 to initially open a fund.

A minimum payout is a certain amount of money that certain charitable funds are legally required to pay out to charitable organizations each year. For example, private foundations have to pay out 5% of the fund’s assets to nonprofits each year. DAFs don’t currently have federally imposed minimum payout requirements.

However, as current applicable tax laws may change in the future, it may be helpful to consider how a minimum payout requirement might affect you. It’s also important to note that some financial institutions do require accounts to make at least one grant within established timeframes to maintain their accounts.