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What is a Donor-Advised Fund?

An alternative to a family foundation is a donor-advised fund. Many brokerage firms and investment companies offer their own versions of donor-advised funds. These funds are established as public charities and contributions are tax deductible as charitable gifts. They can be established with a relatively small contribution (many require an initial gift of only $5000) and the expenses are often charged as an asset-based fee. This makes them substantially less expensive to establish than a family foundation. 

Once contributions are made to a donor-advised fund the donor can also recommend the investment allocation for the funds. If the money is to be dispersed to another charity within a short period of time, the donor might elect to invest in.a money market account for example. If the goal is to grow the account over a period of many years, the donor might choose to recommend a significantly more aggressive investment allocation. With minimum account balances, many donor advised funds allow donors to recommend their own investment advisor. Distributions or grants are processed on the recommendation of the donor to qualified charities. The grant can either identify the donor or they may choose to remain anonymous. Donors can also name successor donors to continue the charitable objectives of the fund beyond their lifetime. Donor-advised funds are also established by Community Foundations or other institutions. They are accounts that are held separately for the donor that establishes the fund. Normally they allow the donor, with the consent of the Community Foundation, to distribute his or her charitable gifts to as many other charities and in any amount as the donor desires.

Some funds allow the donor to appoint his own money manager or to direct the money management independently. This type of flexibility has become very popular among the giving community since it allows a significant amount of control to remain with the donor. Further, many donor-advised funds allow the fund to remain in force for multiple generations. Contributions to donor-advised funds are deductible in the year of the contribution and for five succeeding years.