Are Donor-Advised Funds Always the Best Economic Choice?

Childs, Bradley D.; Gonas, John S.; Thornton, Jeremy P.
June 2008
Journal of Financial Planning;Jun2008, Vol. 21 Issue 6, p54
Academic Journal
• Donor-advised funds (DAFs) are experiencing rapid growth because they are a cost-efficient way for individual investors to receive an immediate tax deduction, while controlling the timing and disbursement levels of charitable gifts. • Other charitable vehicles, such as private foundations or charitable remainder trusts, also realize this tax benefit, but these vehicles are more expensive to set up and monitor. • Even though DAFs can be preferable to private foundations, they may not be preferable to a hold and give later" strategy that we call checkbook philanthropy." • If other benefits of a DAF, such as charitable due diligence, are not significant factors to the investor/taxpayer, the choice between a donor-advised fund and checkbook philanthropy centers on the interplay between the incremental DAF fees and the effective tax rate on the investments potentially held outside of a DAF. This article finds that a DAF is preferable to checkbook philanthropy whenever the incremental cost imposed by the DAF is less than the product of the investment's return multiplied by the effective tax rate. If the incremental cost is greater than this product, checkbook philanthropy is preferred. • As long as tax rates are constant, the timing of a charitable deduction does not affect how much money is actually received by a charity. The same results occur whether the tax savings of the initial transfer to the DAF are reinvested for later donation or the tax savings are rolled into additional transfers to the DAF.


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