What Are Donor-Advised Funds?
Let’s dive into an exciting topic that merges philanthropy with smart financial impact investing! Donor-Advised Funds (DAFs) can now be used for both! A lot of people don’t know their DAF can be used in for-profit investments - and that the profits go back into their DAF to help it grow.If you're passionate about giving back but also interested in maximizing your financial impact, this new approach might just be the perfect fit for you.
Most people think DAFs are meant to only be used for charitable giving- however that has changed, and they now can be used for angel investing, and then the returns go back into your DAF. It’s a way of making a difference in the for-profit world through your Donor Advisory Fund.
Donor-Advised Funds are unique financial vehicles that allow individuals to make charitable contributions, receive immediate tax benefits, and then recommend grants from the fund over time. Think of a DAF as a charitable investment account. Once you contribute to this account, you have the flexibility to decide which non-profits will receive your donations and when. This structure provides a strategic way to manage your charitable giving while also enjoying significant tax advantages. Some but not all DAF entities where you set it up now allow you to also invest in for-profit companies as we just mentioned.
Setting Up a Donor-Advised Fund
Setting up a DAF is straightforward. Here’s a step-by-step guide to get you started:- Choose a Sponsoring Organization: The first step is selecting a sponsoring organization that manages DAFs. Organizations like Abundance Capital specialize in setting up and managing these funds. They handle the administrative tasks and ensure your fund complies with IRS regulations. They are also one of the entities that facilitates investing into for-profit opportunities.
- Make an Initial Contribution: Once you’ve chosen a sponsoring organization, you’ll need to make an initial contribution. This can be in the form of cash, securities, or other assets. The contribution is tax-deductible in the year you make it.
- Establish Your Fund: After making your contribution, you’ll set up your fund by naming it and defining its mission. This could be in honor of a loved one or dedicated to a specific cause you’re passionate about.
- Invest the Assets: One of the exciting aspects of a DAF is the ability to invest the assets within the fund. This can potentially grow your charitable dollars over time. Most sponsoring organizations offer a variety of investment options, ranging from conservative to aggressive, depending on your risk tolerance and charitable goals.
- Recommend Grants: With your DAF established and invested, you can start recommending grants to your favorite non-profits. You have the flexibility to support different charities at different times, allowing you to be strategic and thoughtful with your giving.
Beyond Philanthropy: Using DAFs for Investments
While DAFs are primarily designed for philanthropic purposes, recent developments have expanded their potential uses. Entities like Abundance Capital now offer innovative ways to leverage DAFs for investments, aligning your financial goals with your philanthropic values.- Impact Investing: DAFs can be directed towards impact investments—investments made with the intention of generating positive, measurable, social, and environmental impact, alongside a financial return. This means you can support sustainable businesses or projects that align with your values, all while potentially growing your charitable assets.
- Social Enterprises: By investing in social enterprises through your DAF, you can support businesses that tackle social issues. These enterprises often reinvest their profits into their mission, creating a cycle of positive impact.
- Mission-Related Investments (MRIs): MRIs are another innovative use of DAFs. These are investments made from a foundation’s endowment with the intention of furthering its charitable purposes. MRIs can offer returns that are reinvested into your DAF, amplifying your ability to grant funds to non-profits.
Why This is Exciting
Angel Investing:The ability to use DAFs for investments is a game-changer. It allows philanthropists to make a more significant impact by not only granting funds to non-profits but also by supporting the growth of socially responsible businesses and projects. This approach aligns financial success with positive social outcomes, creating a powerful synergy between your investment strategy and your philanthropic goals.
Donor-Advised Funds offer a flexible, strategic, and impactful way to manage your charitable giving. With new opportunities to invest in causes that matter to you, DAFs are evolving to meet the needs of modern philanthropists. If you're interested in setting up a DAF or exploring how you can use your fund for investments, I encourage you to reach out to organizations like Abundance Capital. They can provide the expertise and support needed to maximize the impact of your generosity.
Learn more about DAFs on my Invest in Her Podcast episode with Margaret Gifford of Abundance Capital and DAF investor Rebecca Hart! https://www.abundancecap.org/
https://www.sheangelinvestors.com/catherine-gray-daf-investing-abundance-capitals-margaret-gifford-rebecca-hart-ep-401/
Happy giving and investing!
Catherine Gray
Producer- Show Her The Money
CEO She Angel Investors, Host of Podcast Invest in Her, Keynote Speaker
Watch my Ted talk here!
https://youtu.be/Ms-tROEeLn4
