A donor-advised fund is a lot like a savings account that is used for charitable giving. By making a minimum irrevocable contribution of cash or other personal assets, a DAF can be established at a sponsoring organization, which is a registered public charity that sponsors a DAF program. Upon establishing a DAF, the donor receives an immediate full tax deduction for the initial contribution and, at any time thereafter, is allowed to recommend grants from the DAF to qualified charities of her choice. The donor can make additional contributions, with immediate tax benefits, into an existing DAF whenever desired. DAF invested contributions grow tax-free and donors often are able to choose the investment allocation strategy for their individual DAFs from various options offered by the sponsoring organization. DAFs also may exist into perpetuity as some sponsoring organizations give donors the option of appointing a successor advisor upon the donor's death, which allows that person to continue grant-making recommendations from the DAF.
The charities eligible to receive grants from DAFs are IRS-qualified public charities, including educational organizations, environmental organizations, hospitals, museums and organizations for the arts, religious organizations and places of worship, scientific and medical research institutions, and any other organization or institution formed for charitable purposes. Private foundations, charities based outside of the United States, and certain types of charitable supporting organizations generally are ineligible to receive grants from DAFs. Technically, once a contribution is made into a DAF, the donor legally loses the power to control how the DAF assets are distributed thereafter since all DAF grant recommendations are subject to the review and approval of the sponsoring organization. This is why the funds are donor "advised" by name, and not donor "directed." By all indications, however, DAF sponsoring organizations typically do follow the grant recommendations that are made by donors and only in rare cases, such as if the grant request was not charitable in nature or was directed to an individual, are grant recommendations refused. Therefore, although DAF holders legally forfeit control of their contributions, in reality, they are deciding how their DAF assets are invested and eventually distributed for charitable giving.
Donor-advised funds offer donors many advantages when compared to establishing and giving from a charitable private foundation. Some of these advantages are noted in the table below.
In addition to the tax deduction rate advantages noted above, another important difference between DAFs and private foundations is that while private foundations must distribute or spend on their own operations 5% of the value of their net assets annually to avoid additional taxes, DAFs do not have a required payout rate. Historical data does show that, on average, DAFs have distributed grants at rates greater than the 5% required for private foundations, and the three largest DAFs paid out 17% to 22% of their assets in 2011. Some DAF sponsoring organizations also have internal grant-making policies that require a minimum annual payout of 5% of the overall total five-year rolling average of net assets, but the three largest DAFs note that their payout rates have always exceeded this 5% minimum naturally without the need for the sponsoring organization to contact individual account holders with DAFs that have payout rates less than 5% over the same five-year period. The lack of an annual payout minimum for individual DAFs, however, is a concern for CharityWatch since the contributions set aside in DAFs have not yet reached the public charities that depend on such funding to run their programs. Therefore, CharityWatch encourages DAF holders who have benefited from a tax deduction to also allow charities to benefit by not letting their accounts sit dormant.
Donor-advised funds have been in existence since the 1930s when DAFs primarily existed at community foundations and faith-based organizations. In the 1990s, the first commercial DAF programs with a national reach were established, including the charitable affiliates of financial institutions such as Fidelity Investments (Fidelity Charitable), Charles Schwab & Co. (Schwab Charitable), and The Vanguard Group (Vanguard Charitable). Although they have sponsored DAFs for far less time than many community foundations and faith-based organizations, national DAFs held more DAF accounts (over 95,000) than community foundations and faith-based and other single-issue focused organizations combined in 2011, according to National Philanthropic Trust's 2012 Donor-Advised Fund Report. In total, more than 177,000 DAF accounts existed in 2011, and over $9 billion was contributed into DAFs while over $7 billion in charitable grants were made from DAFs, according to National Philanthropic Trust's 2012 Donor-Advised Fund Report. The DAF contribution and grant dollar totals for 2011 represented all-time highs for DAFs. Contributions to Fidelity Charitable increased so much in 2011 that it ranked as the nation's second largest charity overall in private funds raised, second only to United Way Worldwide; Schwab Charitable held the 12th position overall behind The Y and Vanguard Charitable the 22nd position behind Yale University, based on The Chronicle of Philanthropy's 2012 "Philanthropy 400" rankings. The rapid growth of DAFs has continued into 2013 as DAF contributions totaled $7.8 billion and grants totaled $3.4 billion in the first quarter, representing 41% and 18% increases, respectively, compared to the same quarter last year, according to The Chronicle of Philanthropy. Hoping to attract younger donors and families of modest wealth with the allure of DAFs, many organizations now offer DAFs that can be opened with no or relatively low required minimum contribution and grant-making amount. Thanks to the increasing availability of such DAF options, along with the many benefits DAFs provide donors and the recovery of the stock market, DAFs have become the fastest growing charitable vehicle in the United States.
This logo will appear on a charity's website that uses DAF Direct: 
As the popularity of DAFs continues to surge, a new online application will make it even easier for some donors to give via DAF accounts. Called the "DAF Direct widget" and introduced in April 2013, the application was created through a collaboration among DAF sponsoring organizations led by Fidelity Charitable, and 10 charities that piloted the application. The DAF Direct widget is promoted as a free, easy to use web application that will enable donors to initiate, directly from a charity's website, a grant recommendation from their DAF account to that charity. The features of the DAF Direct widget are likely to appeal to nonprofits and fundraisers, which means that the application may quickly become a standard among the online giving options provided to donors. Quick adoption of the DAF Direct widget throughout the nonprofit field should be welcomed by those who already have established and actively recommend grants from DAFs.
With DAFs reaching unprecedented levels for contributions received and grant-making dollars distributed, it is easy to understand Fidelity Charitable's motivation for leading the collaboration behind the creation of the DAF Direct widget. Although the plan is to expand the reach of DAF Direct, upon its introduction, only donors with DAFs held by Fidelity Charitable or Schwab Charitable are able to use the application when it is available on a charity's website. The DAF program features and policies of Fidelity and Schwab have substantial similarities, including the following:
There is no transaction fee for a donor to use the DAF Direct widget to make a recommendation from a charity's website-100% of the approved recommended grant will be distributed to the chosen charity.
If a charity is making use of the DAF Direct widget, it should be among the giving options provided on the donation page of the charity's website. To recommend a grant via DAF Direct, the donor simply selects from a pull-down menu the supporting organization where his DAF account is held (e.g., Fidelity Charitable or Schwab Charitable), enters the desired dollar amount for the grant recommendation, and then clicks on the "Next" button displayed within the widget. The application then automatically transfers the information and the donor to the DAF supporting organization's website where after the donor logs-in, the grant recommendation can be completed within a few clicks. The DAF Direct widget is now available to all qualified charitable organizations that wish to include it on their websites. The American Red Cross and Save the Children, two CharityWatch Top-Rated charities, each currently offer donors the option of giving via DAF Direct. The DAF Direct website (www.dafdirect.org) includes a listing of other nonprofits that use the DAF Direct widget, and assuming the application proves to be secure and reliable, CharityWatch suspects that the list of DAF Direct participating nonprofits will grow quickly. Whether using the new DAF Direct widget on your favorite charity's website or recommending grants from a DAF the traditional way, don't forget about your DAF contributions-make sure they reach the charities you want to support within a few years even though that end-of-year tax deadline is no longer looming.