As baby boomers age into retirement and manage growing investment sums, their financial advisers increasingly recommend something called a “donor-advised fund” as a way to lower tax bills.
A DAF is kind of like a miniature private charitable foundation. A person can set up a DAF, put money into it and immediately take a tax deduction as if they had made a donation to a charity.
It’s a great strategy for wealthier people who are looking to lower their tax exposure. Trouble is, there are no rules to require distribution of the money to an actual charity. And many people just let the money sit.
Sometimes they forget about it. Sometimes they invest it to let it grow bigger. Sometimes they just can’t make up their minds where to direct it.
And depending on the firm that is administering the DAF, they may have given up their say over where the funds go.
“It’s sort of this peculiar institution,” said Jon Pratt, the retired longtime director of the Minnesota Council of Nonprofits.
Early in his career, Pratt led an initiative called the Philanthropy Project that examined every grant by a Minnesota foundation and ranked it on whether it was reaching intended beneficiaries. “It was pressure to influence what they were doing with their money and to pay attention to who’s benefiting,” he said recently.
Today, he and a California-based partner have relaunched the Philanthropy Project to call attention to money in DAFs that has already received the tax benefit of a charitable donation but hasn’t reached charities.