Donor advised funds are funds which facilitate charitable giving by allowing people to make deposits into accounts and make recommendations about where they would like their funds to go. Essentially, such funds are investment accounts with charities named as their beneficiaries. Such funds can be used by people interested in participating in charitable giving at a variety of levels. It is possible to join a donor advised fund run by a financial services company or a charitable organization.
When someone makes a deposit into a donor advised fund, he or she is asked to choose from a list of potential investments, indicating where the deposited money should be invested to allow the fund to grow. Sometimes the fund may also allow people to make recommendations which fall outside this list, usually if they are large investors. The fund also asks people for input on which charities they would like to benefit from the fund when it disburses funds to such organizations.
There are a number of reasons to choose to work with a donor advised fund. People with substantial amounts of money who might set up private foundations for charity may prefer to use such funds because administrative costs are low. The bulk of the money in the fund goes to charity, not to managing the fund, and donor advised funds don't have overhead costs, such as personnel, associated with private foundations. This means that more money goes to charity.
In addition, donor advised funds offer the option of anonymity. Donors may not want to be known, in which case they can ask that their identities not be disclosed during disbursements. It is also possible for a donor to ask to be identified by a fund. In addition, donor advised funds provide an opportunity for large investments which would not be available to many individual investors; just as people in a mutual fund benefit from deposits made by others, charities which are supported by a donor advised fund get more out of the fund's investments.
There are tax advantages to donor advised funds. Donors are donating to charity, albeit in a slightly roundabout way, and they receive tax credits for this. Technically they are signing the money away at the time the deposit is made, so these tax benefits take effect immediately. It is important to make sure that a donor advised fund is registered and run properly, and that it does indeed count for tax reasons to avoid a situation in which tax filings are incorrect.