There are many ways to participate in philanthropic activities. Donor-advised funds, though, represent one of the more interesting tools available. If you're thinking about setting up a DAF, though, you should understand what one is and how the optimal version of one works.

Charitable Account

A public charity can provide accounts for individuals or organizations with philanthropic aims. The goal of a DAF is to invest the funds with an eye toward growth. As the available resources increase through investment, the charity will be able to accomplish more.

As the term suggests, donor-advised funds leave a good bit of power in the hands of the contributors. Donors will be able to direct grants from the funds to organizations that suit their philanthropic goals.

Ongoing Contributions

Like with any investment vehicle, donor-advised funds allow ongoing contributions. If you want to contribute annually, for example, that's entirely possible.

This also makes it easier for you to structure the tax benefits of your donations. Tax benefits from a DAF contribution are immediate. DAFs are excellent for people and organizations that may see variations in annual income. They can make contributions according to their tax needs, allowing them to throttle up or down as circumstances dictate.

You can contribute virtually anything classified as an asset to a fund. This includes stocks, bonds, real estate, and cash. Many people like DAFs because they minimize or eliminate tax events, effectively converting liabilities into benefits.

Long-Term Goals

Given the investing-focused nature of donor-advised funds, you should have an eye toward long-term giving. DAFs are great for supporting causes that confront long-term challenges. If you wish to contribute to an institute researching cancer treatments and cures, for example, a DAF would be a superb vehicle for that sort of philanthropy. The money would grow through long-term investments, providing a pipeline for ongoing research.

Legacy Planning

Ideally, donor-advised funds will grow annually. This presents the notable problem that you'll need a legacy plan for your DAF. You will want to appoint trusted parties to manage the DAF if you pass or are incapacitated.

Good for Donations of All Sizes

A DAF is highly scalable. You don't have to be a billionaire to make a difference. A DAF can handle the administrative costs associated with philanthropy. Big donors may prefer this, too, because more of their contributions will go to investment growth and long-term giving.

Talk to a financial professional to learn more about donor-advised funds.