Thinking of making a charitable gift? Consider a Donor-Advised Fund.
If you’re thinking of making a charitable donation, whether as part of your estate plan or during your lifetime, a donor-advised fund (DAF) has many benefits to consider. It offers a convenient and attractive alternative to directly giving to charities (or, for some families, to starting a private foundation). It’s also a great way to get children involved in philanthropy. While not everyone has heard of them, DAFs have actually been around since the 1930s but have only more recently, and significantly, grown in popularity.
What is a DAF?
A DAF is a charitable giving vehicle wherein a donor contributes cash or non-liquid assets to a public charity, called the sponsoring organization, which creates a separate account or “fund” for the donor, who then advises the sponsoring organization on how invest and ultimately distribute the fund from the account as charitable gifts over the course of many years. The sponsoring organization may be independent, community-based, religiously affiliated, or connected with a financial institution. There is typically a minimum contribution, ranging from $5,000 to $25,000 depending on the organization. The sponsoring organization manages the administration of the fund and handles the tax reporting. In exchange for managing the fund, the sponsoring organization usually charges an administrative fee based on a percentage of the deposit, which is typically around 1% for smaller deposits.
Why give to a DAF?
There are myriad benefits to using a DAF. Some of the main benefits include the following:
Immediate tax deduction – Once you make a donation, you can immediately claim a tax-deductible charitable contribution (which is deductible in the tax year in which the initial contribution is made). You don’t have to wait until the fund makes distributions to the designated recipient. While you are deciding which charities to support, your contribution is invested and grows tax-free.
Avoid capital gains tax on appreciated assets – A huge benefit to DAFs is that you can donate in-kind, appreciated property such as securities and avoid paying for the appreciation in value that would have resulted from selling those assets. The donor gets a tax deduction for the fair market value of the donation and avoids capital gains tax.
Anonymity – Contributions to a donor-directed foundation are not required to be made public, so individuals or corporations can make anonymous contributions.
Administrative convenience – The sponsoring organization handles the legal, administrative and tax filing requirements, allowing the donor to focus solely on the charitable nature of the fund. This is especially time-saving for the donor when transferring non-cash assets to several organizations.
Opportunity to involve the family – DAFs are a fun way to involve the entire family in charitable giving. Together, a family can come up with a name for the account, such as the “Smith Family Fund for Academic Excellence,” and discuss which charities to donate to. Parents can give each child a certain amount of money to allocate to a charity of his or her choosing. This is a great way for parents to teach children about philanthropy, peak an early interest in specific charities, and allow for children to feel involved in the process of giving. Moreover, children can be named as successor advisors, and the fund can continue long after the donor is dead.
Tax savings under the increased standard deduction – The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction from 2017 to 2018 and significantly limited itemized deductions. Consequently, most people who used to itemize on their tax returns will now be using the standard deduction. To benefit from the increased standard deduction, one strategy is to “bunch” deductible expenses together within the same year. DAFs work well with this plan because you can essentially make several years’ worth of donations within one year, take a tax deduction up front, and still be able to spread out your actual gifts over several years.
If you are interested in learning more about DAFs, talk to your financial advisor. If you have any questions about incorporating a DAF into your estate plan or if you have any other estate planning questions, please call our office at (818) 338-3252 and we would be happy to speak with you.