The first donor-advised funds (DAF) were first created in the 1930’s, although Congress did not authorize a legal structure for them until 1969. The popularity of donor-advised funds began in the 1990’s and continued to grow steadily in recent years and right through the economic recession.

What are DAFs, and how can having one benefit you?

How a Donor-Advised Fund Works

 DAF Blog Image

A DAF is a private charitable giving carrier administered by a third party created for the purpose of managing charitable donations on behalf of individuals, families, and organizations.

  1. You make an irrevocable contribution of your personal assets.
  • In any given year, you are allowed to setup and contribute to a DAF.
  • Rather than making a donation directly to a non-profit, you are contributing to the fund.
  • You decide who to give the donation to your charity of choice any time thereafter.
  1. You immediately collect the maximum tax-deduction.
  • This will qualify for a tax deduction only in the year you contribute.
  • The tax-deductible contribution amount can be up to 50% of your adjusted gross income (AGI). For publicly traded securities and other appreciated assets your tax deduction limitation is 30% of AGI, generally deductible at fair market value.
  1. Your contribution will be placed into a donor-advised fund account where it can be invested and have tax-free growth.
  • The fund investments can grow tax free; however, there are minimal fees involved. There is no guarantee of investment growth.
  • You will recommend the DAF account’s investment options based on a variety of programs.
  • Contributed assets will be managed by you or your financial adviser.
  • Any investment growth inside your DAF is tax free.
  1. You can now at any time recommend grants from your donor-advised fund account to the qualified charities of your choosing.
  • Once you have contributed to the fund, it is then overseen by a nonprofit sponsor organization (generally a financial firm), and you are not allowed to make personal withdrawals from the DAF. Instead, you “advise” (or direct) the sponsor organization where to send the grants.
  • You recommend grants to IRS-qualified public charities, also known as 501(c)3 organizations.

Advantages

Proactiveness:

They promote proactive gift strategy, planning, and giving.

Types of Assets Accepted:

They open the door for you to contribute certain assets beyond cash equivalents or publicly traded, appreciated securities. For example, privately held C-corp or S-corp shares may not accepted by some charities.

Multiple Charities:

DAF accounts enable you to support many charities, at any time, with just one contribution.

Anonymity:

Since gifts come directly from the fund, they offer the opportunity for anonymity.

Reduce Urgency:

They can reduce the urgency to find the right nonprofit or charitable cause within a certain time frame, while still allowing you to take an immediate tax deduction in that given year.

Scheduling Disbursements:

You make the contribution in the year you choose and then decide when the disbursements will happen on your own schedule.

Record keeping:

Consolidates your record keeping and streamlines your tax receipts, all in one secure online location.

Allocating Funds:

They create a framework for allocating funds for future giving without a lot of administration.

Estate Planning:

They are a valuable estate planning tool to support your legacy goals.

Efficiency:

They are more flexible than private foundations, which generally require a set amount of payout every year. Private foundations also require more reporting and generally have higher administrative costs.

Investment Options:

They provide a vast array of investment options, including a plan that permits donors’ investment advisers to manage charitable assets on the client’s behalf.

Easy Start-Up:

They are simple to create and do not require the involvement of an attorney.

Tax Deductions:

DAF allows you to take an immediate tax deduction for your contributions – separating the timing of your charitable support and your tax deduction.

 

Most donor-advised sponsor organizations require a minimum investment, generally between $5,000 and $10,000; others may have a higher required minimum investment. In general the fees are set based on the total assets invested. Check with your financial adviser about these specifics before you decide which DAF to use. Once you start contributing to the fund, the sponsor organization will help you set up and transfer assets. This process is usually quick and easy for the donor.

At first Donor-Advised funds require some attention and diligence. It will be helpful for you to know some of the limitations and potential challenges with DAFs. Your financial adviser should be able to guide you in the right direction for your situation.

 

 

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The information on this website should not be used in any actual transaction without the advice and guidance of a professional Tax Adviser who is familiar with all the relevant facts.

Although the information contained here is presented in good faith and believed to be correct, it is General in nature and is not intended as tax advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters.

HighMark Wealth Management LLC assumes no obligation to inform any person of any changes in the tax law or other factors that could affect the information contained herein.

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