Understanding the Donor Advised Fund (DAF)

When it comes to charitable giving, you can have your cake and eat it too. While giving feels great, so does a tax break. Enter the donor-advised fund (DAF) as a potential tool for continuing to give in meaningful (and tax efficient) ways. As always, the below is not intended and should not be considered tax advice. Please consult with your tax professional for specifics to your situation.

What’s Changed About Charitable Giving?

Charitable deductions are still around but several other itemized deductions have recently gone to the wayside, marking it less popular to itemize expenses versus taking the higher standard deduction.

This introduces a new incentive to consider grouping your deductible expenses so they can periodically “count” toward reducing your taxes due.

For example, if you usually donate $2,500 annually to charity, you could instead donate $25,000 once each decade. Combined with other deductibles, you might be able to take a nice size deduction that year, which may generate other tax-planning opportunities.

What Can a Donor Advised Fund Do for You?

Donor Advised Funds are not new; they’ve been around since the 1930s, but they’ve been garnering more attention as a potentially appropriate tax-planning tool. Here’s how they work:

1. Make a sizable donation to a Donor Advised Fund: Donating to a Donor Advised Fund, which acts like a “charitable bank,” is one way to group your deductions. But remember: DAF contributions are irrevocable. You can’t change your mind and later reclaim the funds.

2. Deduct the full amount in the year you fund the DAF: Donor Advised Funds are established by nonprofit sponsoring organizations, so your entire contribution is available for the maximum allowable deduction in the year you make it. Plus, once you’ve funded a DAF, the sponsor typically invests the assets, and any returns they earn are tax-free. This can give your donation more “giving-power” over time.

3. Choose which charities will receive the funds: Over time, and as the name “donor-advised fund” suggests, you get to advise the DAF’s sponsoring organization on when to grant assets, and where those grants will go.

Donating through a Donor Advised Fund may be preferred if:

• You’d like to retain a say over what happens to those assets.
• You’re not yet ready to allocate all the money to your favorite causes.
• You’d like to donate appreciated stocks without selling them first.

The American Endowment Foundation offers this 2015 “Donor Advised Fund Summary for Donors” with additional reasons a DAF may be appealing.

While a DAF isn’t for everyone, along the spectrum of charitable giving, they’re relatively easy and affordable to establish. In theory, they fall somewhere between simply writing a check, versus taking on the time, costs and effort of a trust or private foundation.

Differentiating Donor Advised Funds

If you decide a Donor Advised Fund would be useful to your cause, it’s worth doing some due diligence before you fund a DAF. Here are some key considerations:

Minimums – Different DAFs have different minimums for opening an account. For example, one sponsor may require $5,000 to get started, while another may have a higher threshold.

Fees – As with any investment account, expect administration fees. Just make sure they’re transparent, so they don’t eat up all the benefits of having a DAF to begin with.

Acceptable Assets – Most DAFs will let you donate cash as well as stocks. Some may also accept other types of assets, such as real estate, private equity or insurance.

Grant-Giving Policies – Some grant-giving policies are more flexible than others. For example, single-entity organizations may require that a percentage of your grants go to their cause. Some may be more specific than others on the minimum size frequency of your grant requests. Some have simplified the grant-making process through online automation; others have not.

Investment Policies – As touched on above, your DAF assets are typically invested in the market, so they can grow tax-free over time. But some investments are far more advisable than others for building long-term giving power. How much say will you have on investment selections?

Transfer and Liquidation Policies – What happens to your DAF account when you die? Some sponsors allow you to name successors if you’d like to continue the account in perpetuity. Some allow you to name charitable organizations as beneficiaries.

Deciding on Your Definitive Donor Advised Funds

Selecting an ideal Donor Advised Fund sponsor for your tax planning and charitable intent usually involves a process of elimination. To narrow the field, decide which DAF features matter the most to you, and which ones may be deal breakers. Have more questions? Set some time to chat here.