Donor-Advised Fund
Mar. 2, 2017 Whitepaper

Donor-Advised Funds

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A donor-advised fund (DAF) offers an easy way for a donor to make significant charitable gifts over a long period of time. A DAF is similar to a private foundation but requires less money, time, legal assistance and administration to establish and maintain. Because DAFs are public charities, they also enjoy greater tax advantages than private foundations.

During life, a donor (or a donor's designee) can make ongoing, nonbinding recommendations to the DAF as to how, when and where grants from the fund should be made. Additionally, the donor can offer advice to the DAF regarding how contributions should be invested. The donor may suggest that, upon death, grants be made to charities named in his or her will or another legal document such as a revocable living trust.

However, the fund is not obligated to follow any of the donor's suggestions, hence the name donor-advised fund. As a practical matter, though, the DAF will generally follow a donor's wishes. Grants to recipients are typically identified as being made from a specific donor's account, but they can also be made anonymously at the donor's request.

Tax Advantages of a Donor-Advised Fund

A donor can generally take an immediate income tax deduction for charitable contributions of money or non-publicly traded assets to, or for the use of, a DAF if the donor itemizes deductions on his or her federal income tax return. The amount of the deduction depends on several factors, including:
  • The amount of the contribution
  • The type of property donated
  • The donor's adjusted gross income (AGI) 
Generally, cash donations are eligible for deductions of up to 50 percent of the donor's AGI. If the donor makes a gift of long-term capital gain property (such as appreciated stock that has been held for longer than one year), the deduction is limited to 30 percent of the donor's AGI. The fair market value of the property on the date of the donation is used to determine the amount of the charitable deduction. Any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years.

Moreover, there are no federal gift tax consequences because of the charitable gift tax deduction, and federal estate tax liability is minimized with every contribution since donated funds are removed from the donor's taxable estate. In addition, DAFs are not subject to the excise taxes levied against private foundations.

Five Questions to Ask

1. What types of grants recommended by donors will the DAF sponsoring organization approve?

You will want to make sure you will be able to support your favorite charities through the fund. Generally, DAFs are able to support most 501C3 organizations, but sometimes there are restrictions (i.e. religious, international, etc.).

2. What types of assets can the DAF accept besides personal checks?

Many DAFs accept publicly traded stock, privately-held C- and S-company stock, real estate, life insurance, art and collections. Complex assets have been sources of many of the largest donations to DAFs in recent years, and the trend is accelerating.

3. Can the assets in a DAF account be transferred to another DAF sponsor?

It is important to select a DAF that allows you to transfer the account elsewhere if you ever become dissatisfied with any aspect of the sponsoring organization’s services.

4. Are there restrictions on the amount that can be granted from a DAF?

Is the DAF unrestricted or is it a donor-advised endowment fund in which often only 5 percent of the principal can be distributed annually? Most people who want to give during their lifetimes do not select endowed DAFs.

5. What are the specific account details for this DAF?

Questions you should ask before donating include:

  • What are the investment options? 
  • What is the minimum required to open one? 
  • What is the minimum grant recommendation amount? 
  • How can DAF holders recommend grants: Online, call, mail? 
  • How long does it take to approve the recommended grants? 
  • Can repeated grants to the same non-profits be scheduled in advance? 
  • What are the costs?
 
 
 
 
 
 
 

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