Charitable giving wording across dollars for donation to donor advised funds (DAFs)First established in the 1930s, Donor Advised Funds (DAFs) have become increasingly popular in recent years. By 2017, there were 463,622 individual Donor Advised Funds in the US, holding more than $110 billion in assets [1]. Giving from DAFs now accounts for around 8.3% of all individual gifting in America today [2].

For clients intent on sharing wealth through a planned giving strategy, or for those seeking to optimize charitable deductions following tax reform, a Donor Advised Fund can be a useful tool. SageVest Wealth Management discusses the basics of Donor Advised Funds (DAFs). 

What Is A Donor Advised Fund (DAF)?

A Donor Advised Fund (DAF) is a charitable investment account, held at a financial institution or community foundation. It’s a tax-efficient conduit for your gifts, helping to maximize your contributions, track donations, and streamline your philanthropic endeavors.

How Do DAFs Work?

Donor Advised Funds function like other brokerage accounts, except that contributions are irrevocable.

The financial institution or community foundation (the ‘charitable sponsor’) invests your contributions. Most use pre-set investment pools, although some allow you to recommend asset allocations.

At any time, you may instruct the charitable sponsor to make a donation (or ‘grant’) from your DAF to a qualified charity.

What Are The Tax Advantages Of A DAF?

A Donor Advised Fund offers a number of potential tax benefits, including:

1) With tax-free growth*, your gift has the potential to provide greater philanthropic impact.

2) Directing appreciated assets into your DAF can help reduce your capital gains liability.

3) Any tax deduction for which you qualify occurs in the year of the contribution, not when the funds are paid out.

This feature makes Donor Advised Funds ideally suited for large taxable income years when you might benefit from a large charitable deduction, but wish to distribute the charitable amount over a period of years.

The ability to ‘bunch’ several years’ worth of gifts is also valuable for taxpayers who are no longer able to itemize charitable gifts due to the higher standard deduction. Contributing a lump sum can be sufficient to exceed the standard deduction, allowing you to itemize gifts and claim the tax benefit.

Example: Joe and Jane are married, with no other taxable deductions. Their annual $10,000 donation can no longer be itemized as it’s below the $24,000 standard deduction for joint filers. In 2019, the couple contributes $50,000 (the equivalent of five annual gifts) into their Donor Advised Fund. Because this amount exceeds the standard deduction, they can now itemize and will receive an immediate tax benefit for their lump sum gift. The process can be repeated in the future, although the standard deduction applies in interim years.

4) Charitable sponsors perform due diligence, ensuring that any charity you nominate is recognized by the IRS for tax deduction purposes.

5) Donor Advised Funds may not be subject to estate tax. Consult an estate planning attorney for more information.

Who Can Open A Donor Advised Fund?

Individuals, couples, families, and some entities can open a DAF.

You can usually choose the name of your Donor Advised Fund e.g., The John Doe Fund, The Jane and John Doe Gift Fund, The Doe Family Charitable Fund, etc.

A Donor Advised Fund can be a great opportunity to reinforce family values and involve kids and grandkids in thoughtful giving. Children must be 18 or older to participate in active account management.

How Much Do I Need To Establish A DAF?

Every charitable sponsor defines their own minimum initial investment, typically ranging from $500-$25,000. They may also define minimum contribution amounts for the future, and/or might require a minimum annual account balance.

What Can I Contribute To My DAF?

Each charitable sponsor also defines what assets they accept. The following appreciated assets are common:

  • Cash.
  • Publicly traded securities.
  • ETFs.
  • Mutual fund shares.
  • Bonds.
  • Some restricted, controlled or lock-up stock.
  • Life insurance policies.
  • Real estate.
  • Private business interests or company stock e.g., C-corp or S-corp shares.
  • Private equity and hedge fund interests.
  • Bitcoin.

Note: You cannot make a Qualified Charitable Donation of RMD from your retirement account into a DAF.

How Much Can I Contribute To A DAF?

You can donate cash up to 60% of your Adjusted Gross Income (AGI), or appreciated securities and property up to 30% of your AGI.

How Often Can I Add To My DAF?

You can contribute any amount at any time. Others may also contribute to your DAF, including employers making matching grants. However, you can’t solicit third party contributions.

How Often Must I Make A Grant?

You can make one-off grants or establish a schedule of recurring grants from your Donor Advised Fund. However, there’s no set dollar amount or number of grants that you must make from your DAF. It’s estimated that the annual payout rate for most DAFs is only around 20% [3]. Some individuals even use their DAF as a legacy tool, stockpiling philanthropic funds for the next generation to direct in the future. Just beware of any rules regarding inactive accounts.

Which Charities Can I Support?

You can direct a grant from your Donor Advised Fund to any IRS-qualified public charity. You can’t donate from your DAF for the benefit of an individual, and the IRS regulates the use of DAFs to fulfill pledges, pay membership dues, or purchase tickets for galas or other charitable events.

How Much Can I Grant From My Donor Advised Fund?

For most charities, any donation is welcome, no matter the amount. In reality, though, processing a small donation often costs the same as processing a larger gift. To help maximize the impact of your donation, most charitable sponsors impose a minimum grant amount, from $50 to $500 or more.

Can I Remain Anonymous?

Most charities like to acknowledge their donors. However, your can make anonymous gifts from a Donor Advised Fund.

What About Fees?

Donor Advised Funds usually incur administrative fees and investment fees.

Who Inherits My DAF?

You can nominate individuals as successor account holders upon your death to administer your Donor Advised Fund, or charitable organizations as direct beneficiaries to receive any remaining funds.

A Donor Advised Fund can make it easier to dedicate funds to your favorite charities. SageVest Wealth Management is also a valuable resource, helping you to establish a giving strategy that meets your philanthropic objectives, relative to your broader financial goals and plans. Please contact us to discuss your giving options.

References

[1] https://www.nptrust.org/reports/daf-report/

[2] https://www.forbes.com/sites/catherineschnaubelt/2018/09/27/the-advantages-of-donor-advised-funds-as-a-charitable-giving-strategy/#57d50cb235ff

[3] https://www.schwabcharitable.org/public/file/P-8327431

* The value of investments in your Donor Advised Fund can go up and down, and past performance is no guarantee of future returns.

Prepared by SageVest Wealth Management. Copyright 2019.

The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This article is for informational purposes only. The views expressed are those of SageVest Wealth Management and should not be construed as investment advice. All expressions of opinions are subject to change and past performance is no guarantee of future results. SageVest Wealth Management does not render legal, tax, or accounting services. Accordingly, you, your attorneys and your accountants are ultimately responsible for determining the legal, tax and accounting consequences of any suggestions offered herein.

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