We have just completed the year-end rush of charitable giving and a barrage of requests from multiple organizations. How can we make this process more strategic and tax efficient?

One option is a donor advised fund (DAF). A 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. A DAF also enjoys greater tax advantages than a private foundation. A recent Wall Street Journal article noted that “during the five years ended in 2015, annual contributions to such funds more than doubled to $22.4 billion from $10.4 billion.”

A DAF is a charitable account sponsored by a public charity that donors use to support their giving. DAFs make it easy to be more strategic with charitable giving. So, how does it work?

A donor can establish a fund with an administering organization (through a charitable giving program or a community foundation). The contribution is not limited to cash. Cash, securities, real estate, closely-held securities or other assets can be contributed to the fund. The required minimum donations vary from administrator to administrator, but are usually considerably less than those required to establish a private foundation. Donors recommend an investment strategy to the DAF administrator. The investment management should be aligned with the goals, timeline of the fund and the anticipated giving to charitable organizations.

In most cases, the donor receives the charitable contribution based on the date of the donation to the fund, not the timing of the gift to the charity.

Donors recommend grants from their DAFs to non-profit publicly-supported organizations (commonly referred to as 501(c)(3) charities). The plan administrator conducts due diligence on the recommendations and receiving organizations to confirm the funds will be used for charitable purposes.

Benefits of the DAF:

• Ability to time a large charitable gift for the donor’s tax strategy and allow a longer time horizon on the grant to the nonprofit organization. For example, the donor may be in a position to benefit from a large charitable contribution in a particular tax year, but not want to disburse the entire gift to the charity or charities in the same year.
• Ability to consolidate giving. The donor can determine the total amount of giving for the year and make one contribution of assets – one large gift. After that gift is made, the donor can direct the DAF to disburse funds to various charitable recipients and the DAF manages the administrative task of the multiple smaller gifts.
• Transfer appreciated assets to the DAF. The donor can give appreciated stock to the DAF. The charitable contribution is the fair market value of the stock on the donation date and the donor does not incur any tax on the appreciation of the stock since purchase.
  • With a private foundation, cash and stock contributions are fair market value. However, the deduction for other assets is generally their cost basis.
• Potential charitable recipients are vetted by the plan administrator.
• Distributions from a DAF are considered public support in the calculation of a charitable recipient’s public support test.
• Federal estate tax liability is minimized with every contribution since donated assets are excluded from the donor’s taxable estate.
• DAF has a 50% AGI limitation on cash and 30% for long-term appreciated property compared to private foundation’s 30% AGI limitation for cash and 20% for long-term appreciated assets.
• No required minimum distributions.
• The fund can be built up over time and be part of a family philanthropic plan.
• In a community foundation, the fund can be part of a community-wide gift or grant program along with other DAFs, potentially making a greater impact.
• DAFs are not subject to the excise taxes levied against private foundations.
• Less administrative and compliance burden than private foundations with regard to governance and tax compliance.

A donor advised fund is just one option for planned giving. A DAF provides a vehicle to maximize tax benefits, minimize administration and meet charitable-giving goals. Please contact me at m.everman@mercadien.com or 609-689-9700.