Is a Donor Advised Fund Right for You?

Investing
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By David Munn

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Whether you are looking to be more purposeful in your charitable giving or simplify your tax returns; facing a large taxable event; encouraging a charitable mindset in your children and/or grandchildren; or considering the role of your charitable intents in your estate planning, a donor advised fund could be the path to your goal.

What is a donor advised fund (DAF)? Simply put, it is an account opened with a charitable fund and established by one or more donors. The donors determine when and how much to contribute to the fund; then “grants” are made at the donors’ request to qualifying 501(c)(3) charities. A useful feature of a DAF is that a donor does not have to distribute all of the funds to charities in the same year the contributions are made to the account. This gives a donor time to properly plan to whom they wish to make the grants and/or decide when to distribute them, over several months or several years.

For example, you may be receiving a large annual bonus, or you’re retiring and being paid a lump sum for your built-up vacation time. Or you may be selling appreciated property or a business. You can make a donation in the same tax year as the taxable income and receive an immediate tax deduction, but choose to spread the grants to your charities over time. You can also fund a DAF directly with an appreciated security (stock, mutual funds, etc.) or real estate to maximize tax efficiency and your charitable gifts.

The DAF also works for intentional givers by allowing you to make a gift to the fund at the beginning of the year, and then distributing monthly or quarterly grants to the organizations you regularly support, as well as one-time grants as needs arise. Each grant can be made in your name or anonymously, and you receive one receipt from the fund for your contributions, rather than having to track down receipts for each gift you may previously have made by personal check.

A DAF is established with a charitable organization, many of which are connected to local communities or religious denominations. There are no setup costs for most DAFs, but there is a nominal annual expense that may depend on the account value. Many programs allow the donor to select investment options from a list of investment pools. Some programs permit the donor to establish a Separately Managed Fund account managed by the donor’s financial advisor.

Many donors use a DAF as a tool to encourage charitable giving in their families by allowing family members to select recipients for a portion of their annual gifts. The fund can also survive the donor and be administered by selected heirs, and the assets are not considered part of a taxable estate.