donor Advised Funds (DAF)

In this education issue, we will identify what a Donor Advised Fund (DAF) is and how to use it for charitable contributions, including non-cash contributions. Donor Advised Funds can be another tool in the toolbox to fulfill God’s stewardship. Additionally, DAFs may greatly reduce the tax liability of appreciated assets.

First, a donor advised fund is a “fund” established by a charitable organization (or community foundations) to receive charitable contributions from donors and are managed by a financial institution. Donor Advised Funds are compared to community trusts; however, DAF are treated as a public charity and can receive higher deduction contributions over private foundations. (IRS Publication Guide Sheet, 2008). Second, many DAFs can receive cash, stock, real estate, and other valuable assets. The benefit of donating non-cash assets may greatly reduce the tax consequences of individuals and businesses when you consider the capital gains and depreciation recapture from an outright sale. The IRS rules for gifts allow up to 60% of adjusted gross income deduction of cash and 30% of non- cash assets.

Another advantage of many DAFs is the ability to consolidate all your charitable giving in one place, reducing the administrative paperwork. For instance, DAF can allow you to place your contributions in their pool and then choose which charitable organizations you wish to donate to and define the time frame for giving. At the end of the year, you get one consolidated statement for tax purposes. Additionally, you may wish to take advantage of their investment platform to grow your idle contributions tax free until you are ready to select your charitable causes. This may be a good way to “turbo-charge” your stewardship impact. Consequently, you can even set up a successor gift advisor to carry on your desired charitable philanthropy.

Another possible use for a DAF is to set up a Charitable Gift Annuity (CGA). When You have a heart to give but need a source of income to sustain your needs, setting up a CGA inside your DAF is one possible solution. You can make a gift, partially deductible, to your DAF then receive a fixed annuity payment for the rest of your life. The balance is used to donate to your chosen charitable causes.

There are certainly some planning necessary to determine the best giving strategy for a particular asset. For instance, when your heirs inherit personal real estate or marketable stock portfolios, they enjoy the stepped-up value of the asset not the original cost value. This perk greatly reduces the capital gains tax on the asset. It may be beneficial to compare the stepped-up value plan with opening a DAF to determine the most suitable approach for giving, particularly for non-cash appreciated assets held for more than 12 months. Remember, your donation for cash contributions is limited to 60% of your adjusted gross income and non-cash assets and marketable stock are limited to the fair market value and 30% of your adjusted gross income.

How can you make the greatest impact for God’s Kingdom? All things considered, what are the fees for managing a DAF? What is the minimum investment required to open an account? Are there any start up costs to consider? Talk with your financial advisor about your best options.

Your faithful servant