For part 4 of our year-end blog series on generosity, we will explore one of the most flexible giving vehicles available, the Donor Advised Fund (DAF).
A Donor Advised Fund allows a taxpayer to give a current-year gift that does not have to be given directly to the charities in that same tax year. This can be a useful tax planning tool for those who want to make gifts before year end but have not made final decisions on what charities they want to support with those gifts.
The following is a list of frequently asked questions regarding DAFs:
How is a DAF structured to allow a current-year tax deduction?
- A DAF is established under a charitable entity that administers the utilization of the funds. Some larger charities have their own DAFs, but the vast majority of our clients use a charitable entity that is not affiliated with other charitable organizations, and whose mission is to run and administer DAFs.
Are there rules around how quickly I have to distribute funds held in a DAF?
- The IRS has not established any specific timeframe for when money in a DAF has to be given. This creates maximum flexibility for a donor, as they are not tied to a specific timeframe for distribution.
Can I only give cash to a DAF?
- You can certainly give cash to a DAF, but you can also gift appreciated securities from an investment account, appreciated real estate and even private business interests. Keep in mind that the more complex the asset (businesses and real estate), careful planning becomes paramount, involving a team of professionals (tax, legal, financial advisors) who understand the ins and outs of more complex gifts.
Can my money grow within the DAF?
- If funds are not going to be distributed imminently, they can be invested within the DAF. Any earnings on investments within the DAF grow tax-free, but do ultimately have to be distributed to a 501(c)(3) organization.
Does it matter which institution I have my DAF with?
- Every institution has different rules and fees regarding the administration and distribution of DAF funds. Most institutions have rules around what charitable organizations can receive funds from a DAF they sponsor, so be sure there are no restrictions that could impede your ability to distribute funds to the charities of your choosing.
What happens to the funds in my DAF when I pass away?
- You name a successor advisor on your DAF who is then responsible for final distribution of these funds. Similar to your will, you can leave instructions for your successor advisor on how you wish your funds to be distributed at death.
How do I best leverage the planning benefits of a DAF?
- DAFs are best for larger ($25,000+) lump sum gifts. They are especially useful in higher-tax or peak-earnings years. In these higher-tax years, you can fund a DAF to enable a tax deduction when you are in a higher tax bracket. Later in life, when you are in a lower tax bracket, you do your giving through the DAF instead of giving out of cash flow, as the charitable deduction is not as ‘valuable’ to you.
If you have any further questions about how a DAF could fit into your charitable giving plan, contact a member of the team at Master’s and we would love to discuss it with you!