Quick Recap of Donor Advised Funds
Enter the Donor Advised Fund (DAF); flexible, cost-efficient and a unique way to reflect your wishes around involving your heirs in charitable decision making before and after your passing. DAFs also typically can be opened with a relatively small amount of money. Many can be opened with $10,000 or less. Another nice point to DAFs is that they can allow for anonymous giving. In comparison, private foundations must file annual reports disclosing the members of the board, grant recipients and other information.
With the Tax Cuts and Jobs Act of 2017, Donor Advised Funds have become even more interesting to savvy charitable givers who are looking to maximize the years in which they itemize on their taxes. The beauty of the DAF is that you do not have to donate (or spend) all of the money you put into a DAF in that year. You can donate the funds to multiple qualified charities over multiple years. Let’s recap that point because it’s important: you get an upfront deduction on your taxes (if you itemize) on your full contribution to the DAF in the year the contribution is made, even if you donate the money to charities over several years.
Different DAFs have slightly different rules around what you can contribute, but typically you contribute any appreciated asset such as a stock, mutual fund, piece of land or perhaps even a business (speak with your DAF provider around what they allow). The catch is you need to have owned the asset for one year or longer. Then you may receive a tax deduction for the full gift in the year the donation to your donor advised fund is made; even if you don’t donate all of the money to charity in that year.
Building a Family Legacy with DAFs
If you have a family legacy you would like to pass down, a DAF is a great way to get your children/heirs together to make family gifts. There are different ways to do this, one popular way of encouraging heirs to develop their own philanthropic habits is to ask each heir to present a charity to the group. The heir can share what the charity is doing and why that’s important to them. By setting some guidelines before heirs select charities (i.e. will there be a broad focus such as human rights, environmental issues or local charities? Are alma maters acceptable?) and teaching heirs how to evaluate charities for effectiveness, you can help develop your heirs into savvy givers. You can also prevent an ill-feelings if an individual’s selected charity does not meet group guidelines by making the guidelines clear. Ideally, these are guidelines and not rigid lists. The goal is to encourage charitable behavior. If you have a very specific idea of how you would like the money to be used it may be wiser to invite your heirs for a nice meal and then share directly with them your charitable decisions and what went into them. This would most likely better protect family harmony and talking about how you make charitable decisions is an extremely valuable learning experience for your heirs.
Limitations of DAFs
There are some important limitations on DAFs donors should know about. DAFs cannot be used to fulfill personal pledges, funds may not be given to individuals, donors cannot receive any goods in exchange (i.e. tickets to a gala) or suggest that grants be used to pay tuition at private schools or colleges. Some DAF providers have limits on investment vehicles but typically you can invest in stocks, bonds, mutual funds, and REITs among other investments. Your DAF provider can reject your donation request if the charity is not a qualified charity.
Ultimately, the restriction to qualified charities is in place to protect you and the tax deductibility of your contributions. Your financial planner can help you navigate setting up and managing your Donor Advised Fund. Most companies allow you to continue working with your advisor on that money. Some DAF providers can manage your DAF investments for you so you have some flexibility there. It’s hard to beat the flexibility, anonymity, and cost-effectiveness of a DAF compared to a private foundation. Many DAFs allow for professional investment management if it’s your desire to create an ongoing charitable funding vehicle.
Have questions about how to incorporate charitable planning into your financial plan? We love to help clients use their money to reflect their values. You can book a time that’s convenient for you by clicking on the link below.
Questions for Lauren?
Financial planner and advisor, Lauren Zangardi Haynes, CIMA®, CFP®, works with business owners in Richmond and Williamsburg, VA. She also works virtually with clients nationwide. As a fiduciary, she offers comprehensive Fee-Only financial planning and investment advisory services so you can live your dreams with confidence.