If you are seeking simplicity for your charitable giving along with immediate tax benefits, the Donor-Advised Fund (DAF) may be right for you. New DAF accounts are being established by the thousands. It is estimated there are more than two million DAFs and they give about $60 billion to charitable organizations each year.
There are many reasons why you might want to set up a DAF. If you have experienced a financial event resulting in a tax liability, a DAF could save you substantial taxes and provide a source for your charitable giving that can be stretched over many years. Examples of such events include receipt of a large bonus, the exercise of an incentive stock option, or the sale of a highly appreciated asset.
A DAF must be established at a public charity, sometimes known as a sponsoring charity. Examples of sponsoring charities are community foundations, religious organizations, and some universities and colleges. Some investment firms have created their own public charities to sponsor DAFs. Depending on the policies of the sponsoring charity, you can often establish a DAF for between $5,000 and $25,000.
Once your DAF is established, you make a gift to your fund at the sponsoring charity for which you receive an immediate income tax charitable deduction. The most common assets used for gifts are cash and appreciated securities qualifying for long-term capital gain tax treatment. Some sponsoring charities will accept highly appreciated non-liquid assets such as real estate. By contributing appreciated assets qualifying for long-term capital gain tax treatment, the tax on capital gains is avoided while you receive an income tax charitable deduction for the fair market value of the contributed property. Many sponsoring charities will allow you to name your fund should you wish to establish a family legacy. Of course, you are always welcome to add to your fund at any time.
After your account is funded, you contact the sponsoring charity to recommend grants over time from your fund to public charities. DAFs are often used to make annual gifts to charities but can also be used for more transformational gifts to campaigns and for capital projects. You receive no additional tax benefits when the grants are actually paid to the charities. You have great flexibility in suggesting grants from your fund, in that if you choose not to make grants in a year you are not legally obligated to do so. Your fund sponsor may allow you to name heirs to recommend grants from your fund should there be remaining assets when you are no longer here, or you can designate Feeding Westchester to receive the remainder of your fund.
If you are considering setting up a DAF, you should research various sponsoring charities to compare required minimums to establish the fund, fees, investment options, and policies for making grants. For the philanthropically minded, the DAF offers a unique opportunity to save taxes and to have a source of funds to support your favorite charities for years into the future.
