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 donor advised fund accounts are being established by the thousands. It is estimated there are more than 728,000 DAFs and they give more than $23 billion to charitable organizations each year.
There are many reasons why you might want to establish a donor advised fund. If you have experienced a financial event resulting in a tax liability, establishing a donor advised fund may save you substantial taxes and provide a source for your charitable giving that can be stretched over many years. Examples of such events are a conversion to a Roth IRA, receipt of a large bonus, the exercise of an incentive stock option, or the sale of a highly appreciated asset.
A donor advised fund 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 established their own public charities to sponsor donor advised funds. Depending on the policies of the sponsoring charity, you can often establish a donor advised fund for between $5,000 and $25,000.
To establish a donor advised fund, 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. Once established, you are always welcome to add to your fund.
After your account is funded, you contact the sponsoring charity to recommend grants over time from your fund to public charities. Donor advised funds are often used to make modest annual gifts to charities, but can also be used for more significant 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. Some sponsoring charities such as universities and colleges require that a percentage of the fund be given to the sponsoring charity. You may be permitted to name heirs to recommend grants from your fund should there be remaining assets when you are no longer here.
For the philanthropically minded, the donor advised fund offers a unique opportunity to save taxes and to have a source of funds to support your favorite charities for years into the future.